Trading Control for Controlled Trading
© Daryl Guppy 1998
Nobody openly admits to believing in the absurd idea that they can control the market, but often action speaks louder than their denials. Commonly we equate success in the market with successful prediction.
Insidiously and erroneously the idea grows that the trader is somehow able to control or improve the outcome of his position by superior analysis. It comes as a shock to most novice traders when they realise this does not mean they can control the market.
If this sounds unreasonable then consider any of your open positions that are currently showing a loss. Ask yourself why you haven't exited the trade - and answer truthfully. Too often we kid ourselves with excuses: "The sell off was overdone." Satisfied with this, we go on fighting the market pitting our ego against it trying to prove .... that we know better than the market.
Exploring the roots of our confusion can give us a trading edge. Paradoxically they are often entangled with the roots business success.
For many successful businessmen who turn to the market this is a significant trading trap. Strategies which bring success in business bring disaster in the market. The successful businessman often has held on when things were grim only to emerge victorious and profitable because he has controlled the external factors in his segment of the market and outlasted his competitors.
For instance, he may analyse the housing market to predict a shortage of duplex units. This analysis gives him the power to control events by building duplex units to met the identified demand. To him it seems that superior analysis means control and this equates with success. Not so in the market, but the idea is hard to shake because it has given him the
wealth to trade in the first place.
Past business success develops the unspoken conviction that if he can understand the key market factors or information then he can call the market and make a profit. This gives insidious support to the idea of market control because even a small string of successful market predictions helps to reinforce this erroneous idea. Instinctively we reward ourselves,
and others, for being right when they correctly call the market direction.
Eventually the businessman begins to believe that his understanding of the market means that when he takes a position it must move in his favour. When a position turns against him he is stunned, and holds on, waiting for the market to reverse and match his previous market call. He rationalises what he is doing. "I have been right before so this will come good," or "
Perseverance pays, so I will stay put." Even more perversely some feel that if they can carry a large loss it says something positive about their wealth.
In reality these are all attempts to exert personal control over the market via an open position.
For an extreme example of this phenomena take a look at Rogue Trader, the story of Nick Leeson. He showed how traders can go bad in a big way, but every day there are traders quietly doing the same thing on a smaller scale - betting their prediction against the market reality.
The need for control - the need to be right - produces some creative excuses for trading failure. "I bought too early, but I can see the bottom forming" or " I am surprised the market doesn't realise the potential of this stock. I will buy more now it has gone lower."
No matter how foolish these excuses seem in retrospect, the wannabe trader has to convince himself they are valid because to do otherwise is a larger threat to his self esteem. Essentially he struggles to control the market because control of the business environment has bought him success in the past.
The key lies in untangling the relationship between success and control by redefining what we mean by control in terms of trading. Business success often comes from controlling events. Trading success usually comes from reacting to those events. The control required is personal rather than external.
The trader understands that the only events that he has control over are the timing of his entry and his exit. This does not destroy the need for analysis but it does change its relationship with control. An understanding of demand and supply factors, of management strengths and weaknesses, of statistical measures of performance, or of technical indicators used with
charts is a vital part of the trading process. Good analysis helps to make the entry and exits much better.
But the trader understands that his analysis does not shape the market. It helps him to define it, but not to influence it. This is the direct opposite to the understanding of the relationship between analysis and and control of events in business. Returning to our housing example, as a result of his analysis the business man takes control of events by building duplexes. The trader increases exposure to that market segment in reaction to price activity. It is the exercise of this understanding that permits the trader to profit from the market.
Irrespective of whether the markets are the result of a random walk, of a pattern, of cycles, or a product of chaos, the trader makes his profit by controlling the only element he can realistically control - himself. He applies an analytical framework to improve his understanding of the market so he can make consistent decisions about how he is going to trade the market as it is rather than the way he would like it to be.
No matter how right you think your market interpretation is, the real money is made from trading the market. When the market is bullish this is easy. We tell ourselves that valuations are too high but this doesn't prevent the trader from taking new positions and selling into strength. It is harder when the bear hits and too often we stubbornly cling to a strategy of
selling into strength.
There are many businessmen who successfully make the transition from business to trading. The most successful are those who understand that the rules which allowed them to accumulate business wealth are not the rules which favour trading profits.
When they understand this they concentrate on controlling the time of their entry and their exit because that is where the consistent profits lie. They trade fictitious control of the market for better control of their trading.
First published in Your Trading Edge magazine.
DARYL GUPPY is one of Asia Pacific's leading writers and speakers on share trading. He is the author of Bear Trading: Strategies for Survival (1998), 'Trading Asian Shares', 'Share Trading' and 'Trading Tactics' and is a frequent speaker at investment seminars and conferences in South East Asia.
He will present an evening talk on Run with the Bulls, Hunt with the Bears! for stock market private investors and traders on June 29, 1998 (7.30pm-10.30pm); and a one day seminar on Trading Shares for Profit for brokers and traders who want to survive in the stock market on June 30, 1998 (9.00am-5.00pm) at Shangri-la Hotel, Kuala Lumpur, Malaysia.
In-house seminar details, contact RAYMA Management Consultants Wendy Song at tel: (03) 7044-666, fax: (03) 7044-484 or e-mail: firstname.lastname@example.org