The banner on this blog page states that I am imparting to you all my trades so that I may return, in kind, the favor that other bloggers do me every day by publishing their material. Over the years, I have found that having good trading skills can give you valuable fertilizer for your lifelong financial garden—a Midas touch, if you will. On the other hand, if used without the proper mindset, trading can be a nice sousing of Agent Orange for your life savings. With that in mind, I feel obligated to impart to you some the causes of the not-so-bright journeys I've taken through my trading career. I hope you will take them seriously. If you do not, and you have the right cocktail of strikingly common personality traits, you could end up damming me and other bloggers out there as a bunch of people who gave you horrible advice when it was really you who gave up the golden opportunity to have that Midas touch and be a successful trader for life.
Very rare is a trader who can tell you that he/she had double-digit gains in perpetuity. In fact, the statistic is that most traders can't beat an index. Which begs the question, "With all the time it takes to trade, in the absence of an edge in the market, why would you trade if you could give your money to someone else to do it for you?" There are two possible answers to this question, in my estimation. Either you:
- Love it to the extent that you would do it even if you couldn't make money doing it, and/or
- Your ego is so tied up in it that your brain mistakes trading as a survival mechanism
The first is a constructive motivation, and a person for which #1 holds true can also have #2 as an inherent trait at the same time. Regardless, #2 has no place in your psyche if you are going to be a good trader, and it is very hard to stave off. If you are exhibiting the behaviors below and in the subsequent few posts, you likely have #2 mixed in with your motivations to trade. This post should serve as a warning to you that you are likely headed to a bad place.
A Word on Nitrogen Narcosis
Shadow Divers, by Robert Kurson is a spectacular true read about two divers' insane perseverance in legitimizing the discovery of a World War II German U-Boat over 50 miles off the coast of New Jersey in 1991. In the book, the phenomenon of nitrogen narcosis is graphically depicted and really jumped out at me as a great analogy for what both I and other traders tend to go through before and during periods where they can't make a dime or only lose and can't understand why.
Nitrogen Narcosis results from diving at great depths for extended periods of time. It comes from a higher than normal concentration of Nitrogen in your blood, which creates much the same effects of alcohol consumption or inhaling nitrous oxide, among others.
One of the many problems with Nitrogen narcosis is that you are experiencing it in an environment where planning your plan and living your plan are of the essence because of the minefield of hazards that exist at great depths. In Shadow Divers Kruson describes the dynamics of narcosis and the downward spiral that it can create in a diver, particularly a wreck diver, leading to a self-induced disaster. You start your dive with a distinct plan. You know exactly how much time to spend in the deep, what you will and will not permit yourself to do, and with at least some precision, where you will be at various times during the dive.
Then, something unexpected happens or you make a miscalculation that derails your plan to some extent. Let's say something falls on you and pins you down for a minute or two, which is common in wrecks. Under the confusion of narcosis, you start thrashing around, which is a big no-no in wreck diving due to all the silt there and also because fast body movements and a panicky mentality consume much more oxygen. Now you are at a disadvantage physically, having less air than you originally thought. After a few minutes, you free yourself, but now you can't see due to all the silt swirling.
Narcosis also accentuates panic. Even more panicked than before, you start moving very fast around the wreck to save yourself. Wrecks often have a lot of stray protrusions because they are, well, a wreck. One of the hoses on your breathing apparatus gets caught on something and now you are stuck again—more panic and more consumption of vital air. You free yourself from that obstacle, and somehow you find your way out of the wreck.
In a panicked and extremely "drunken" state, you forget that you left a reserve bottle of air outside of the wreck that you could use to breath. You look at your gauges and manage to calculate that you have 10 minutes for an ascent that you must spend 40 minutes doing to adequately decompress. More panic and more air consumption, but in reality with all that's happened, you don't even have those 10 minutes available because of all the extra air you consumed during all your misfortunes. Feeling doomed, you cut your losses, fill your wings with air, and shoot up to the surface. That ending is a true ending—to a life—and these types of scenarios happened repeatedly during the course of the true story told in Shadow Divers.
Notice the spiral, with the catastrophes building exponentially. Notice also how the more things go wrong, the more activity you engage in to save yourself, the more air is consumed, and the worse the situation gets. It just builds and builds until the you shoot up toward the heavens, where hopefully you will be forever more.
OK, sorry for the drama, but the metaphor is perfect. In this scenario:
- Diver = trader
- Wreck = the market
- Activity = trades
- Strategy = trading style
- Air = money
The Anatomy of a Trading Spiral
Before I really begin on the trading side of this, you need to know one thing that I won't belabor, but if you would like to Google the words "ego" and "survival" side-by-side, see what comes up and you'll get my point. When your ego is identified with an activity, your brain's survival mechanisms mistake that activity for a survival mechanism. So if your ego is identified with your trading, you will engage in trading much with the same subconscious perspective as a wreck diver engaging in the truly life-threatening activity of wreck diving.
Step 1: You Have a Plan That You Want to Execute
Like the seasoned wreck diver with a dive plan. You have a trading style, philosophy, or paradigm that you either are convinced is going to work or you have been using for quite some time. For whatever reason, now it's gone south. Over some time, you begin to second-guess yourself. Identified with your ego, your brain starts asking you questions about your self-worth and if you will really "survive" as a trader. Your ego starts making tragic, fatalistic statements to you like "if I don't succeed at this, I don't know what I will do" or "I'll be finished." Your judgment is clouded, and trading narcosis sets in. With your sense of survival at stake, you start to panic.
Step 2: You Make an Unplanned Tweak in Your Trading Style
With panic and clouded judgment, your trading narcosis starts to cause you to reach at tweaks in your style with little or no thought. You don't go to a simulator to test out your tweaks before you implement them. Your ego convinces you that you have got the solution right now. If you implement this one thing, you will undoubtedly solve your problem. You wake up the next morning and start trading with a slightly new style. You begin losing money or more money that before. Your air (money) supply is beginning to wane.
Step 3: You Make Several Unplanned Tweaks in Your Trading Style
Rather than helping your situation, you have accelerated your losses. Your level of panic increases. You begin to thrash around looking for a solution. That paranoia familiar to divers with narcosis and the resulting panic sets into your trader's mind. You become more and more obsessed with your situation and trying to fix it. You start to play out elaborate schemes in your mind of how you can figure out the market and free yourself from the hell you are being pulled into like the grips of tractor beam. You start watching the traders on Bloomberg and CNBC with tips of the day and nuggets of wisdom, not thinking for once that 1) these interviews are orchestrated for everyone to disagree—so there's at least a 50/50 chance that in any given spot, one or both of the participants in an argument are wrong, and 2) you have no evidence that any of them are any more successful than you have been. You lay awake that night, and you put together all your information. The next morning or a couple later, you wake up with the solution to your problem. You blindly implement it.
Step 4: Repeat Step 3, Every Time . . .
. . . with less air (money) and a loftier goal (to make back what you have lost, and then some), until you . . .
Step 5: Fill Your Wings and Shoot to the Surface
After having visited the unfortunate land of step 3 several (or more than several) times with your situation getting ever worse, you acknowledge you are now in a spin. You exit all your positions and decide you need to "regroup" for a while. You check your mind into the decompression chamber of trading. You lick your wounds for a while. You wait for the dust of humiliation (that only you are aware of, by the way) settle for a while, and then you go to . . .
Step 6: Reenter, More Debilitated Than Before
Unless you really realize what caused your spiral—that is, that you let your ego take over and hence, your mind has equated survival in trading to the level of personal danger inherent in something like wreck diving—you will begin trading again, set up to repeat steps 1-6 again. You will begin, most likely, not having psychologically recovered from your last bad dive, with less confidence and self-assurance, with less money, and with the goal in mind to trade to make it all back. Maybe the diver with the lethal bends is more fortunate (I of course mean that completely metaphorically) because he won't ever be able to live the cycle of a bad dive again. You, on the other hand, can dive into the market over and over again until your money (or air) is gone.
This cycle is the chief dynamic in so many failed traders. I tell you because I have been there, but I have luckily been able to recognize it and detach that ego from my trading before making that next dive. This ego detachment is essential to surviving the markets. In this way, you have the leg up on the wreck diver.
Yes, technology in diving improves with every passing year, making it more and more safe, but the diver has to wait as time goes for the danger in his dives to lessen. You, on the other hand, can acknowledge what is happening, take a good, deep, hard look, and make a change tomorrow.
As you read this, you may have thought of the word "addiction," which is a teaser for a subsequent post.
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