I’m going to start things off with a little story.
You’ve been dabbling with investing & trading for a few years, you’re not quite profitable yet some months you manage to hold your own. You’ve learnt the basics of fundamental and technical analysis, read a few books, and spend 2-3 hours a day in-front of the screen trying to perfect your craft.
You’re searching for your next play and come across a company of interest, for the sake of the story we’ll call this ‘Company 4″.
After a lot of research you begin to realise that unlike the last 20 names you’ve researched this has real potential. Growth numbers are good, profitable, founder CEO, no debt, large TAM. All of the things you’re taught too like and for good reason. The stock has been chopping in range for a year as the story begins to unfold and numbers improve.
Now this is where we switch to a Parallel universe for the second half of the story.
Let’s Begin.
Universe 1:
In universe 1 you earn $70,000/year for a 55 hour work week. You absolutely hate the commute to work yet don’t mind the work in itself nor the camaraderie. You drive a Mercedes with heated seats and Aircon. You’re in a stable and happy relationship and you live in a small bungalow just out of town. Life is stable, you’re relatively happy, your partner isn’t happy you trade and wishes you’d focus more on work.
The 2-3 hours a day infront of the screen are mainly spent on X/reddit and stock twits.
Work can be a little boring, the pays good but for the most part you sit around scrolling every 20-30 minutes. In-between meetings and presentations.
You relish the idea of being able to have a little more free time and be in a position to spend your time on things much more fulfilling. You see the lifestyle of others on social media yet are fully aware most of it doesn’t paint the full picture. You consider yourself much more down to earth, just the thought of eating lunch out 2-3 times a week, laptop on the table and a nice coffee. Then a couple more holidays a year and the ability to take your partner on more dates to the theatre, weekend breaks and spas. You’d like the materialistic side of things but the freedom is of top priority. You have a little bit of debt that sometimes stresses you out, yet nothing that can’t be handled.
Now…
Thanks to your new found excitement in Company 4 you immediately enter. Considering how good of a find this is you position heavy and begin to inform others of your unicorn find. You’re aware it may take some time, you understand that discipline and emotional management are the keys to success in trading. You’ve just read Ryan Holidays book “sit still” and feel fully prepared to wait for your inevitable gain. Your sell rule is simple, once it breaks the daily 17ema you’re going to sell.
Each day you check your trading view app 10-20 times, sometimes when on the toilet, other times as you enter your car on the way to work, each time you sit down to eat and a couple of times as you workout at the gym. You remind yourself that it’s a longer term play but there’s nothing wrong with keeping an eye on it.
Two weeks go by and nothing has really happened, the stock is down 4% from entry. A few more weeks go by and the stock is now down 10% from entry whilst the market is up 6%. You continue to check on it and begin to mock others for not being in, you simply can’t believe how stupid they’re being. You can’t believe the funds are yet to accumulate and you most certainly can’t believe that less equipped names are moving higher.
Another month passes, you’ve now be long for 8 weeks and given the 10-20 checks a day you’ve checked the price 400-800 times. It’s now only 2% down, the market is now up 15%. You feel extremely frustrated about its under-performance yet you continue to hold.
The following week the stock gaps up 25% on news you’ve known for ages, this is the first time you’ve seen the position profitable and it’s a nice healthy profit. Enough in fact, to pay off your credit card. You watch the price like a hawk all day, it almost feels a little unbearable how large the fluctuations are every 15 minutes; after all you went in with large size. 2 hours before close you start to think the move has gotten a little silly, you question whether the stock will just gap back down tomorrow. You remind yourself that you can always get back in and that nobody ever went broke taking profits. So you cash and land a big win, you’re elated. After years of education, leading you to a nice potential mover, holding for 2 months and approximately 100 hours of “peaking” at the price action, you finally realised a gain.
Yet what’s your immediate thought after such a long commitment, after holding for what felt like a lifetime? What’s the very first thing that enters your mind?
I hope it doesn’t go higher.
Over the coming days and weeks you watch in fury as company 4 in fact heads higher, you’re mad at yourself for selling the first day of a rally when you know at the minimum it should last 3-5 days. You watch in awe how that very trade could have paid off your car loan too and doubled your account.
Finally, 3 weeks after you sold the stock tops and begins its decent. It breaks the daily 17ema after pulling back 20% from highs, at this point the gain would have been 700% vs the 30% you realised thanks to the exponential gains of the contracts you held. You feel a slight relief that it’s over but remain frustrated at just “how out of hand” the move got. Even though, it’s exactly what you expected to happen 11 weeks ago when you first entered.
It’s now been close to 3 months, during this period you have taken two more trades but lost on both. The talk of the town has been company A and everything else got left behind. Your account is now lower than where you started thanks to your withdrawal and losses. You begin to pay for things on the credit card again. During this whole period your obsession with one name has led you off track with the markets pulse. You’re not really sure where you should be positioned at this point, which is to be expected considering your free time was watching the name you were already in, then again once you were already out.
Universe 2:
In universe 2 life isn’t as stable, the $70,000/year Job has be switched to $22,000 a year. You get the bus to work which takes much longer than a car and in the summer it’s unbearable, the winters even worse. You live in a cramped flat with two room mates who are intolerable. So you spend most of your time at the gym and infront of the PC. You’re in debt, two maxed out credit cards where the minimum repayments take up half your monthly pay check. You have $10,000 in your trading account, have learnt just as much as universe 2 and have no time to think of pleasantries like lunches out, you’re just fucking hungry to break this cycle.
You spend the 2-3 hours a day infront of the screen looking for setups, checking market breadth, reading reports, backtesting your own trades and learning more about reading balance sheets and 10-Qs.
You haven’t entered a position in 6 weeks, it’s frustrating but you’re waiting for that big opportunity. During this period you’ve been watching a name called Company 4.
After a lot of research you begin to realise that unlike the last 20 names you’ve researched this has real potential. Growth numbers are good, profitable, founder CEO, no debt, large TAM. All of the things you’re taught too like and for good reason. The stock has been chopping in range for a year as the story begins to unfold.
The problem is the chart is stuck in chop and you currently can’t see that changing until the rest of the market pulls back and rotates.
Then one day the market puts in a big stuff, company A rises from recent lows and the alerts go off on your phone. They’re meant to be in your locker at all times which makes it impossible to take trades during market house. You head to the locker room and quickly enter a heavy position. The moment you enter you’re shouted at by your boss, you apologise and immediately stash your phone back into your locker.
A week goes by and you’re exhausted, work is hard on the body with a lot of psychical labour. Each night you update an excel sheet containing market breadth, current leaders/laggards along with notes. You still feel Company 4 is the best place to be positioned even though so far little has happened. You have alerts set for a break of the 17ema but are willing to sell early if a better opportunity arises.
The following day you’re at work and a large order comes through, the boss is absolutely elated and in one of his very rare good moods. So he offers to buy everybody a few pints after work, you decide you deserve a little time off and join everybody at the pub that evening.
By the time you get home you’re a little tipsy, Sam your flat mate has locked the bolt from the inside. After 30 minutes of knocking and unable to ring him due to your phone being flat, he finally awakes, apologises and lets you in. You return to your tiny room and immediately head to sleep.
The following morning, phone charged and back to life, you see the alerts of Company 4 from the day prior. You’re absolutely elated, you’d been so busy you’d forget to check. You load the chart briefly and see it closed 30% up and then ran another 22% after hours. You check the news and it’s exactly what you’d been waiting for, you set a trailing stop loss against the 17ema and head to work.
The entire day you’re desperate to check your phone but can’t, you keep reassuring yourself to stick to your plan. The outcome is out of your hands, you remind yourself almost hourly and continue to focus on work. At the end of each day you rush back to the locker in order to check your phone, the market is closed by this point and you’re elated to still be in. This goes on for three weeks, then one day the stock suddenly drops 20% from highs. You’re stopped out for an enormous profit, thanks to the options you selected your account gained a total of 700% from a high of 1,200%. The trade is now complete, whilst you’d seen your account at highs of $120,000 and now stare at a balance of $70,000 the small frustration is outweighed with a sigh of relief and accomplishment. You’d stuck to the plan, a plan you know is likely to yield consistent and reliable results. You now also have a much larger account, just 3% would now bring in almost an entire months wage.
A work colleague comes into the locker room asking if you’re ok, in fairness, you’ve been sat their for 20 minutes staring into the abyss. All you can think about is getting home and jumping on the PC. During this entire trade you’ve been tracking the market and spotted another great opportunity, eager and full of confidence you head back to do more research.
On your way home you consider paying off your credit card bills, it would be a massive weight off your shoulders. Imagine not having to pay those enormous interest payments each month. The trouble is, it would cost half your trading account. The easiest option would be to pay it off, you’d feel less stressed than then likely trade better.
Yet on the flipside the minimum payments are now only 1.5% of your account, so you look at this in a logical manner. The past 3 months netted you a 700% gain, whilst you don’t expect that to be repeated you remain confident that keeping the capital will generate more than the 1.5% interest payment. So you don’t withdraw a penny, even though you crave the gratification of getting out of debt.
4 days later you’re in your next position and buy leaps in Company 6, you’ve noticed money transitioning into that sector. Work is still rough, you know one day you’ll be able to quit but for now you must remain focused.
……
Universe 1: 12 months later and you remain in fairly the same position, you can’t quite understand what you’re doing wrong but no headway is being made.
Universe 2: You’ve finally quit your Job and decided to live in Malta, where the pace of life is a lot slower and more enjoyable. You now trade for a living and spend a lot of time eatings lunches out in the town square, playing bowls, swimming and exploring local areas.
In both universes the same person was presented with the same opportunities. Circumstances helped shape their emotional tolerance, which lead to one winner and one loser. One stuck to the plan even though his situation was worse, the other lets his emotions get the better of him every time.
One focuses on where the market is heading and where the next opportunity lies, he puts in real work and acts upon discipline at all times. The other tricks himself into believing that watching his position is working, that keeping an eye on the trade is like caring for a new born chick.
Trading is hard, all of the things that should appear to be easy are in fact hard. The very basic yet realistic comparison above, is what I’ve seen and witnessed first hand. People like to assume that once their account is at X they’ll trade differently, or if they can just pay off their mortgage they’ll be more relaxed and trade differently. They like to place emotional control into the future rather than accept its responsiblity in the present.
People also like to put in “fake work” where they trick themselves into thinking they’re accomplishing something. Like reading a report on a company they would never trade, researching ideas on Twitter as though that’s where the best ideas are born. Monitoring their positions as though they have control over what the price action does next. Taking part in social media posts/debates which may be fun but a waste of time vs reading reports and dissecting figures.
Doing nothing is by far the hardest part of trading, avoiding over-stimulation that consistent watching of the charts will provide. The feeling of doing nothing and fear of missing something is hard to shrug off. Focusing on other tasks when fully positioned, not knowing if it will become a loss or large gain. Then accepting that specific outcome is not within your control.
When you’re positioned lightly you’ll often sell too late, when you’re positioned heavily you’ll often sell too early. Your emotional state prevents you from becoming rich and instead keeps you poor. Your inability to accept that the market does not care nor does it change upon how much size you have at play. It doesn’t care if you watch it or not, it doesn’t care if you think it’s stupid or smart. Other traders on the other side of your bet do not care if you lose money, infact, they want you too; for your loss is their gain. Your weakness will lead you into the same field with the rest of the sheep, unable to escape and at constant mercy of those above.
So you can either put in real work and constantly remain on the hard path, the path that goes against the grain, or you can continue to feed those who do.
Leave a Reply