In trading it's you versus you

In an upcoming Netflix film called Hustle, Adam Sandler mentors a rising basketball star.

“There is no competition,” he tells the young player. “It’s you versus you”.

That may be true in sports but it’s even better advice for trading. It's fashionable to say that the market is the “toughest arena in the world” and that “individual traders are competing against some of the smartest people in business” but the market is not at all like organized sports or even organized business. In capital markets millions of independent agents pursue their own specific agenda in wildly different ways, across radically different time frames. In fact if there is any universal truth in the market it is that no one gives a f-k. No one gives a f-k about your trade. No give gives a f-k about your stop and most importantly no gives a f-k about your performance. 

In the market it is always you versus you. But since we love to anthropomorphize that which we understand poorly, we create a convoluted narrative that helps to shift the responsibility away from our own shortcomings and onto this mythical beast.

There are a million ways that we tend to sabotage our trading. Some of it is very basic. Often we fail to  understand the basic constraints of the operation. Simple things like maximum margin, maximum liquidity or just awareness of calendar event risk will wreak havoc with your capital. But trade long enough and after a while you learn the hard way what can and cannot reasonably do.

But while ignorance of the rules is a fixable problem, awareness of our inner demons is a lifelong battle. 

In my opinion there are only two types of traders. There are fear traders and there are greed traders. This has nothing with the VIX, derivatives or any complex trading strategy. I define fear trades as simply those that approach the market from the point of fear while greed traders approach it from the point of greed. These are not pejorative terms. These are simply the two personality types that are prevalent in the market and have nothing to do with actual bravery or avarice in real life.

I am, for example, a fear trader, but I will step in front of a price collapse or fade a parabolic moonshot without hesitation. But like a pigeon keenly aware of car traffic I will take only the tiniest peck of profit and will scurry on to the next trade. On the other hand, my friend @anothyrudele sounds very much like a “greed” trader. On his podcast he constantly talks about pressing size when he is on the right side of the move. He is clearly comfortable going for the jugular and that’s great because he knows who he is and I know who I am and that is the foundation for building a trading strategy that works for each one of us.

The problem comes from success rather than failure. Greedy traders will often lose their appetite for risk the more money they make and will then see their performance fall off a cliff. Fearful traders on the other hand will often confuse the success of their strategy with their own brilliance and will begin to take on far more risk than they should. I am a poster child for that particular foible. Right now I have a strategy that is executing perfectly, but it  requires 20 to 30 trades just to make 5 to 10 basis points per day. Nevertheless it makes money like clockwork. Am I happy? Of course not. I want more. I am in effect subconsciously shifting on the risk spectrum from being a fear to being a greedy trader and in the process ensuring my own funeral. As I’ve explained in past columns, the market is always about tradeoffs and if you don’t respect the tradeoff rule you will always lose in the end. Just ask all the geniuses at LTCM.

So. The bottom line is this. In trading, as in sports, once you achieve a certain level of proficiency the game becomes internal rather external and the biggest competitor you face is yourself.