Friday, August 01, 2008

Those Who Fake It Never Make It: Notes on Faking Reality

After noticing Trader Mike's update regarding a doctored interview with Dave Mabe of StockTickr, I decided to leave a comment on Dave's site. Here I'd like to amplify that comment, because it gets at the heart of trading success and failure.

We talk about losing discipline in trading as we might talk about losing our car keys or our way out of a forest. But losing discipline is not about a simple act of forgetting. It is an active process of refusing to act upon one's knowledge, of blotting out uncomfortable realities. It begins in small ways: talking about our winning days, but remaining mum about losers; convincing ourselves (and others) that we're "doing okay" and "breaking even", when in fact we've stopped looking at the red P/L; ignoring a profit target and taking small gains; violating a stop-loss level and substituting hope for planning on a losing trade.

Out of such small fakes of reality come the larger ones that lead to blow ups: the breaking of risk management rules, the rogue trader's futile attempts to cover up losses.

The really good traders? They don't present themselves as gurus. They're all too keenly aware of the market's way of humbling such pride, and they keep their hard-won lessons firmly in mind. Reality is their best grounding. It's the boasters and self-promoters who have to fake reality to sustain their images in the public mind. But if would-be gurus can't be faithful to reality, how can they remain true to you?

Years ago, when I was in Syracuse, I met with a trader who wanted coaching and counseling. He had sustained major losses in the markets. During his description of his trading woes--and his grandiose plans for making the money back--he casually noted that his home life was tense because he had hidden the losses from his spouse. I declined further meetings with the gentleman. His problem was not trading and, strictly speaking, it wasn't psychological. It was his lack of integrity: his unwillingness to be true to his wife, his plans, and his perceptual process. I had no doubt that his marriage would blow up the way his trading had blown up--and for precisely the same reasons.

As part of writing my new book, I asked over a dozen bloggers and traders to share their ideas about self-coaching and what has worked for them. A dominant theme in the responses has been a relentless drive to keep score: to learn from losing trades and winning ones; to assess performance and guide risk taking accordingly; to clearly identify strengths and weaknesses and adjust trading styles for those. These are experienced and successful traders who have met with success largely because they've been unafraid to sustain the look in the mirror.

Now when I first start working with a trader or a firm, I will toss out a simple homework exercise, such as keeping regular journal entries. Some traders go out of their way to make the most of the assignment; others fulfill it with minimal effort; still others fail to follow through at all. It's the difference between those who work hard at trading and those who hardly work: one seeks earned achievement; the other seeks the unearned. One is grounded in plans, the other in fantasies.

Show me a person's relationship to reality and I'll show you their character--and their success. Contrary to the popular saying, those who fake it never make it.