Sunday, October 22, 2006

Trading is war - isn't it

I hope you don’t miss Christophe’s comment. I’ve known him for some time, saw him struggle and now he seems to have found his way. I don’t know, whether he still trades his own account or – as it seems to be- whether he is now employed by a trading firm learning to be a trader.

His comments speaks of knowledge, of being sure of himself, of finally knowing which way to go. And I could leave it as such, because he has written a true statement how he now sees the markets, what he believes is necessary to be successful.

“Trading is a war, we try to beat each other up and take each other money. If you don't agree let me ask you what you feel when you are taking up a beating and having a red day ??? are you totally zen or do you feel the pain? well guess what, someone else whilst you are feeling the pain is having a good time enjoying the good feeling of making money. The people who don't feel the pain are the people who can afford to loose.

Whenever the price goes up or down, someone is smiling and counting the money whilst another is praying and suffering. This is trading in few words.

Most traders start trading as if it was a nice social activity without realising that they throw them self in an arena full of sharks and lions. “

Ask an US soldier coming back from a tour in Iraq, if trading is war?

If you take a loss, do you lose a limb, do you lose an eye, do you face abduction, torture or death every single moment you are in a trade.

No Christophe, trading is not war and don’t think so one second.

Yes some elements are the same, but one element is not: In trading, if you lose, you can stand up and trade yourself back to where you were and do better next time. You have another life as long as you push yourself up and start again.

In war, if you're dead you sure stay dead for eternity.

As far as I know more than 1 Trillion US-Dollars are traded every 24h seven days a week. And I’m carrying contracts worth between 50.000 USD and 1.000.000 USD. Does this amount really matter, does it change anything at all, does the grande scheme of things care whether my trade is executed or not. Is there any chance at all, that I will learn who is the counter-party of the trade, which blew up in my face? I’m not Amaranth, the hedge-fund who blew up 5 Billion USD in the Natural Gas markets. They know their counter-parties, they know who profited from their losses. These losses can be personalised. But still it’s not war.

Taking profits and losses in a Zen like state of mind, being detached from it isn’t the way for me. In trading I feel emotions, I allow myself emotions as it helps me to prepare for the next trade, to find back my calmness necessary to objectively analyse the markets.

I’m happy about a great profit, about a plan succeeding.

I’m angry about a loss and I vent it, because it helps me to take the loss.

But in both cases I analyse the trade, I think about it, so I might redo the profitable setup and I might avoid the losing setup the next time I encounter similar circumstances in the markets.

When taking a profit, does my counter-party have to take a loss? Most futures trader would answer: Yes!

But let’s look at it, because it’s not as simple.

My best trade on Friday was a short in GOIL Z6 (that’s the December Gas Oil contract traded on IPE in 0.25 increments with a tick value of 25USD)


GOIL was trading around 548.00 at 09:58:00 and I placed a Short at 556.75. At 09:59:30 this order was filled in a spike, going up to 561.00. I exited the trade at 10:00:25 at 550.25 for a 25 tick profit or 620USD including commission.

Had my trading program placed an automatic stop I would have been stopped out of the trade, because I never ever would have let GOIL trade above 560.

But I had learned this lesson a few years back, when such an event actually happened and instead of a 500USD profit when the Russell broke 8 points I was sitting at a 200 USD loss due to a stop triggered in this spike, as the Russell continued another 3 points before reversing all the spike range upward again. 

As it were at one point, right after my entry this GOIL trade showed a loss of 500 USD, so the trader going long against my short had the chance to exit his trade at a 500 USD profit. And he was not alone because there were a few trades happening above my entry. Profits and losses made by automatic programs. 

But nothing happened for me, I just held my short during that 1 minute spike, actually oblivious about what was happening, because I was getting myself a cup of coffee at that time. Back at the screen GOIL was trading right above 550 after dipping below 550 and I decided to exit the trade happy about the profit I made. I thought about the trader going long at 561, but I actually will never know, if he rode it down all the 11 points or if he took a stop at 560.25 or if he actually was happy about his loss, because it was a loss executed according to his plan.

Trading and losses are inseparable. You can’t trade without losses. It’s how you handle your losses, how you take a defeat, which decides whether you will succeed or perish in the markets.

But it’s not a war. 1 Trillion USD is like an ocean of money with waves of opportunity and the only thing I’m doing is turning small drip-lets into my account and trying to make sure it’s getting filled faster than money is running out of the natural hole every account-bucket has.