The Linear vs The Exponential

The Linear vs The Exponential

When I was six years old, I read a book of cool math tricks. One of the experiment was called "How to become a millionaire." I was supposed to go to my mom and offer to do the dishes everyday for one whole month. As payment, I would only accept 1c for the first day. That sounds like a pretty good deal for my mom. The second day, I would receive 2c. Each subsequent day, the charge would double to 4c, 8c, 16c, etc. until the end of the month. Now a month is a mere 31 days at most. How much could I really make? I flipped the page to the mock invoice and my jaw dropped. I quickly ran downstairs to find my mom cooking in the kitchen and presented this proposal. My mom chuckled as my dad put down his newspaper and said "Sorry son, we don't have 21 million dollars."

Even though I was unable to trick my parents out of 21 million dollars, the idea of exponential growth stuck with me. Albert Einstein once said that "compound interest is the eight wonder of the world. He who understands it, earns it... he who doesn't, pays it." The problem is, most people do not understand it. In fact, if I walk down the street and ask random people if they would rather receive $1000 a day for a month or the payment structure of the dishwashing scheme, the vast majority would choose the $1000 a day. That choice will yield $31,000 over the month while the latter would place you among the wealthiest people in the world. Human beings are conditioned to think in the now. We ignore the growth structure and zone in on the $1000 vs the 1c. We focus on day one. Immediate reward are far more desirable than future rewards.

When the numbers are laid down on paper, it seems obviously logical to take the second pay structure. People will look at my math and quickly change their choice. However, when the choice of linear vs exponential presents itself in life masked in various scenarios, we continue to choose wrong.



Exponential Progress

So what is the point of this post? There are not many people handing out free money on the street or moms dishing out millions of dollars, so these are obviously not practical examples. It is because exponential progress lies in many aspects of life, mainly education. Almost everything worth doing in life follows an exponential curve. People want immediate satisfaction, even though foregoing that satisfaction will lead to a much greater reward in the future. Education is an example of path #2. The vast majority of people do not invest in themselves because they do not see immediate returns. Studying a book does not yield an immediate increase in brainpower. Running a mile does not show an immediate loss in weight. Lifting weight will not turn you into a bodybuilder by tomorrow. Trading stocks will not bring in profits right away.

In so many chances throughout life, we have chosen the option with immediate results. We have been conditioned to expect these results and we experience internal turmoil when these results are not realized. After multiple iterations, we grow increasingly frustrated which hinders progress. Eventually, we quit. Many people have false expectations in trading. When I first started trading live, I expected to make hundreds of thousands of dollars in the first year. I faced immense frustration. Instead of improving, I traded worse and worse everyday until I was in a deep hole. I consistently made negative progress until I was able to abandon these false expectations.

Learning to trade is an exponential activity. This is evident in the fact that experienced traders can makes millions a year. The trade off is that at the start, you will be making almost nothing. Expect to make nothing. Progress will be very slow. You will often go weeks and months while seemingly making no progress. Trust me, you are making progress.



Discipline

"Focus on the process, not the results." I cannot attribute this quote to anyone specific because I have been told this at one time or another by every successful trader I know. By "results", people are talking about the P&L. You should not focus on your P&L because when you are starting out trading, this is not the measurement of results. The true results are an unmeasurable internal understand of the process. For this reason, focus on the process. Are you following your rules? Are you trading correctly? Are you trading with discipline? P&L is a false indicator of progress. Even as you improve the process, you might not see any improvement in P&L. This does not mean that you are not improving as a trader. Discipline is understanding and following your process, even if results seem lacking.

So many times, I see people breaking their rules in hopes of catching a quick profit. These same people claim they want to become millionaires. When we break our rules, we are making negative progress. We are halting our exponential path to try and catch a quick $1000. Why grab $1000 now when it hinders your progress towards millions tomorrow?



Key Points

Everything in life with large rewards starts out slow, especially trading.

Discipline is following your system, even if you cannot see the positive results.

Focus on the process. Change the way you review your trades. Did you follow your system?

Green trades are not necessarily good trades and red trades are not necessarily bad trades.

It may seem like you are not making any progress but if you are working hard, you are.

Baby Steps

I had the pleasure of spending the last couple weeks with Kunal and the Bulls Team. The first day I met Kunal, he approved me for live trading. I showed up 6am in the morning and, most days, stayed well into the night. I tried to absorb as much information as possible within these couple weeks and here are a few things that I took away from the experience.

1. If there is a female living in the house. Put the toilet seat down after you're done.

Apparently, they can fall in.


2. More hours do not necessarily yield greater results.

My first week in Los Angeles, I spent about 15 hours a day doing something stock related. I reviewed hundreds of trades and drew lines on  thousands of charts. I read books, watched documentaries, and even watched my recorded-self explaining trades (this gets annoying fast). During trading hours, I was often glued to the trading screen the whole day without food until Kunal would force feed me his goat cheese, salami, Sriracha special. Even on the weekends, I woke up early to re-play previous market days.

It seems that I had followed the blueprint towards success to the letter. Unfortunately, my health declined, I was constantly exhausted, and my mind burned out. Kunal suggested that I take a day to "veg out". I spent a day in bed watching Seinfeld and eating beef jerky. The next day, I was ready to work.

I had to do more in fewer hours. I re-evaluated my regiment and narrowed down my studying to two main parts:
                           Trades that I took that I should not have taken - Why did I take them?
                           Trades that I should have taken that I did not take - Why did I not take them?

I found that this is the most efficient way for me to study. Instead of looking through countless charts and reviewing random trades, I focus on the mistakes I was making and work to eliminate them one at a time.

Working smart trumps working hard.


3. Make Friends

Trading can be a lonely business. Most traders, including myself, are lone wolves. They trade better when they are alone and focused. Unfortunately, being a full time trader alone in a room can lack human interaction. It was quite interesting watching the Bulls team and their shenanigans throughout the day. They were all friends from long before and work as a team. Kunal had to wake up to catch the market open at 6am on the west coast, but Omer and Tim also woke up early every day to work.

While I was in Los Angeles, I had the pleasure of meeting a handful of fellow Bootcamp students. We exchanged ideas and discussed our trading paths. I learned that it is much easier for an outside person to see what you are doing wrong. These fellow traders are a support group, a collective adviser, and even a cheering section. We are small time traders and we all want to see each other succeed.


4. Enjoy the fruits of your labor

We are all trading for a variety of different reasons, but a major reason for many of us is to the enjoy the freedom and comfort that can come from being a trader. It is easy for us to quickly forget this as we start to make money. We grow the desire to make more and forget the reason we wanted to trade in the first place. I read a lot about master traders who never take a day off and stay at the computer through the whole trading day. As many of you know, Kunal often calls it a day early to go to the beach or to just hang out with his friends. He travels around the world with his friends, hopping from city to city.

Remember that there are more important things in life than money. The reason we make money is so that we can enjoy those things.


5. Park's BBQ in Los Angeles is pretty damn good

Nuff said


6. Do not get discouraged.

Trust me, you are making progress. It it easy to see a string of losses and think that you have completely forgotten everything you learned. Some days, it even seemed like I was taking steps backwards. Learning to trade is a process. There is so much going on in the market that it takes time for us to absorb things. Win, lose, or draw, playing the market exposes you to the subtleties of the market.

Progress is not shown in a linear fashion on the P&L. Some people want to see the P&L increase a little bit every day but this is not how it works. I felt like every day, I was learning something new. I was eliminating mistakes and taking better trades. Still, my P&L did not reflect the progress that I felt. One day, things just started to click and the P&L took a turn. This is not a time in my career to focus on the P&L but to focus on learning. Every day, regardless of my P&L that day, I can pat myself of the back knowing that I am a better trader today than I was yesterday.


7. Have fun

Trading is fun. Look around you and realize how lucky you are. You are not stuck in a cubicle. There is no boss to report to, no one looking over your shoulder to micromanage you. You do not have to wear a suit or even pants for that matter. You can work butt-naked if you want! When I first got to the house, I was probably the downer in the group. Kunal is having the time of his life singing along to Cher and having fun with people in chat while I'm hunched over a computer tap tap tap-ing away.

Ironically, I found that I am better at trading when I am blasting music, watching tv, eating, and enjoying every other "distraction." This probably does not work for most people, but it eliminates my nerves and lets my instincts shine through. This might not be your cup of tea, but find what makes trading fun for you. Being happy and enjoying trading will yield better results than stressing over the P&L.

5 Lessons Traders can learn from Poker Players

I love poker almost as much as I love trading. The more I play, the more I see a strong correlation between the two. The psyche of a trader is very similar to a poker player and mastery of either requires similar things. Poker players and traders both play a game that involves chance. In both games, we can utilize methods to sway the odds in our favor. We play a game of leveraging risk based on the condition on the table or in the market. I put together a short list of the major things I believe are vital for the success for both poker players and traders. Of course there are many more things to add and I probably will compile a more comprehensive list as time goes by. Enjoy.

1. A poker player limits his risk. A poker player understands that the most important thing is to stay in the game and to do so, he must never lose all his chips.

2. A poker player does not try to win every hand. He understands that losing hands is part of the grand plan as long as he keeps his losses low.

3. A poker player waits for, and takes advantage of opportunities. He does not try to force a play but remains patient.

4. A poker player does not predict which cards he will be dealt but plays the cards that are dealt.

5. A poker player has balls of steel. He does not sweat when he is down and keeps a cool head when he is ahead.



- Still Broke

The Fine Line

There are many things that satisfy the idiom "There is a fine line between..." We try to tread carefully along this line is fear of tipping towards the wrong side.

There is a fine line between...

Ambition and Greed
Love and Hate
Confidence and Arrogance
Genius and Madness
Bravery and Stupidity

The list goes on.

We correctly identify that a slight distinction exists between these pairs but rarely seek to identify this variance. It is much easier to claim that there is no one quality that makes one desirable and the other avoided. However, identifying these subtle differences is what gives a clear path to staying on the right side of the line.

I have struggled in the past distinguishing confidence from arrogance. I considered people of great intellect and talent and thought that they must be aware of their abilities. So, if one of these people opt for the 'playing it humble' approach, that would make them liars. The alternative is to recognize their gifts and be labeled as arrogant. I won't preach on what I think defines the line between confidence and arrogance but if you can identify the key element that differentiates the two, you can take measures to avoid finding yourself on the wrong side of this line.

In trading, there is a fine line between being a profitable trader and a losing trader. It may seem like the traders making the big bucks are highly educated individuals with great insight into world economics. Or perhaps they are mathematical genius with an innate ability to visualize patterns. Even after years of trading, I am surprised at the subtle differences between a winning trader and a losing trader. One small tweak in your trading habits can be the focal point of a profitable trading career.

I was able to identify my fine line through analysis of my past trades. I noticed that I had many good trades, but lost the majority of my money in one or two bad trades. I let the losses run too much and, often times, a single trade wiped out the gains for 4 to 5 winning trades. I also noticed that I had a high percentage of losing day trades. As a swing trader, some days can get boring with no action and I sometimes try to throw in a quick daytrade to keep things interested. This break in discipline only lost me a bucks here and there but the net loss of all these trades was significant.

Practically overnight, I eliminated these discrepancies in my trading and was amazed how far I was up in the first month. I not only made the switch from a losing trader to a winning trader, but to a highly profitable trader. This line is different for each trader but it is necessary to take the time to identify this line. As a losing trader, I spent months thinking that eventually something would click and carried on trading as I always had.

When I was growing up I played the violin. I started playing when I was only 8 years old but didn't see much improvement until I was about 13. Previously, I had practiced the same time over and over, believing that repetition would build proficiency. It is said that 'practice makes perfect' but in fact, Practice Makes Permanent. Practicing something incorrectly over and over just makes you better at doing something the wrong way. I eventually practiced violin for fewer hours but spent the time to think carefully about what I was doing.

In trading, doing the wrong thing repeatedly only makes it a habit. One must take the time to pause and analyse what is going wrong and what is going right. I was able to take a couple hours to turn something that wouldn't after months of trading. In the future, I plan to analyze my trades to further eliminate mistakes and become a more profitable trader. I'll save a lot of time, a lot of grief, and a lot of money.


-Still Broke

My Missing Arm

There is a story that floats around in the world of martial arts about a young boy with the desire to learn Judo, a form of martial arts involving using leverage to throw the opponent. As daunting as this task may seem, it may have seemed a much higher mountain for this boy as he was missing his left arm.

He found a teacher that agreed to lead him on this endeavor and together they trained. The teacher taught the boy one move and asked him to practice it day after day. Months went by and the teacher had still only taught the boy one move, so the boy practiced the same move over and over.

After several months of  training, the teacher decided to enter his student in a Judo tournament so that he could get some experience in competition. The boy was puzzled and asked his teacher, "Shouldn't I learn more moves before I enter a tournament?" The teacher told him that it would be okay if the boy just tried his best.

During the tournament, the boy easily defeated his first few opponents. He was surprised, as most of the other competitors were older and more experienced, not to mention that they had both their arms. The boy continued his way through the tournament using his one move over and over until he made it to the final round. For the first time, the boy faced difficulty. His opponent was much larger and stronger than him and it was apparent that he was much more experienced. The two went at it round after round to a standstill and the boy was noticeably fatigued. During the break, the referees came to the teacher and asked if he would throw in the towel in fear that the boy would be injured if he continued. The teacher declined and told his student to keep trying his best. As soon as the next round started, the boy managed to catch his opponent off guard and threw him to the mat, winning the entire tournament.

On the drive home, the boy was elated, but confused. He asked his teacher, "How was I able to beat all of those other guys with only one move?" The teacher remained silent for a while and answered, "That move, the only known counter is to grab the left arm."

And thus, the boy's greatest weakness became his greatest strength.

___

Last year, I was diagnosed with something called cholinergic urticaria. Cholinergic urticaria is a disorder whose symptoms show the body experience an increase in temperature. The body becomes unbearably prickly from head to toe and it feels like a million angry wasps are stabbing you repeatedly. It got to the point where I would have to take off all my clothes and scratch all over to try and ease the discomfort.

Things that increase body temperature include:
Eating hot or spicy foods
Warm places/rooms
Physical exertion (including exercise)
Emotions - Anger, embarrassment, panic, etc.

The worst thing about Cholinergic Urticaria is that no one really knows what causes it and there is no cure.

I had to go through extreme measures to avoid my body warming up. At first, it seemed like all I could do was stay and home and lie in bed (without a blanket in fear of my body heating up). Over time I learned to avoid the things that triggered the cholinergic reaction. The hardest by far was controlling my emotions. Emotions are mostly a reflex and brought on by outsides stimuli. I had never been an angry person but even an emotion as mild as frustration or annoyance would trigger a painful ordeal. I tried so hard to control my emotions in the terror that I would experience another wave of hornet stings and in time, I learned to master them. I don't remember the last time I was angry or panicked.

Around the same time, I watched my performance in the stock market take off and never look back. Even to this day, I look at the positive things in life and it is almost impossible for anyone or anything to provoke me. I am a fiery and dynamic trader but I never have a flash of emotion that may affect my judgement. My cholinergic urticaria has diminished greatly to the point where I barely recognize it, but my temperament has remained the same. My greatest weakness forced me to develop my greatest strength. Looking towards the future, I hope that I can identify other traits about myself that may seem like weaknesses and find how they can be strengths.

-Still Broke

Play the Player, Not the Chart

As most people, I entered the market with the belief that the stock prices moved depending on how much money the company made. I was surprised to find that what caused stock prices to move was so simple.

People buy stock = price goes up

People sell stock = price goes down

Trading is a zero-sum game. Money is not created or destroyed (for the sake of this argument pretend the FED does not exist). Money simply trades hands. There are times in the market when everyone is making money or everyone is losing. For someone to make money, someone else has to lose money. The stock market is a free-for-all battle field and it is every man for himself. When I am trading, I don't simply look for patterns that I've learned about in books but I try to interpret them. If I can figure out what everyone else is doing, I have the advantage and can counter them. Each candle is a collection of players buying and selling and tells a story.

Who is the player? 
Institutions, big time investors, day traders, swing traders, amateurs, bagholders, the 9-5 worker, etc. Each group behaves differently and follows a different set of logic.

What are they doing?
Buying, selling, short selling, buying to cover. Although buying to open is the same action as buying to cover, one opens a position while the other closes. This difference leads to different implications on these two actions.

Why? 
This is the most difficult part. Every trader had a different reason for making a trade and a lot of the time there is a lack of reasoning. Through observing the market, it is possible to recognize certain behavior that is always present in the market including

• panic selling 
• greedy chasing
• denial/egotistical bagholding (refusal to close a losing position).

Understanding the people that are playing the market and understanding their thought process allows you to get a better indication of the 'why?'. Although it is impossible to distinguish what each individual might be thinking, it is possible to get a good sentiment on the aggregate players in the market.

Hypothetically, if you knew what every player was doing and thinking, every trade would be perfect. The closer you can get to the reality of what the market is thinking, the better your trades will be.

-Still Broke

A Game of Dollars and Sense

As stated in the previous post, I have a few days of down time before I jump back into trading. I thought this would be a good time to reflect on my long term goals. The goal when it comes to trading is straight forward: make money. Everyone may have different motivations for making money but at the end of the day, we all have two goals in trading:

1. Make Money
2. Don't Lose Money

I enjoy making money. Now that may seems like an obvious statement. Who doesn't enjoy making money. However, I found that most people in the world do not like making money. Everyone likes to  spend money, not many people like to make money. The difference is huge. Most people like having money because they like to spend money, but if they had a choice of making money or winning the lottery, they would go with the latter. I genuinely enjoy making money. Up to this point, I have no withdrawn any money from my brokerage account. I just want to watch the numbers go up up up. I do not speak of stock prices in dollars but in points. That's what the stock game is to me, a game with points for success.

I have noticed that I perform the worst when I concern myself with the monetary aspect of trading. Greed clouds judgement and influences irrational behavior. The stock market is not as complicated as most people believe but chasing money causes mistakes. Traders have strategies that work but lose big on a single trade because they went heavy whilst thinking "I'll hit the jackpot if I win this one." Traders but positions too quickly because the position is in the red when the chart shows that the trade is still in play.

It is quite ironic that to be successful in a game where money is the sole goal, one must not think about money. On a wall on my trading room I have posted, "Be ambitious not greedy. Ambition fuels motivation, greed clouds judgement." Don't grab too many peanuts or your hand will get stuck in the jar.

-Still Broke