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4/8/2008 2:19:03 PM Tales of the Promiscuous Trader by: Peter Kaplan It is tempting to experiment with multiple trading approaches in the hope of success, but how worthwhile is it? When it comes to achieving consistency as traders, there is an obvious strategy, though one that can easily escape traders in the heat of battle. Achieving consistent results in the market comes from taking consistent actions. Period. There are, of course, an endless number of ways that traders can be inconsistent in their actions; however, in this discussion I focus on one syndrome in particular. Over the course of many years training other traders, I have periodically seen trading students get off track by carelessly experimenting with and switching between dramatically different approaches to the market. Understand, I’m not talking about a healthy level of open-mindedness to different and better ways of trading. Nor am I suggesting that one should act the same way at all times, irrespective of conditions. Rather I’m talking about the following sequence: first making some serious headway in one approach, then hitting a rough patch and eventually ditching the plan altogether because “so and so” says his or her technique is making a fortune at the moment. (Do you know how many “so and sos” I’ve met over the years? These people, services or gurus make a heck of a lot of noise when they’re doing well. They go strangely silent when they’re not.) The Wanderer Let me tell you a little story which illustrates my point. I once had a catch-up phone conversation with a guy who had been a trading student of mine years earlier (I’ll call him Bill for the purposes of this story). Bill was one of the best students I ever had. He came to me with a decent amount of training already, and we worked together intensely every day for several months. I basically taught him everything I know, and indeed, Bill began to achieve success, transforming into a consistently profitable trader right before my eyes. And yet, he had one little tendency that I did not particularly appreciate. About once every two weeks or so he would show up for the day’s trading and say something like this: “Hey Peter, this weekend I was perusing such and such website, and you know those guys are really making a killing doing this, that and the other thing. I’ve been looking at their stats and they look awesome!” OK, so I’m as jealous as the next teacher, and I was a bit offended by my student’s wayward attentions (wasn’t he getting everything he needed at home?). However, since it’s never been my intention to create little trading clones of myself, I let it slide at first. But as Bill’s periodic “extraeducational affairs” carried on month after month, I began to crack the whip more forcefully. You see, I had witnessed this tendency before in other traders, and I knew that if Bill’s attention was wandering when things were going well, he was going to have little capacity to stick with his plan when the inevitable rough sledding arrived. At least on my watch, I was able to keep him on a short leash. However, even by the time we were finishing up our work together, I was aware that he was starting to flirt with several other styles on the side. Past a certain point, it was up to him. I could only beat him over the head with my message a couple dozen times. The Odyssey Alright, fast forward a few years to my recent phone conversation. There I was, having a nice catch-up chat with Bill, listening to the stories coming out of his mouth, which belonged on an episode of National Geographic’s “Extreme Trading Adventures” (currently in production, I’m sure). Essentially, Bill had gone on an extraordinary trading odyssey in the two years since we had worked together. He laid out such a hair-raising itinerary of disparate styles, teachers and timeframes that he sounded like an investigative journalist conducting research for a big trading industry exposé. And had it all worked out for him? Did he come away from the two years of pell-mell “research” as some sort of megatrader? Bill hemmed and hawed a little, but in the end he finally admitted the truth. While he had made some decent progress in almost every one of the approaches he had studied, he had not achieved consistent profitability in any of them. In fact, the only consistently profitable stretch of trading he had ever experienced in his life was the time we had spent working together. Now I turn to you, dear reader, and ask why do you think that was? Was it because I am the world’s greatest teacher? I can tell you right now that I’m not. There are always better teachers, better traders, better approaches ... better everything. So why, in all of Bill’s searching, had he not stumbled upon them and become a better trader? Or, more accurately, when he did stumble upon them—which almost certainly happened in the course of his many travels—why did the encounter not launch him into super-traderdom? To answer the question, one need only look again at the period which directly preceded Bill’s odyssey. The reason Bill’s results were consistently positive during my tenure as his instructor had less to do with my abilities than the fact that Bill whole-heartedly focused on a single approach to the market (or rather, a small selection of styles that he and I fused together seamlessly). As I said, Bill came to me with a fair amount of experience already; however, what he had never experienced was a hard-nosed New Yorker getting in his face on a regular basis, effectively acting as his trading conscience. Apart from his bimonthly blabber about other methodologies, this guy was not able to stray from his plan or shift his attention from what was working for even one minute. This was the first time he had ever experienced anything like it, so suddenly all of the formidable ability and knowledge that he had accumulated during the years was able to finally manifest on the P&L screen. His worst tendencies were no longer running loose like a pack of wild monkeys, sabotaging his best efforts every time he made some headway. Conversely, when he ventured off on his own, those selfsame monkeys re-emerged. Once again, consider the assertion from the start of this discussion: Achieving consistent results in the market comes from taking consistent actions. Don’t Overtinker Bill’s (not-so-excellent) educational adventures did not work because he never performed a consistent enough regimen of actions to become consistent in his results. Only during our time working together was Bill forced to stay on track long enough to realize the full effectiveness of his approach. The stretch of market through which we traded was generally good, though it certainly contained its rough spots. When we hit those periods, Bill was able to make some minor adjustments to what he was doing, scale back his activity and absorb whatever small hit the market delivered. He did not run away; he did not panic. He did not switch methodologies entirely to try and make a killing during the rough patch. He waited it out and was ready to pounce again quickly when favorable conditions returned. Once he left my browbeating presence, however, he clearly did not show any of this same poise. Some of you reading this may not be able to relate to Bill’s story; you have been successfully practicing the same general approach for years, and your affections rarely, if ever, wander after the next “hot thing” in trading. If so, good for you, this is not an issue that’s causing damage to your trading results. However, most traders suffer from at least some small aspect of this syndrome, even if only the simple tendency to overtinker with the trading plan. If you find yourself constantly changing rules in your plan every time you have a bad day, there may be something here for you. You should thoroughly evaluate your plan periodically, but only make changes after you have acquired reams of hard data, not as a compulsive reaction to a few painful losses. Some Pointers Because I am rather fond of lists, I have decided to lay out a few points that might prove helpful to those prone to market promiscuity. These are good to keep at hand when your trading hormones get overactive and you feel the overwhelming urge to cheat on your primary style! 1. Above all else, you need to operate from a clearly defined plan (this really goes without saying, but I’ll state it nonetheless because everything else is moot without this point). For those who deliberately operate in the market without a clear plan, here is a message for you: Go philander to your heart’s content with every style ever invented. You are not going to make money anyway! Or if you happen to stumble into some initial gains, you certainly will not keep what you make. This discussion only has value for those who possess enough discipline to operate from a clearly defined plan. 2. If and when you do achieve success with a particular style and are now looking to add another style to your arsenal, do this sloooooowly. My friends, it is difficult enough to master even one single approach to the market, let alone multiple approaches. What’s the big rush? Perhaps you are quite exuberant with your newfound success and figure that by adding more styles, you will add more success. Trust me, it rarely works that way. Usually, a trader makes that jump too soon, and he or she ends up sabotaging the style that was actually working. Although no set rule exists for how long to wait before you can declare a profitable style as fully mastered, the following is a decent guideline: • If you are an intraday trader, give your successful style at least three months before you consider it “in the bag.” Although you may think you have seen everything the market has to offer after a month of trading, you probably have not. Three months are likely to take you through several cycles of market expansion and contraction—at least from a day trader’s point of view. At that point, you can determine if you truly have the approach mastered. • If you are a position trader, give the style a full six months at the minimum, and ideally, you should wait a year. The cycles in the swing and core trading timeframes take much longer to play out, so you simply will not experience the full gamut of market mischief until all phases of the annual calendar have come and gone. 3. If, like my student Bill, you begin to struggle with a formerly winning style, pause before you go looking around for a better approach. The vast likelihood is that a style that was once successful will be successful again. Perhaps you have loosened your stringent criteria, and a bit of review will reveal places where you have allowed bad habits to creep into your trading. Or maybe you have not changed a thing. Maybe it is the market that changed, and you are now looking to add a style that will work better in the new type of market. Fair enough; there’s a time and place for that. However, consider that if the approach you were using worked well under one set of market conditions, there is a distinct chance that it could function adequately under the new conditions if you only made a few simple adjustments. Although this is beyond the scope of what I can cover in this piece, it’s amazing how relatively minor changes to your timeframe, the specific setups you use, your method of entry, profit-taking and the manner in which you implement stop losses can make all the difference in a new market environment, as can the frequency with which you initiate trades (fewer!). So before you go throwing the baby out with the bathwater, see if a few simple adjustments to your style can help put you back on track. 4. And, finally, never forget that there is absolutely nothing wrong with standing aside when you enter a stretch of market that does not favor your chosen style. Don’t fall prey to the myth that you are required to make the same amount of money under all market conditions simply by shifting between different trading styles. This is harder to do in practice than it appears in theory. Often a far easier approach is to alternate between offense and defense. Attack aggressively when there is money to be made, then defend your capital with equal fervor once conditions turn sour. For the vast majority of market players, this is the far safer and better approach. I hope this list will help those of you who struggle to control your wayward impulses to remain monogamous with your trading plan. Believe me when I tell you that there is no way to truly master a trading style unless you have stuck with it through thick and thin and weathered a whole host of different market conditions. Fidelity (as it is in other areas of life) is a great virtue in trading. May you and your chosen trading style live happily ever after! |
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