Have you ever heard something like: ‘The market is a battlefield, be ready to fight with all you’ve got’, or ‘The market is a war’, or a variation of this theme? I bet you have, it’s a fairly common theme. Enemies may change, but the theme stays the same. The market maker is an enemy one day, the specialist the next, or the quant’s, the algo’ traders, the high frequency traders or the Federal Reserve traders etc. I’ve run out of names here – you may remember more. The question is: is it true – are these people really your enemy? Or, a better question might be: is the mindset – ‘that the market is a battlefield’ – one that you really want to adopt?
The reason I pose the question this way is because trading is not a purely intellectual exercise. As traders, first and foremost, we want practical results. With performance as our primary goal, we want to remain pragmatic – and such an approach calls for one overriding criterion in evaluating any method or mindset. That criterion is a simple and straightforward question: does it get me closer to my goal? In this example, ‘it’ is the mindset ‘that the market is a battlefield’. While the question seems obvious, it’s anything but. For years I’ve seen traders devoting a lot of energy and time to arguing points that may be fascinating dinner topics (well, assuming you have nothing better to discuss at the dinner table), but do very little for practical trading.
Don’t get me wrong – by no means do I want to present the marketplace as a happy place where refined gentlemen high-five your every win (hmmn, do refined gentlemen high-five at all? Or do they back-slap only? Or, in tune with the topic in hand, do they back-stab?). Similarly, do they console you with fine whiskey and a cigar after every loss? Of course not; they are out to get you just as much as you them. In that sense, everyone in the market is an enemy of everyone else. But that’s not really the point. The point is this: will this attitude toward the marketplace and its happenings help you to survive and navigate it successfully? Or is it going to undermine your success?
If the market is a war for you, you are going to be in the warring mode all the time. Can you function well and for very long when you’re constantly in fight mode? It’s an extremely tense mode, which is going to wear you out rather quickly. Longevity – or lack of it – is not the only negative here. It’s an extremely stressful state of mind, likely to cause you enormous strain and leave you constantly on edge, ruining your sleep, and negatively influencing your daily life and relationships. Worst of all, does it bring you any benefit in trading itself? Does it get you closer to your goal? I mean, for all this stress, you better have something to show for it, right? Not the case – most likely your trading is going to be edgy and nervous at best.
Have you ever observed an elite professional, trained to function in some dangerous field, requiring high concentration and precise, quick reactions? Say a firefighter, pilot, surgeon, martial arts practitioner – or yes, a trader even? If you have, you no doubt noticed – and probably commented – on one remarkable trait they all share. They are all focused, gathered, observant, acutely aware of their surroundings, ready to spring into action at a moment’s notice – yet they are relaxed! A dry joke here and there, a comment with a colleague about the lunch menu or a sports score – and all this while they continue scanning the situation, evaluating it, remaining alert and ready to respond in an instant. How on earth do they manage to do it?
Well, allow me to offer you a very different attitude. This alternative attitude is one where the market is a natural environment for a trader – an environment where certain patterns govern all the comings and goings. Is it a dangerous place for a trader? Of course it is. Think of it like an ocean. The ocean is a dangerous place to be and swimming in it is a dangerous thing to do – just like trading the markets. Alternatively, think of it as a deep forest, savannah etc. – any such environment can be deadly hazardous.
However, is it useful in practical terms to think of the ocean as a battlefield and view sharks as enemies? While it’s the obvious thing to do and probably the first instinct for many of us, it’s hardly helpful. If you approach the market this way, you will start making your decisions based on emotions, anger and frustration – which will result in you feeling powerless and, ultimately, in inevitable defeat. Does that sound like an appropriate mindset for a winner, or one that is likely to produce a solid performance?
Instead, try to think of the ocean as a place that is indifferent to you – not friendly and not hostile – but simply a natural environment where incorrect behavior gets you killed. Because that’s exactly what it is. It has no idea about your existence. It’s not hostile to you (nor is it friendly of course). By its very nature, it contains certain perils and hazardous creatures. As such it is a dangerous environment, but it’s unemotional toward you, impersonal about you and not really aware of you. Its waves, currents and sharks exist regardless of whether you are in the water or safely tucked away on the shore.
Start thinking of the ocean in this way and a miracle happens. Instead of emotions, focus on studying patterns – where the current flows, whether it will take you to where you need to be, where the sharks are, or where they are likely to be. What are the signs of them circling, how do you recognize their approach and how do you spot fish that you can catch and eat etc? That’s your cold-blooded trading approach where you act according to the patterns and not according to what your emotions would have you do.
The market makers, specialists, quant’s, algo’ traders, and high frequency traders etc. are not your enemies; they are merely fellow market participants who create the patterns from which you can profit. Consider them as enemies – and you’ll find yourself fighting those patterns. Instead, consider them as part of the environment – and start to study and follow the patterns they create. In a strange kind of way, they become your friends. Okay, not friends you want to invite for a Sunday dinner perhaps, but helpful entities that create signposts which you can use to navigate the markets.
Re-read the paragraph above before you start your next trading day. See if it puts you in a calm and confident state of mind where you feel in control of your emotions and actions.
Vadym Graifer can be contacted at RealityTrader