What separates the winning trader

Sometime back, I was interacting with a website visitor who was fuming at the market’s unfailing efficiency in inflicting losses on him. He had a conspiracy theory. For some reason, everyone was out to get him - the brokers, media, analysts, television anchors and even the neighbours who disturbed him while he was trying to concentrate on his trading, thereby causing errors of judgement.

After a detailed discussion on his trading blueprint, I pointed out to him a great mistake he was making - he did not learn how to scale down his trades when the markets proved him wrong. Nor did he scale up when he was in a “winning streak.” He was behaving like a losing gambler who wanted to “recover his losses” so he could walk away from the table.

The trader promised to make amends and recently called up to thank me for the advice. Unknowingly, he had made a psychological adjustment, not just a financial one.

For him and others like him, here’s a story that tells us how a trader should behave in good and bad times.

A hermit and his discipled went around a village everyday to ask for food. The alms so collected were to be consumed on the same day and the leftovers were to be distributed among the needy. The objective was to discourage hoarding. The food was collected in a small cotton cloth that the sadhus used to cover their heads with. The cloth was then knotted loosely and hung on a nail in the wall of the hermitage.

The disciples would observe two rats that invariably turned up to claim their share of the booty. But, while one of them would leap up and reach the cloth and nibble to his heart’s content, the other would try till he was exhausted only to return hungry. Although both the creatures were equal in size and strength, one would invariably return disappointed.

The disciples asked the hermit why this was so. The hermit did not reply, but instructed his pupils to go and “raid” the hideouts of the rats to know the answer.

The pupils were amazed to find that the rat who invariably managed to jump higher was “rich” - had amassed reserves of food, while the other was “poor” and had next to nothing.

The guru then explained that the strength of the stronger rat came not only from the physical self, but also from the emotional self that was assured and backed by the “wealth” of reserves it could fall back on even if it failed to find some food. Much against the belief that necessity was the mother of invention, the guru told his disciples that the rat’s inspiration was his affluence. It was the same with humans, he told them.

To prove his point, he told his disciples to “rob” the rich rat of his food for a day. The disciples did as said. Surprisingly, they found that the “rich” rat, too, could not jump as high as he used to earlier. There was lethargy in his movement - a loser’s dejection in his gait. Now, return the rat’s treasure, the guru ordered and the disciples obliged. Soon, the rat was back to its winning ways again. The disciples were convinced about the power of wealth in influencing behaviour patterns.

Now, how is this story relevant to day traders like us? Like the rats, we jump (read trade) for food (profits). Our psyche is deeply affected by our immediate profit or loss. We tend to lack conviction in our self or our trades and tend to stop or cash out earlier than we should. Our body sends out signals of nervousness; we modify and re-modify our limits on our trader terminals. We refuse to leave the terminal during lunch hour or to visit the rest room.

Indeed, biting the nails is not the only sign of a jittery trader. A hassled trader will yell at the peon for the coffee not being “right”, scream at his wife for calling on his cell to remind him of his doctor’s appointment, or vent his ire on the courier for disturbing him during trading hours. His nerves are so taut, you can actually play violin with them! He invariably makes more losses....

But, observe the same trader after he has made a neat packet - he calls for cokes and cakes for all fellow traders in the office. Enters a trade on his trading terminal and will refrain from modifying limits frequently.

He will stick to his levels as he is confident of his judgement. He even calls his wife during market hours and asks her out for a movie. The diametrically opposite short-term traits in the same trader are basic examples of trading psychology at play.

By cutting our exposure during trying times, we not only limit potential losses, but also accept “defeat.” Taking a break to collect our wits and return to our terminals is a good idea. And once we “get into the groove” again, firing on all cylinders is the only thing to do. Cutting back during a losing streak is a must if a trader wants his annual report card to look healthy.