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 Up to this point, I have no withdrawn any money from my brokerage account.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

The Blame Game and the Pattern Day Trading Rule

Dario Wunsch is professional gamer in a game called Starcraft. Starcraft is a 1 versus 1, real time strategy game where a player has the choice among three unique races to play. Since Starcraft is a computer game created by people, it inherently has imperfections and balance issues among the different races. Discussion on the balance between each race pairing has become a regular occurrence. I once had to opportunity to ask Dario on his thoughts of the current balance state of the game. I was accustom to players complaining about why one thing was too strong while another thing was too weak so I was quite surprised by Dario's answer. He said that there probably were certain imbalances in the game but that he did not concern himself with them. He said that having the mentality that something is wrong with the game discourages your practice because the player blames the game and not himself. If a player believes that his success is dependent on the game design more than his ability, the battle is already lost.

Dario Wunsch

Dario possessed a strong internal locus of control. He kept a positive attitude and always reflected on himself to see how he could improve and did not waste time complaining about things out of his control. I notice this same mentality in top athletes. A top athlete always blames himself for a loss, not his team. He does not blame the referees, the weather, or anything else. He instead reflects on what he could have done differently, thus improving himself for the next game.

Kobe Bryant - Constantly looking to improve himself

In trading, there is a rule called the Pattern Day Trading Rule where a trader with an account under $25,000 can only make three round trip, day trades in a five day rolling period. The brokerage that I use bars the trader from opening the fourth trade as to prevent any possibility for violation of this rule. Today, I had a trade setup that I had been watching for weeks. The chart unraveled just as I had speculated but when I went to enter the trade, my brokerage prevented me. Naturally, the stock price exploded and I missed out on hundreds of dollars. I posted an angry tweet about my brokerage and blamed them for this missed trade. I can moan all I want but I cannot do anything to change my brokerage's policy. What I can do is to place blame on myself. I did not keep track of my daytrades and had no idea that I had hit my third one. I could have planned more carefully since I knew that this great trade setup was near fruition. There were several things I could have done to prevent this miss but instead I blamed my brokerage.

I find that I often place blame on things outside of my control when trading. I blame my brokerage for not having shares to borrow, blame others for degrading a stock that I own, blame school for making me miss crucial trading time. It is much easier to pass blame, and there are always a countless number of possible scapegoats. Passing blame protects your psyche from shame and self-degradation but at the same time inhibits progress. As soon as we subscribe to an external locus of control, we subconsciously stop trying and inevitably fail. I cannot control these outside factors, I can only control what I do. Therefore, I must learn to reflect on what I could have done differently and improve myself for the future. Only then will I, too, be a champion.

-Still Broke

Learning to fold

In Rochester there was a mayor who desired so strongly to leave behind a legacy in the form of a project called the Fast Ferry. He devoted all his time and millions of the city's dollars with the goal of a ferry that crossed Lake Ontario from Rochester to Canada. This was no ordinary ferry. It had exquisite architecture with game rooms, casinos, and restaurants. No expense was spared in the planning and execution. Unfortunately, not much thought was devoted to the clientele. It turned out that no one wanted to ride a ferry across the lake and the project was in a deep hole. As a response, the mayor threw more money at the project trying to make it bigger and better. He added the construction of a dock that would house the ferry and ran advertising campaigns to promote the ferry and dock as attractions. The project fell further and further. There is no happy ending for this story.

Inside the Fast Ferry

Keep that story in mind and let's change directions. I've been teaching a few student how to play cards. I found that the games usually end quickly. I try to give as many opportunities as I can but in the end, I win quickly and convincingly. Most importantly, I noticed a pattern among all amateurs, one that I find the be the greatest cause of failure: Amateurs rarely fold. Folding is a move where a player will bow out of the current battle, forfeiting his capital. Amateurs do not think about the longevity of the game but are too focused on the current hand. No one wins every hand . In fact, no one even wins close to 1/2 of the rounds. The experienced players know when to cut their losses and when to continue while amateurs will dig themselves into a deeper hole, refusing to lose the small amount on the table.

As a stock trader, you MUST MUST MUST learn to fold. As an amateur, I found it difficult to take a loss. I was so focused on each individual trade and I hated to lose. I hated to lose because I hated to lose money but more importantly, I hated to lose because it represented a state of failure. I keep a log of all my trades and every red row shows a loss. I try so hard not to add another red row. At times i forget that if I make $1 million in a year, it does not matter how many losses and how many wins I have. Even if i lose 4 out of 5 trades, the value of the million is the same. In poker, I do not keep track of how many hands I lose and how many I win. I focus on the end goal of having all the chips. Losing chips here and there is part of the plan. I must cut my trading strategy from the same fabric. Trading is a long term endeavor. I will always lose trades and I will always win trades. The importantly thing is to not dig myself into a bigger hole and throw more money at a project that's a lost cause. Abandon pride and learn to fold.

-Still Broke

Impatience and Greed

I've tried this blog thing several times and each time lacked the commitment to stay consistent. On big winning days I don't want to lose my high by taking the time to pause and write a blog and on losing days, I'm too frustrated to reflect on the day. I decided that there is no need for me to compose an epic saga with each blog post so from now on I will try to write sometimes every few days, even if it's but a few sentences.

Today was a revelation day for me as I snapped myself out of a destructive trend. Through dedication and commitment (and a whole lot of luck) I managed to grow my trading account by 123% in just under 4 months. Since then, I went on a losing streak. Each loss was a large dollar amount and it seemed that I developed the bagholding mentality. Ed Seykota said that people that lose want to lose and people that win want to win. I gave this some though and saw that I had developed a destructive attitude. I was angry at the market for my losing money and continued to throw money at bad trades. The more I lost, the faster I traded.

Ever great trader says that when on a losing streak, it is time to take a break. I refused to stop because I desperately wanted to make my money back. That was the first problem: "Make my money BACK" I should have been thinking of moving forward but was, instead, so focused on a sort of revenge. The two might seem the same but the slight variance in mindset makes all the difference. I kept repeating to myself how much money I had to make to "break even" (back to my account high). I was not focused on being better but on being less bad.

Tomorrow is a new trading day, I have liquidated most of my positions, winning or losing, and will start with a clean slate and a new mindset.

-Still Broke