VIEWPOINTS OF A COMMODITY TRADER

Nobody goes there anymore. It’s too crowded – YOGI BERRA

 

It continues to amaze me to watch the Wall Street Gurus apply scientific and fundamental logic to an illogical game. Not only does this cause traders, who buy into these scenarios, to underestimate risks, it also draws a crowd into the scenario, increasing risk further. As John Train said in his book Dance of the Money Bees, “The herd instinct seems to be the strongest human emotion, one that the race is constantly breeding off as the mavericks are liquidated. Happiness is running with the crowd.” 

If we place too much emphasis on the “quantifiable”, we run the risk of being blindsided by a changing world and changing markets. This upsets the balance between left brained analysis and the right brain instincts, both of which we should employ to be good traders. When we get sold on sophisticated models, that tell the future from past data, by very qualified and believable scholars, we underestimate what can go wrong. 

Bennett Goodspeed in his book The Tao Jones Averages points out, “Analysis can be equated with poker. Security analysts carefully follow the table talk of the game and examine the up-cards. Although analysts effectively follow and communicate these two aspects of the game, they either ignore or ineffectively guess at the other major element-the down-cards.” 

“On Wall Street what is known tends to get glorified at the expense of the unknown. We have become so caught up in our scientific methodology, that if something cannot be measured or counted, it will not be believed. As a result, we tend to adapt the world to our belief systems, rather than try to understand as it is.” 

This is not to say that one should underestimate their trading plan. It means don’t buy into it. Stay flexible, and always think in terms of what can go wrong. This is especially true these days, where momentum trades and “bubbles” have become commonplace. And when the crowd shifts, be assured that the controlled logic will give way to uncontrolled emotion. 

I think it pays to assume this can, and at some point, will happen. Your approach should have a “worst case” scenario, no matter how right you think you are. What if all my trades correlate and go bad all at once? What will happen to my account? 

Paul Tudor Jones in Market Wizards said “the most important rule of trading is to play good defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down.” 

“Don’t be a hero, don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.”  Read Related post

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Filed under: Favorites, Trading Psychology by Charles Maley