What does the growth and maturity actually look like? Below a professional trader of many years describes his journey. It was written and sent to me as a way of talking about his growth as a trader during his work with our Ignite Your Spark Individual Program.
His idea began when listening to me explain how I almost drowned in the big waves of Hawaii due to my ignorance and arrogance of not being able to appreciate the power of the Hawaiian waves compared to the relatively tame waves of my youth on the Atlantic and Gulf Coast of the United States. The parallels of trading and surfing are then transferred to his native Australia.
His commentary, below, is left unchanged and unedited from what he sent me. Understand, this guy was already a professional trader for many years. This is a space where he transforms the trader who trades.
The Novice Ocean Swimmer
You're on vacation and stroll down to the beach. The ocean looks inviting; blue-green glassy waves capped with crisp white peaks. You are a confident swimmer, spending time doing laps at the local pool, during the summer months, but as you wade into the water you lack the ability to discern the conditions; there are forces at work which although unseen by you, would jump out at someone with the right knowledge.
You make your way through the surf to beyond the break and float on your back in the calmer water. Without a reference (the view of the beach) you are not aware that you are drifting sideways, parallel to the coast and into a rip. You suddenly notice a change in the nature of the water and come to with a start; you are a long way from where you expected and drifting out to sea. In a mild panic you start to swim – aiming straight for the beach. Your alarm grows as you realise that you've been swimming hard for a while but made no progress. You curse yourself for being so stupid "I'm always messing up" and redouble your efforts. Time passes and you've still made no progress, you feel your impotence in the face of a force which doesn't know or care about you and your arms, legs and shoulders are tired. Your breathing is heavy and as you gasp for breath you swallow a big slug of salty sea water and gag, cough, splutter. Panic sets in, you think to yourself "I might to drown out here" and your mind goes into a whirl…..
Fortune favours you – a lone surfer, noting your distress, paddles over to help. You grab hold of his board and as you spend a few minutes resting he explains " the trouble is you're caught in a rip current, all that water rushing into this fairly narrow bay has to escape somewhere. It finds the path of least resistance and flows back out through it. That's where you are now and you are fighting it. The rip is actually quite narrow and short & you have two options. You can simply float and the current will take you out for a bit, not far, until it loses its strength, then you can swim parallel to the beach and head back, or if you're feeling strong enough, swim parallel from here until you get out of the rip and then head back to the beach."
Since you're a strong swimmer (in a pool) you chose option two, make it back to the beach and vow to learn about surf lifesaving.
The Novice Trader
You've heard about the fabulous money people make out of trading the financial markets; it seems like they make money without having to do any real work and the books and magazines you've read confirm this. You simply have to find a "system" and you've got it minted. Adverts in glossy mags show traders lounging around with their laptops working from exotic locations. "I'll have a bit of this" you think to yourself, I got my MBA last year, how hard can it be? Most of the magazines you've read suggest that futures are where the action is (saves you from having to read up on companies, leverage) and the CME has these eMini contracts which seem ideal for the retail trader – they are liquid with a small contract size. All you need do is open an online account and off you go…
The months pass but rather than the riches you expected, you have burned through half of the capital you deposited in your account. In fact, you hardly even look at your account statements any more. At first you checked daily, but now its too painful, so you justify your losses as a "tuition fee" – you'll make up for it all with the future profits you'll make, after you've tweaked your indicators to fit the the market. Still you feel cross with yourself and redouble your efforts, buying and reading a collection of books on short-term futures trading strategies and taking courses on technical analysis. You've never worked and studied so hard (the MBA was child's play & at least there were definitive answers to the questions). Worse of all is that your self esteem has taken a battering – you take pride in your can-do wherewithal, your sheer competency which has enabled you to brush aside previous challenges. Self-doubt is your shadow, yet worse of all is the fear – fear that manifests as a racing heart and perspiring body as you get engaged in trading. Yet still you persist – persist as if you were compelled like an addict – you keep on losing, making the same mistakes and feel your impotence in the face of forces which neither know or care about you…….
Fortune favours you – attending a trading expo, you get chatting to a seasoned trader, who was doing the rounds, looking at the latest bumf being peddled by the various vendors. You introduce yourself as a trader and the first thing he asks you is how equity curve is. This subject makes you extremely uncomfortable and you stammer an evasive reply but the trader won't let it go. "Your P&L is the only true measure of your effectiveness, without it as a reference, you are adrift". Your reply to his question about trading style involves using a bunch of technical indicators which you have tested and tweaked to tease some sense of meaning out of the market. You bounce the question back (expecting a complicated reply involving sophisticated entry and exit algorithms) and are astounded by the simplicity of his reply "I look for those points in the market where participants are going to be forced into action because it's dawned on them that they are wrong and they better get out NOW, before they lose even more money". He goes on "their activity creates a path of least resistance, I don't know how far it will carry me, but I ride it as far as I can". Your answer to his question regarding pre market prep is that you read the market reports, watch CNBC and have a calendar events. You don't even know how to begin when he asks about the work you do on yourself – it had never dawned on you before. "Best get to know yourself & find out why you do what you do" is his parting comment.
The Body Surfer
You love and respect the Ocean. Along time ago you were lucky enough to be rescued by a surfer when you were caught in a tricky situation and that episode acted as a catalyst for you to learn about ocean swimming. As you arrive at the deserted beach in Western Australia, you check how you are feeling both physically and mentally – This is a new location for you & it's not patrolled; you alone a responsible for your safety. Your respect for the ocean ensures that you keep in control of any hung-ho tendencies. You know that you can handle just about any situation in the water, but once or twice before you've caught yourself taking big risks body surfing off the point of a shallow reef.
Before you left your beach-shack, you checked the macro conditions – wind direction, swell size, water temperature and the shark report. There have been a number of attacks from great whites in W.A. during the past few years and you want to minimise this risk of this rare but high-impact event. Knowing that sharks most actively hunt at dawn and dusk and are attracted to highly contrasting clothing, you've chosen to time your swim for 11am and are wearing matching marine-blue board shorts and rash top.
As you saunter down to the water's edge you size up the conditions – swell, sandbars, reef and the texture the water. You mentally prepare yourself for dealing with any tricky situations you may find yourself in, knowing that you can observe all you like from out here, but once you get into the water you need to rely on your feel for it and be prepared for what it throws at you. You know that the key to the micro-management is to keep in control of your breathing. It is literally impossible to drown with inflated lungs as humans are naturally buoyant, especially in sea water. Moreover, you know that by managing your breath you can keep calm and relaxed in the water, think clearer, get in the flow.
You check your watch before heading out; in these conditions & with this water temperature you reckon on being good for about 60mins before your fatigue levels become an issue. Therefore you plan on getting out of the water in about half an hour to allow a margin of safety in case of any difficulty you may encounter in getting back in.
Earlier, when you were checking the water, you spotted a rip and you swim towards it now, to get an easy ride out to the back of the breakers. As you test the strength of the current, you reflect on how your perceptions have changed; what was once scary and threatening is now your friend – you are moving in harmony with the ocean, rather than fighting it.
As you reach the break, you swim parallel to the beach, toward the waves which are standing up and racing back to the beach, beautifully hollowed out by the offshore wind. As you float in the water, waiting patiently for a good wave to catch, conserving your energy, you ponder that although similar, each wave is unique and furthermore each of your interactions with a wave is unique too. When catching one, you never know how far it will carry you, or even that you'll get onto it properly – some promising looking waves just seem to fade. You understand that you are immersed in a complex system, a game of probability and all you can do is to use your judgement to spot the best looking opportunities, do your best to get onto them and let the ocean take you with it. You enjoy the uncertainty, its the nature of the beast and it keeps things interesting……
You ride the surf back to the beach, climb out of the water, and thank the ocean for the time you've had and what its taught you.
The Professional Trader
You have a deep passion and respect for the financial markets. Sometime ago you had to dig yourself out of a big financial hole after you'd burned through a large chunk of your trading capital. That episode acted as a catalyst for you to get yourself together, to get to know yourself and to learn how the markets really work. Luckily, you were able to find the right advice. Advice which awakened you and enabled you to sort out your psychology and find a trading style in harmony with your personality and financial goals.
When you woke up this morning, you checked the macro conditions – how you are feeling physically, mentally, spiritually and then spent time in meditation, adjusting and getting intentional for the day to come. Yesterday, at the close of business, you logged your P&L and were content to see a steadily rising equity curve. You had a losing session which caused minimal impact on your steady progress but more importantly you followed all the rules of operation, so you therefore classified the day as "good". At one time you'd have gotten bent out of shape by losing, but now you have developed self-trust and are realistic; you expect to have sessions which don't go your way but have great faith in your methodology delivering you an edge over a series of trades.
As you arrive at your trading office, you are intentional as to why you are here – to provide yourself with financial freedom and personal growth and to provide the monetary wherewithal to enable your families options and opportunities. You recognise that you alone are responsible for your safety in the markets …. and for your results.
You size up the conditions as you log into your computer, looking over recent price action and then check to see what events are pending today. Finally you check for any news on the broker with whom you have your account. In the time that you've been trading, you've witnessed the market being closed for 9/11, the "flash crash" and the demise of MF Global and want to minimise the risk of these rare but high-impact events.
You've caught yourself making the odd dumb trade when overly tired during the PM session, so you consider your energy reserves and given that its been a busy week, you opt to trade the AM session only and use the PM for study, admin etc. Well before the market opens you mentally rehearse the set pieces of your trading plan and drill new skills and process goals you are working on.
When the market opens, you feel calm and prepared as you settle in to patiently observe price action unfolding. You reflect that the only meaning that the markets has for you, is the one you give it; for example, one man's downtrend is another man's uptrend (depending on the time frame) and in that sense the market is observer generated. Furthermore you believe the each example of support, resistance, whatever is unique and on top of this each of your interactions with these levels / patterns is unique too.
In times gone by, you looked for "canned" setups, a combination of indicators to tell you what to do, but now you know that was incredibly naive; as if you could order up some simple formula for making money, really! The reality of that mode of operating is that you are just another deceived, unthinking member of the crowd – prone to buying highs, selling lows and generally doing the wrong thing at the wrong time. Once you were a part of that crowd, constantly getting "picked off", but now you are the hunter, not the hunted…
As you are relaxing, focused & in the zone a potential opportunity sets up on your charts. Your training kicks in and you check in on yourself, both calming your breathing and sharpening your focus. You like the look of the setup – it looks like a whole bunch of traders shorted upper resistance, fading the news and the market has showed weak momentum in their direction – they will either be in marginal profit or small loss. You identify a level where you calculate the short traders will feel under pressure to act to cut their losses as the market moves against them. If your scenario is correct, you can see the market running 40 points to the next significant level of resistance, but if your scenario is wrong and support breaks, you only need to risk 15 points. These are good risk / reward metrics and you place your stop entry buy, initial stop and target orders.
The market grinds higher putting pressure on the short traders and then suddenly pops. You see that you have been filled and that your management orders are in the market. You submit yourself to the will of the market, accepting that it will do what it may and that all you can do is to manage your own performance as best you can. Uncertainty once unnerved you and you'd be clenching your fists, talking under your breath as if you could some how control the market – it was exhausting. You marvel at how your perception has flipped; now you enjoy the uncertainty and appreciate that it's central to the very nature of your business, for without the uncertainty there would be no opportunity.
As you patiently observe your charts, you see price take off along the path of least resistance and swiftly rally to your target price, propelled by the trapped shorts scrambling to cover and the standing buy orders who missed getting filled at lower levels and are now chasing price so as not to lag VWAP. This was a nice easy trade and you're grateful for it, but you don't get carried away, appreciating that out of a sample of trades, you'll get some which take off nicely and never look back, some which initially look good but then just fade and reverse on you, others which show no promise at all at first and then go blasting off, running far further than you ever expected and plenty which immediately go against you and stop you out.
As you go through you end-of-day processes you thank the market for the opportunities it has given you and for offering you an activity you have passion for – trading.
To learn more from Rande, be sure to check out some of his other articles at TradersStateofMind.com.