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”.
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.
