- The Market
- Winning and Losing
- Investor v. Trader: How Do You See the World?
- Fundamental v. Technical: What Kind of Trader Are You?
- Discretionary v. Mechanical: How Do You Decide?
- Timeless
- Has Trend Following Changed?
- Trend Following Modus Operandi: Follow Price
- Follow the Trend
- Handling Losses
- Conclusion
- Key Points
This chapter is from the book
This chapter is from the book
This chapter is from the book
Winning and Losing
Between the corporate and market scandals of the past few years, it is understandable that the general public equates winning with abusing the market system. However, there are disciplined men and women trading in the markets with the utmost integrity who achieve spectacular returns year after year. We urge you to examine their market philosophies and strategies so that you will understand what makes them successful. We ask you to examine their beliefs and self-perceptions so you understand what keeps them honest. However, before we examine other's perspectives, we want you to take a moment to consider your own. How do you approach investing?
The joy of winning and the pain of losing are right up there with the pain of winning and the joy of losing. Also to consider are the joy and pain of not participating. The relative strengths of these feelings tend to increase with the distance of the trader from his commitment to being a trader.
Ed Seykota4
For example, does this describe you? At the end of the Nineties, just when you were feeling good about yourself because you were more secure financially, the dot-com bubble burst, and by the time it was over, you had lost a significant amount of money. You found yourself angry with the analysts, experts, brokers, or money managers whose advice you had taken. You didn't do anything wrong except follow their advice. Now you doubt that that you will ever meet your investment goals. You've held on to your remaining investments believing that the market will eventually turn around, but deciding what to do with your 401k money has become stressful. You still believe that buying at the bottom is the way to go. You've now begun to think that what winning in the markets really requires is just plain dumb luck.
Or maybe you might view your financial world like this: Sure, you lost some money in the bear market but, win or lose, you enjoy the thrill of investing in a stock in the hopes of making a profit. Investing is entertainment for you. Plus, you like to boast about your investments to garner the admiration of others. You know you can be depressed and angry when you lose, but you also know that when you win, you feel terrific. It's a great high. Since your main goal is to invest for quick profits, you're going to keep on doing what you've always done, bear or bull. After all, there was one time a few years ago when trading off a "hot tip" made you a nice profit.
If you think education is expensive, try ignorance.
Derek Bok
There is a much better way to think about investing. How would you feel about embracing this perspective? Your approach is objective and rational. You have enough confidence in your own decision-making that you don't seek out investment recommendations from others. You're content to wait patiently until the right opportunity comes along. Yet, you're never too proud to buy a stock that is making new highs. For you, buying opportunities are usually market breakouts. Conversely, when you recognize that you are wrong, you exit immediately. You view a loss as an opportunity to learn and move on. What good is obsessing on the past going to do you? You approach your trading as a business, making note of what you buy or sell and why in the same matter-of-fact way that you balance your checkbook. By not personalizing your trading decisions, you're able to look forward to making them.
What a stark contrast in perspectives. The first is that of a potential loser; the latter is that of a potential winner. Don't be in such a hurry to choose the winning approach until you've found out just what making such a choice entails. On the other hand, we hope you'll find, in Trend Following, the inspiration to step up to the plate and go for it:
"Profit-seeking speculation is the driving force of the market."—Ludwig von Mises5
The perfect speculator must know when to get in; more important he must know when to stay out; and most important he must know when to get out once he's in.