Tuesday, July 28, 2009

The Perils of Trading as a Victim

I've seen bears make money, and I've seen bulls make money. I've worked with longer-term traders who have been profitable, and I've worked with successful daytraders. But there's one group of traders I've never seen win. Those are traders who view themselves as victims.

Victims don't win, because--in a fundamental way--they do not see themselves as in control of their own destinies. They attribute their losses to bad luck, the market manipulations of others, or random, situational factors. It's difficult to change problem patterns if you don't own them. It's difficult to sustain confidence if you don't perceive yourself to be the driver of your own destiny.

Trading victims mostly come in two flavors:

1) Permabears who complain that markets are manipulated/distorted when their own views and theories are getting hammered;

2) Active traders who whine that markets are not giving them enough opportunity.

I can't help the former group. They really aren't interested in trading or investing. They are interested in promulgating their theories and conspiracies. See this post for details.

The second group seriously needs to get a grip. The excuse that the markets are slow, don't move much, don't offer opportunity, etc. only goes so far. Your job is either to adapt to those market conditions or to find other, more suitable markets to trade.

Plus, the idea that these markets are unusual in their lack of opportunity is simply NOT TRUE!!

Let's take VIX as a proxy for volatility. The VIX at present is around 24. Going back to 1990, what is the median VIX? It's 18.58. There is nothing unusual about this market at all.

Not satisfied with VIX as a measure of market movement? Let's take the median daily trading range for the S&P 500 Index (SPY) going back to 1990. It is 1.14% What is the recent median daily trading range (last 20 trading days)? A little north of 1.4%. Again, nothing unusual in this market.

The problem with the market isn't that it is trading abnormally. The problem is that it's trading like the stock market usually trades. What was abnormal was the crazy volatility of late 2008 and early 2009. If you can't find opportunity in the current trading conditions, perhaps stocks aren't what you should be trading.

At the very least you shouldn't be blaming the market for behaving typically, reinforcing a sense of victimhood. When you find the opportunity that *is* there and focus your efforts at exploiting that, you are in the driver's seat. That's what self-efficacy is all about. And you might just make some nice coin.