The Market Owes You Nothing
Yesterday Tim Knight over at the Slope wrote a candid post marking the fifth anniversary of the ongoing bull market. Actually to be more precise he not so surprisingly called it ‘this insane, interminable, agonizing bull market‘. Now given my reputation for dishing out generous servings of tough love you may expect me to post a scathing retort criticizing him for clinging to his bearish stance all through what I believe will be remembered as the most significant bull market in our lifetime. Well, yes and no.
Yes, because just looking at the chart above drives home the lesson that directional bias can be extremely lethal to both investors and traders. And no, because after having run an active trading blog for five and half years and counting I have had the benefit of holding a permanent ring side seat to the trials and tribulations of the average retail trader. So instead let’s talk about some of the lessons learned and how my approach and personality has evolved over the past half decade.
Let’s go back to the inception of Evil Speculator. Some of you may remember that I used to be pretty active on the Slope. Back then Tim and I were conversing quite regularly and we even met once down in Orange County near Disney Land. Our charts were pretty much in sync starting in early 2008 – they all pointed down, way down! Back then we both also shared a keen interest in Elliott Wave theory and not surprisingly our own work was influenced by a certain Robert P., who I am sure you are all familiar with (for better or for worse). Now being bearish back in 2007 or 2008 was not exactly a popular stance – sure, those were different times when the bulls had to actually drive prices higher on their own without the helping hand (or should I say helping printing presses) of the Federal Reserve.
I also used to post a lot on a site called OptionAddict run by a really sharp fellow called Jeff Kohler. Very talented and technically excellent – a bit street smart as well – you know the type. Back then his site was at least as busy as the Slope – things were hopping and everyone was banking coin. Now here shows up this guy called Mole, who nobody had ever heard of before really, and he starts to post these super bearish charts! SPX at 800 or below – etc. – equities are going to fall off the cliff – not unlike what Tim was saying back in those days. You know the theme.
And after a few weeks of me doing that I actually started to ruffle quite a lot of feathers over there at OptionAddict. Up to the point where some of his readers and clients started to complain and wanted me gone. So Jeff wrote me an email and to be honest he was actually very cool about it. He actually wound up offering me a special section in his site where I could post all those insanely bearish charts. As you can imagine I was a bit surprised about that but I laughed it off and just told him thanks but no thanks. Instead I spent a weekend slinging some WordPress PHP code and the following Monday I announced my own blog, and that was the inception of evilspeculator.com, sometime in early August 2008.
When I started out I never envisioned it to be a long term commitment. Actually I simply wanted my work to be seen by people and for me personally it also served as my trading log. Which as you all know is a key component in becoming a successful trader. It keeps you honest and it allows you to re-visit your old campaigns and hopefully learn from them. As luck would have it however (and for some mysterious reason) Tim Knight really loved my new blog and by talking about my work he sent a ton of traffic my way. So here I was getting a ton of hits just a month or two after having started my new site. I was very lucky to say the least and I thank Tim for his support to this day.
It goes without saying that we had a lot of fun in 2008 – I was posting my bearish charts and my audience grew by leaps and bounds. The tape certainly was going by the script but I must confess that I was horribly naive about it all. As I’ve mused before – it’s one thing to prepare for a bear market – it’s another to trade through it and come out in one piece. One infamous day that will remain burned in my memory for the rest of my life is that of September 17th, 2008. I was shorter than a pygmy in a limbo contest and out of the blue Chris Cox over at the so ever helpful SEC announced out of the blue to temporarily ban the practice of naked short selling. My wife came running into my office as I was sweating bullets and cursing like an angry sailor whilst trying to close out my long list of short positions during a relentless short squeeze. Let’s just say that I lost over 50% of my account that day.
That was just one out of many occasions when I was forced the embrace and adjust to brutal reality of trading a bear market. Some of you may still be looking forward to one but be careful what you wish for, you may just get it. Fact is that 90% of market participants are against you and much more importantly – so is your own government. That was another miscalculation I am sure many of us are guilty of – we completely underestimated the power and resourcefulness of the White House, Congress, the SEC, and especially that of the Federal Reserve. For all of them are being judged by the health of the economy (rightly so or not) and they will do whatever it takes to preserve the status quo.
March 6th 2009 passed like any other day for me – I was getting a bit nervous about any remaining downside potential but I was still sitting on a generous amounts of puts. The days and weeks that followed slowly relieved me of any remaining short positions as the tape started to continue higher. This didn’t affect the traffic on my blog very much – as a matter of fact all we welcomed the ongoing rally as an opportunity to short equities again from higher up. How foolish and how arrogant in retrospect. Any retracement that followed was relatively shallow up until April 2010 when equities started to descend lower again. Of course we were all convinced that this was the onset of the next wave down – P3 if you will (I was still wave wanking then). Tim wrote me and we were both very excited about the expected repeat of 2008.
Of course that didn’t happen. What did happen was that the SPX 1000 remained intact and just kept clawing its way higher. Week by week and then month by month – which eventually turned into years. All the way through that the main question on our mind was when the next phase of the bear market would transpire. We were getting rather antsy.
By late 2010 I was pretty disgusted with it all and then one day I suddenly had a bit of an epiphany. I’m not sure where exactly it came from but within a week’s time I completely changed direction on my blog as I increasingly began to entertain the notion of this being more than just a mere correction within a bear market. I realized that counting waves was not only not helping me but instead had served to impair my trading. I actually had done much better before when instead of predicting market direction I was simply looking for entry opportunities. Why not simply go back to the type of technical analysis that allowed me to balance both bullish and bearish views? And bank coin in the process?
So I reverted back to more basic technical analysis and completely cut ties with Elliott Wave International. And strangely enough I started to experience the inverse of what had happened back on Kohler’s blog – people got upset about about my now more bullish and especially my ambivalent charts. What happened to P3 Mole? Why are you suddenly becoming more bullish? As a matter of fact I started to lose a bit of traffic. This was in some part based on my new approach to things but also due to me having little tolerance for what I perceived nonsense or mental masturbation in the comment section. I wanted to shift things to a more productive level – exchange charts, analysis and solely focus on banking coin. What I didn’t want was to run a social club where people just hung around to chat and talk about their pets and respective hobbies. I knew I would surely lose traffic that way but I frankly didn’t care. So I changed. Some people didn’t enjoy the new Mole and left for more greener (and perhaps more bearish) pastures. My trading and my bottom line however improved significantly.
1.You are your own worst enemy.
The most important lesson I learned was that you need to be in touch with yourself and be realistic about your pain threshold as well as your personal abilities. But more importantly, recognize that it is you who is the problem. As the saying goes, we have met the enemy and it is us! Not the market, not Bernanke or Yellen, not anyone on the outside. If you expect certain things to happen and then they don’t it’s no use to get upset or resort to sardonic remarks to make yourself feel better about your own losses. Just mosey over to ZeroHedge for a great example of highly intelligent folks who continue to have their butts handed to them in the market. Do you really want this to be you?
2. There is no justice.
Yes, I know that’s a rather tall order to swallow. See my musings above about the government and how it will fight the bears every step on the way. I am not going to waste your time regurgitating the state of the country, our economy, our financial system, our society as whole. How the books were cooked, how the money printing continues to this day, how banks basically got off the hook free and clear. And not only that – they were rewarded instead and continue to profit handsomely from gaming the entire financial system. Tim and others have been rather prolific in belaboring that fact but despite the fact that the lower 95% of the population asked for justice you can count the people who were actually punished (kind of) on one hand. That should tell you all you need to know about justice in the financial system.
3. You cannot affect things outside of your control
This one ties into the prior point – getting upset about things or events outside your immediately control only serves to instill unneeded stress and frustrations. Both of which lead to the express elevator to the woodshed. Once I stopped caring about the inside dealings and games rampant in the financial markets I suddenly was able to think a lot more clearly. Trading is difficult enough – there’s no reason to get emotionally involved. I know, easier said than done. But it’s possible and without becoming a complete cynic – quite on the contrary. You can still care outside of trading but once you walk into your office all that matters is your next trade.
4. Maintain a strict information diet.
But I didn’t stop there. In the past few years I have greatly reduced the amount of information I ingest on a daily basis. In 2012 I actually wrote a post on the subject and I hope you will find it interesting. To make a long story short, when it comes to information more is not necessarily better. Actually on the contrary – the more information you ingest the more difficult it will be for you to maintain an objective stance. At this point I don’t care if I’m trading crude, the E-Mini, wheat, or the EUR/USD. It’s all just a symbol to me and I simply follow what my charts are telling me. And of course I always fade the paper.
5. Relinquish any outcome bias.
In the past few years I have completely detached myself from what is commonly referred to as outcome bias. That actually has deeper implications. Not only don’t I care about where the market swings – up or down – it’s all the same to me. I do not believe that bear markets are any more ‘socially just’ than bull markets. Yes, I am aware that it’s all built with smog and mirrors but according to rule #3 there’s nothing I can do about any of that. On a more hands-on level I also do my best to not care whether or not a trade is successful. Yes, you heard that right – as long as it was a ‘good trade’ I am happy. Why? Because I have spent a lot of time creating various systems with a demonstrable long term edge. If I follow my own rules and remain disciplined it will result in profits. Which brings me to my next point:
6. Have a system!
That of course deserves an entire post itself and I’ll have to limit myself to a few general thoughts on this. If you trade without a system you will be trading the one that has being issued to you at birth: LOSING! I don’t want to over dramatize this but trading without entry rules, campaign management rules, stop loss rules, capital commitment guidelines, etc. will sooner or later result in you getting wiped out. Trading is a tough game and it requires clear rules that tell you when you are wrong and when you should be taking profits. They can be very complicated or as easy as a moving average crossing system. It doesn’t matter as long as they clearly promise an edge over time.
Now you have two options – 1. you can develop one yourself – or 2. you can buy or steal one. In either case – make sure you first sit down and write down your beliefs and your personal requirements. Why? Because we all are special snowflakes and as such we have a different threshold for pain and greed. Also, you may enjoy trading certain symbols, certain markets, or certain timeframes. Trend trading for instance works for some people and it clearly has an edge but most people do not have the mental fortitude to actually follow trending systems. It doesn’t matter if a system has a good edge if you are unable to follow it. I have written about this quite exhaustively on my blog and will probably do so again. Don’t think that system trading will solve all of your problems. You just exchanged one bag of problems for another one. You will have to learn to follow your own system, no matter what – otherwise you will probably wind up losing more than by simply following your whims.
7. Predicting prices has little to do with successful trading.
I already mentioned that I gave up on Elliott Wave International a few years back but that was only the tip of the iceberg. I realized that I needed to be very cautious about being influenced by others around me. That may include other bloggers, fellow traders, the news, the daily rumors, my own family, etc. There is no problem with embracing good trading principles and with consuming charts that objectively give you the opportunity of getting positioned. But when I see someone offering predictions I usually run the other way. Fact is – nobody really knows what lies ahead.
Most traders analyze the market in order to predict prices. But predicting prices has little to do with successful trading. What is important is determining when the risk is overwhelmingly in your favor and then controlling that risk. If you simply produce charts to predict markets you are simply engaging in an academic exercise without real world consequences (i.e. profits or losses).
8. The market does not owe you anything!
Most importantly – realize that nobody owes you anything. If you decide to trade the markets then you need to embrace everything that comes with it – the good and the bad. Don’t try to turn this into a personal vendetta or try to prove to yourself or others that you were right all along. We are all in this to make money and as such that is all you should care about. The only thing that matters is the size of your account – and hopefully you will be able to see it grow week after week, month after month, year after year. That should be your core mission – nothing else matters. Don’t get distracted, don’t take it personal, and don’t blame anyone but yourself.
Since I have started to incorporate these rules into my trading life I not only have become more successful and profitable, I also have become a much happier human being. I’m still an edgy and mostly evil Mole of course but in general I wake up with a smile each morning and look forward to my work – both the blogging and trading end. I don’t stress over open trades anymore and I sure as hell don’t lose any sleep over them. And that’s a much better way to live your life, wouldn’t you agree?
Enjoy your weekend!