A Trader’s Guide to Sipping Kool Aid

You’re red hot, trading your way to incremental riches, absolutely killing it in the market while leaving a slick grace of success in your wake.

Yeah, yeah – Get over it.

Michael Davey again…

Kool Aid is a killer.

I’m serious. It doesn’t take a Dow Jonestown debacle to necessarily lay you to rest. Don’t drink the stuff – yours or anyone else’s.

Their Kool Aid: You will never be able to follow another trader with much success, if you don’t follow yourself first. Sure, if you never design a disciplined strategy and just wing whatever you feel on any given day (avoiding looking at account statements, have a penchant for tiny gains and not-so-tiny losses, etc.) then you might trade better in someone else’s wake. But we want to do better than that. We may as well excel, right? Yes, we can glean from others – we absolutely should! We’re not the greatest genius who has no need for outside information; not even close. But if you want to learn to maximize your own trading (your own account!), then you absolutely must listen to yourself first and incorporate the ideas of others somewhere down the line. 

Maybe you’re new at this and you could argue that you will only fail if you weigh yourself above others who know more than you. Good good good – you want to fail! Success, when you are new, is going to make your struggle so much worse down the road. That’s not actually a joke – experienced traders know it is absolutely true. Trade on paper if you cannot afford the losses (or vastly reduce the size, I recommend more; since you learn faster losing real money). But trade and learn. Incorporate ideas and learn. You think that losses are bad (perhaps), but losses are going to help you to improve; if you only let them. Most importantly then – develop your own strategy and discipline – your own set of rules for set-ups, stops, gains, etc…and (_____).

Learn While You Burn (Firewalking for the Rest of Us)

The bottom-line point is that you need to be the master of your discipline. You are only holding-back your progress by only-following everyone else.

Here’s where we mix it up a bit (I’m going to get fired for this, watch). There is a very respected trader, Kemal_1, who is commenting frequently these days on Hot Option Babe (the site that Mole shall not name ;). I won’t get into the history of Kemal (I know very little, though I have seen his comments on and off for over a year now; previously on Xtrends). The guy is a sharpie. Sharp enough that if I disagree, or am positioned on the other side of him, I re-examine my take (which I do like every hour anyway) and consider possibly adjusting. There are few traders I give that much respect.

But while I’m endorsing Kemal (kudos to you, tough guy!) I’m going to chide the many traders who are suddenly lapping at his punch-wake. The HOB-knob community is rabid for what Kemal, Anna, etc. will say next and that, my more popular friends, is not going to work in the long run. The gurus hold-back their performance for getting too guru and the followers hold-back their growth for being glued to someone else’s opinions (a little of this is fine, sure; I’m talking about habitual or excessive following). 

What happens when the trader you are following (the same guy or gal who should have been looking at the market instead of wiping your ass with helpful hints and compliments) suddenly changes their mind? Are you going to change right along with them? The proper answer is – yes, you had better – since you were only in that trade based on their recommendation anyway, right? WTF is the point of being the only chimp in the room when the lights go out? 

You see the problem?

Again, no disrespect. I bring this up because after selling the argument all day for a bounce, tonight Kemal re-evaluated and changed his mind (on the short term), suddenly saying “So sell longs NOW”. Yes, that is out of context, which is unfair, but I know the heart-rate of many skipped a beat when they read that – and that is what I want to talk about (for the record I’ve yet to see Kemal really drinking his own Kool Aid, ever. He is always modest and gracious; he has learned well everything I am talking about here; I suspect. I see nothing wrong either with looking and positioning one way and then changing to the polar opposite…I do it myself whenever I get the opportunity). 

If you were following blindly though, you’re in the popcorn machine right now. You were coming around the Sun alongside Venus and now you’re suddenly on a trajectory toward Saturn. With a dynamic as volatile as the markets, hot butter is going to send molecules in varying directions – sometimes all at once. I don’t know what they teach you in law school (jealous again) but I know you can’t really guide others on how to react to that and I suspect people are better served in the end by guiding themselves first. If you want to follow someone, then study; study what they are telling you. If you want to learn something, then study. Study study study, lose some money and go study. Make some money (now be careful Einstein) and continue to study.

Tonight’s homework: Study!

Look, some of you are going to be great traders. That’s just a fact. The rest of you (and me as well, since I can’t do this forever) are simply not. I think that’s fine to admit. I also think it is fine to copy someone else if that is all you want to do. But for the few here who are not yet – but will be one day great traders – don’t follow blindly, you’re only inhibiting your greatness. Use your resources, study your books, take your lumps…and learn. You have special weaknesses (we’re all special, eh?). As such, you cannot follow someone else because you are going to find your personal, individual way to mess it all up. I am not exaggerating when I say that I could tell 1000 traders exactly what will happen tomorrow (which I cannot) and more than half of them will find a way to lose money. Why this is true is really really interesting to me (and why I follow the anti-genius more than anyone who might be exceptionally brilliant). You need to plug-up your special weaknesses and that will only make you stronger. Most of us (including me) need to find another activity for down the road. We’ve got to accept that. Failing miserably is a blessing if you only learn how to respond; allow it to be a part of your growth, etc. For those of us who won’t be traders in 10 years, well, there is no reason we cannot be better at what we’re doing because of the lessons learned here.

Stay alive and thrive.

Anyway, I’ve certainly stepped on my foot by now, made new enemies and taken up too much of your time (your fault!). But your mentors are only as good as you can make them. It’s your challenge to figure out how.

Your Own Kool Aid: Ok, this half is no joke, especially if you need to make money. First and foremost, trading is no popularity contest. That’s easy for me to accept, since I’ve lost in the popularity department my entire life (some people are born with all the luck). I’ve been very lucky to be loved by few since pretty much day-1 (like a hundred years ago).

And questioned by many.

I’m serious though, you can try to be popular, but it comes at the expense of performance. Right away now you should be questioning me for coming on here to say all of this. Very good, you’re a sharp student. One day I might get into this, but let’s just leave it at me admitting I’m not trading forever for the moment. These posts do cost me money, certainly in the short run. Fortunately there are some positive side effects like organizing my thoughts, forcing me to keep to my discipline, since I am touting it publicly, things like that. But if you told me I had to gain 100% in the next 3 months or it’s game over for me, I would most certainly not start talking about it. I’d just get busy and trade. Screw all of you in that case.

When I examine my biggest historical draw-downs, I learn all kinds of things. One pattern that won’t surprise many of you is that the biggest losing periods have originated on the heels of a strong phase of success (note the term phase!). Especially dangerous, it turns out, is getting a little too confident in your ability and beginning to believe you are printing money or something. Now, this might be my personal pitfall (my ghost) and yours may be something else (doubt it!). But for myself, I’ve never maximized future results by throwing a party in my honor. The moment I swagger out-loud about how well I am trading, even if to the dog, is the moment I’ve endangered ongoing gains and invited punishing losses instead. I’ve got numbers to back this up.

As it turns out, I would have been so much better had I never considered my positive results (negative results must always be examined). Positive results have a way of relaxing something, something important if you want to perform. Keep aware of this, especially when you are on a roll. Keep that side of you in check.

It’s not fair, I know – that you can never really be satisfied – never lift your glass in a toast of your obscene prowess. But you don’t want to be punished for it the next day (months!). As I’ve gotten older (I’m just this side of ancient now), I’ve learned to take my chips off the table and head-off quietly for some thump-hump retreat; getting far away from the market before risking anything like…fulfillment.

This is why I’m such a freak, I suppose; at least on the job (when I’m pumping hole-saws into melting ice-caps I’m really quite a decent fellow). As long as you are in the market, you remain in battle; period. It doesn’t matter that you’ve knocked the cover off the ball the previous 6-to-56 weeks – you better not tell anybody about it and get feeling good about yourself, because you will get run over. In fact: and this is the meat of the matter, it is precisely when you’ve run like god, and hearty, sick gains act like a floating mood-spring, that you (you!) need to be most aware of this twisted little phenomenon. If you don’t know what I am saying, then either I cannot write or you are new to trading (either way, you’d be excused). But traders with salt in their bones know fool well what I’m getting at. Your guard is down when you hail yourself the king. A little self-doubt in this line of work is mandatory. You’ve go to maintain some self-disrespect (no self-loathing though); especially when you’ve been rocking only-higher, outperforming peers and identifying potential entry and exit points like Santa can identify a good lap-dance.

By all means – when you’re hot, keep trading. I’m not telling you to stop. But know that if you absolutely must take pride (silly creature), then take your marbles out of the ring and scurry-off before making speeches on your behalf.

Trading is an animal thing. You are on one side of a trade and someone or some bot is on the other. If you were truly the alpha dog here, you wouldn’t be bragging. Your life is no picnic. There is an endless line of foes looking to bite your ass and overtake your darling little spoils. How can you relax and feel fuzzy about how you dominated the last juvenile to come around when you’ve expended energy to keep your claim and now the next set of teeth is waiting for you to let your guard down so he can strike. The top-dog gets the girls, sure. But he doesn’t get to flaunt it much since that would only inspire future defeat.

Look, it’s no life – this being a trader. You’re holding a steady state of pent-up energy – an even stream of kill-keel and never allowing yourself to get too high, nor too low, and certainly not hung-up on yourself; only to fight endlessly day and 24-hour-trading night in order that you’re biting someone else’s ass instead of the other way around. Who wants to live like that?

Well, you do apparently, as I see you have read along this far. Which is the first and foremost reason not to go around bragging about it!

Nothing left here but to close this. I’m not going to question your career (I’ve got my own career to question!), but I will suggest you watch what you drink. You’re a great trader – I like that. But unless you’re en-route to Aroma Bora and you have zero positions on your book, then let go the beauty contests and keep your head in the market.

Don’t take any bows – they cost too much.

Beast out

Previously in this series:
Losing Like a Winner: A Trader’s Guide
A Trader’s Guide to Secondary Offerings (Part 2)
A Trader’s Guide to Secondary Offerings (Part 1)
A Trader’s Guide (Introduction)
A Trader’s Guide to Chasing Ambulances
A Trader’s Guide to Exhaustion