Friday, March 19, 2010

Getting Punched in the Mouth as a Trader

A savvy reader recently passed along a quote from Mike Tyson, the boxer:

"Everyone has a plan 'til they get punched in the mouth."

That's one of the central challenges of trading. We set out with plans, then we get punched in the mouth with adverse movement.

Once we're jostled out of our game plan, we lose our edge. We're like the shaken boxer who no longer adheres to a fight plan. Without strategy, we cannot maximize our strengths and compensate for our vulnerabilities.

The flip side of Tyson's observation is that, until you're punched in the mouth, you don't really know if you have a solid plan. Making money is a lot easier when market conditions are favorable. It's when we have to deal with adversity that we discover how resilient we are and how effective our strategies can be.

One way to think of risk management is as a framework that allows you to be aggressive enough to occasionally get hit in the mouth, but not so wild that you'll get knocked out. Learning how to take a punch is key to boxing success, and it's also an important trading skill. That's how you train to dig down deep and find the competitive drive that will move you forward and help you weather adversity.