The most important four letter word in trading

Those of you who day trade with me everyday know that I have a big potty mouth. Part of it is because I am a New Yorker and we use the f-word as an adjective, adverb, noun and verb in almost every other sentence. Part of it is just my own iconoclastic personality that likes to mock polite society. Part of it is me reading somewhere that people who curse are actually more creative.

Regardless of the reason f-bombs fly in my room all time, often as a matter of frustration, sometimes as an exclamation of wonderment at whatever the market is doing. But recently I realized that although it's probably the most common four letter word in the trader’s vocabulary it is not the most powerful. That distinction goes to another four letter word that is often overlooked but shouldn’t be. 

The most important four letter word in trading is... wait.

This is kind of ironic since trading and especially day trading is supposed to be all about speed. The faster you react,  the better price you get, the more profit you make. Yadda, yadda, yadda. But that is no longer true. The days of front-running “paper” are long gone. HFT algos will beat you to the punch every time. Speed is now the domain of the machines and humans need to compete on longer time frames where analysis and nuance are the true edges to exploit.

But of course as humans we are easily distracted by the newest shiny thing. How many of us have jumped onto a price move before it confirmed our setup because we were one million percent confident that price was going up or down, only to have the market reverse and rip our face off? I am certain that anyone who has day traded and reading this now has had that happen to them multiple times. In fact, I could make a strong case that the majority of losing trades in your portfolio are not the result of your setup, but rather a function of you jumping the gun. That’s certainly been the case with me.

One of the problems with “creative” people is that we think we know everything ahead of anyone else and jump into action before the market actually confirms our thesis.

One thing learned from the school of “hard knocks” is that price follows momentum. It doesn’t matter how you measure it, it doesn’t matter what indicator you use. The bottom line is that if momentum is negative, price action is unlikely to turn positive and vice versa. After years of trying to catch falling knives or fade rocket moonshots I have finally learned to ... wait.

The momentum to price dynamic is by no means a guarantee of success but it is a tremendous filter for avoiding bad ideas. The thing about trading is that if you are right it doesn’t matter if you are late and if you are wrong it won’t help to be early. So you might as well wait and let that magic four letter word help you perfect your edge.