Monday, August 12, 2013

The Costanza Problem...8.12.13

The Costanza Problem 

The Jerry Seinfeld sitcom often featured George Costanza, a character who was a serial loser by his own admission.  George was frequently unemployed for long periods of time and was forced by his poor financial situation to live with his parents whom he found every opportunity to denigrate and demean. Although George tried almost every job imaginable, he always found a way to get fired, often under embarrassing (and hilarious) circumstances. His personal relationships and his professional pursuits were a series of unending blunders.   George’s inability to make either personal or professional commitments doomed him to a world of constant conflict between Relationship George and Independent George.  As George was fond of saying, "A George divided against himself can not stand”. 

George was a comic success because of his personality quirks, but a deeper analysis of his multiple character foibles provides an insightful look into the types of behavior and attitudes that can help investors and traders succeed.

While George frequently acted like the poster boy for deviant behavior, he was merely displaying an over the top version of many of the negative traits that traders must avoid in order to become consistent winners.  Denial, failure to be honest with one’s self, lack of training, lack of a professional attitude, lack of self-discipline, lack of patience, lack of focus, poor capitalization, poor planning and/or the inability to formulate and follow a plan are all examples of self-destructive behavior that traders must overcome.

In a particularly watershed episode George experiences a glorious epiphany that everything he has ever done in his life has been wrong and that to rectify his failures and now become successful he must behave exactly opposite to the way he has behaved in the past.  George undergoes this realization while in a tavern and immediately approaches to the back of a very attractive, apparently unattached blonde perched at the bar.  Completely contrary to his usual attempts at gaming and deception he openly declares, “Hi, my name is George, I’m unemployed and I live with my parents”.

The anticipated result of this encounter is, of course, that the blonde will turn away from George in disgust and disdain.  But with an inviting smile and flourish she turns to George, extends her hand and says, “Hi, I’m Victoria, it’s so nice to meet you.”  It is in this moment of brilliant clarity that George ceases to be divided against himself and presumably later reaps the benefits of his new persona off camera with his new lady friend.

In like manner, a mantra for traders might be,  “A trader divided against himself cannot survive”.  How can a prospective trader formulate and effectively utilize a unified mindset and attitude that will enable him to emulate George’s awakening and trade with calm, clarity and consistency?  The ability to successfully answer this question is fundamental to a trader’s longevity and the shape of his equity curve. 

State of Mind

Long term investors and short term traders operate in a dynamic, probabilistic and opportunistic environment characterized by uncertainty and risk.   Market movements are driven by government financial policies, unpredictable news, intentional mis-information, chat-room hype, program trading, earnings reports, business fundamentals and the rampant trader emotions of fear, greed and hope that can dramatically impact price and volume action in both stocks and options.  The markets are a zero sum game and utterly impersonal.  Other traders have no regrets about taking your money and eating your liver for lunch, presumably with some fava beans and a nice Chianti.

If you ignore the following brute facts of market activity then it is extremely unlikely that you will be able to preserve your capital and to survive as a trader:

Anything can happen (and probably will).

There are always unknown forces and traders operating in the market with diverse goals and strategies that may not be logical or probabilistic according to your perspective. If you believe anything can happen in the markets then you will always be right.

Murphy’s Corollary:  “Anything” will most often happen when you least expect it or when it is most disadvantageous to your market position.

A trading edge increases the probability that market moves can be anticipated.

The only determination you need to make is whether the factor you have identified as an edge is present at any given time. If you mix in other information to try to qualify a prospective trade then you are weakening the probability of your edge. Do not waste time attempting to gather more information to guide your trade if the market offers you a legitimate edge.  Instead, apply your risk management plan, seize the moment and take the trade.

Every moment in the market is unique.

Come to the market with no agenda other than to let it unfold as it may. If you have a quantified trading edge then the laws of probability will prevail over a series of winning and losing trades. Incoming market information, news and data are only threatening if you expect the market to react in a certain way.  If you don’t expect the market to make you a winner every time you place a trade then you will have no fear of losing.  If you eliminate your expectations, then the market cannot disappoint you. Maintain a clear and focused state of mind in order to recognize and take advantage of the opportunities the market makes available to you. Successful traders have trained their mind to believe in the uniqueness of each moment in order to be open to perceive what the market is offering.

Once you have accepted the inherent uncertainty of the market your success will increase dramatically. Consistently successful traders develop an almost detached state of mind that treats trading as a probability game because they know with a high degree of certainty:

v  What a trading edge looks like and how to determine if it is working

v  The amount of risk required in order to determine if an edge is going to work

v  A specific trading plan to mitigate risk and to define how to take profits and cut losses.

As a investor or trader you need to be rigid and flexible at the same time: rigid with the rules of the trading plan and flexible in the expectations for how the trade will play out.  A trader needs to be rigid to give himself protection in a market environment that has few boundaries and to promote self-confidence and a trader needs to be flexible in order to be objective and give clarity to what the market is communicating.

Creating consistently profitable trades results from acquiring and embracing the tools to master these technical, tactical and mental skills rather than focusing on making money.