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