Wednesday, June 03, 2009

The Ability to Not Trade: An Unappreciated Contributor to Successful Trading

In a previous post, I compared the trader to a sniper, blending self-control with a high level of aggression and decisiveness. There is one other respect in which traders are like snipers: both engage in periods of intense performance activity punctuated by potentially long periods of inactivity.

The sniper may wait hours or even days in a hide, waiting for the perfect shot. Wet, cold, cramping, and simple boredom are the sniper's greatest enemies. It is a rare individual who can keep still for extended periods of time and then function with the utmost skill and accuracy. How do they do it? Many keep themselves mentally occupied and active, even while they're physically still.

One characteristic I've found among successful traders is that they function effectively when they're not trading. When markets become very quiet and range bound, they occupy themselves with a variety of activities, from sharing ideas with peers to conducting research. Traders who do not tolerate inactivity well inevitably feel the need to trade, often when there is no objective edge present. For them, losing money is less onerous than experiencing boredom.

By structuring your non-trading time, you can be like the sniper: fresh in your thought and perception, even as you're waiting patiently for the next opportunity. Reviewing markets and relationships, reviewing your performance, testing trading ideas, learning from and teaching others: there are many activities that make non-trading time productive.

If, however, your motivation is not to understand markets and develop yourself--if your motivation is to enjoy the thrill of risk and action--you will find non-trading time to be aversive. There are those who live to trade and there are those who trade to make money. Trading success is an expression of what you bring to markets; it cannot fill a personal void.


Dtowntrader said...

I think a huge impediment that retail traders have is that under-capitalization leads to the impression that one needs to make money on a fairly consistent basis. It's hard to escape the mindset that "hard work" in the form of daily progress leads to the completion of the task at hand, in this case making income. For the retail trader, this is aggravated by the fact that bills are piling up, but tension is also building up if trades just aren't there. So one inevitably makes stupid moves to compensate. If one has another stream of income such as a day job, this probably only takes away from one's attention to detail in trading. So either way he's disadvantaged. It's better to look at things on a multi-day to weekly basis in that case...but many still try to reap money off intra-day moves.

It's hard to fully appreciate the fact that trading conditions might call for one to patiently await the right moment from Monday-Thursday and make a whole week's salary in the last two hours of trading on Friday. This goes against everything people have learned in their lives.

Yngvai said...

Recently I haven't been trading well so I stopped trading with real money and went back to paper trading to get my consistency back and to work on my skills. I compare it to a major league pitcher who has been struggling and temporarily goes back down to the minors to work on his pitches.

There's nothing wrong with taking time away from real trading when necessary, whether its due to lack of good trading opportunities or due to a drop in performance.

WiredCoach said...

A timely article . . . and good comments from Dtowntrader as well.

As a new swing trader, I'm learning to be more disciplined and to be patient. Occasional reminders that there are times to wait are helpful - thanks folks.

davboz said...

Dtowntrader - Hit the nail on the head!!! I might add that those last 2 hrs. on Friday, under those conditions, may be fraught with a high anxiety and an impending need to - once again - finally do SOMETHING. Even if it's not wise.
And what a great post to start with!

uempel said...

Brett, I always drew the same analogy as you: trading is the art of hunting.

Being able to trade without thinking about the end-of-month bills is a huge advantage.

We try to live our everyday lives without taking any money from the trading accounts: not following this rule always turned out to be an impediment to performance.

So how do we do it? We have other sources of income and lead a frugal life (which is much more fun anyway) and only take some money out of the trading accounts every one or two years.

Bhuban said...

agreed, traderbrett. at first, it was difficult for me to be effective at doing other things while i traded. and frankly, my body felt coiled after several months of that. i took a month off, and when i came back to the tape, i incidentally had to continue prepping for the cfa exam. leaving the monitoring of my stocks in the background and studying while "waiting" for the critical moments made me much less prone to trade "for fun" or to squeeze a few pennies out of a horrid risk reward scenario.

Carlos said...

One must not forget that the object is to hunt and we must not pass up on a good 10 pointer waiting on a better 12 pointer. Sometimes even a great 8 pointer looks good too.

Patience is a virtue but courage is also a virtue.Be wise my friends