Trading is a high stress occupation

25 09 2007

IV

Trading is a high stress occupation, and frequent holidays are important. Larry removes himself from even hearing about the markets by going out on a fishing boat. When he does finally hear about the market while on holidays, Larry often cuts his holidays shorter than planned if he sees that the market is ready for it’s next movement. Before going on holidays, all positions are liquidated.

After this fishing trip, Larry returns to the quotation board and watches the tape for an idea of the market’s mood. Although he is generally bearish, the short-term indications seem to point him to long one particularly active stock. He explains his reasons for buying the stock and puts on a large line. As it turns out, the position wasn’t proven correct so he bales out – then shares his observation of others who stayed long and started to sweat, and to hope. ‘The only thing a man can do when he is wrong is to be right by ceasing to be wrong’. In exiting his position, Larry sells at the market. Although one can lose a few ticks on poor execution by a broker, setting a limit order is often worse. Often your limit isn’t hit, and you get stuck with a bigger loss when you try to get out later. When you want to get out, get out.

Market behavior and people behavior are not the same. After an outrageous rally in a bear market, people started to talk bullish again. The course of the market, however, said the rally had run it’s course. And Larry sold. His profits reminded him that he was right and he sold more. After four months of trading on the bear side, the markets began to slow down. Larry cleaned up operations and took a holiday in Europe for the summer. Returning early from this trip as well because of market conditions, we are again given the inside view of the ‘other’ traders mind. The market was megaphoning it’s warning to the world until the day of reckoning for the bulls that, ‘dreading the pain of a small loss at the beginning, were now about to suffer total amputation – without anesthetics.’ The mouse in the glass bell analogy fits perfectly.

The rest of the chapter talks about the tightness at the bottom of the bear market, the profits that our character has pulled from the markets, and finishes with a great quote; ‘But my biggest winnings were not in dollars but in the intangibles: I had been right, I had looked ahead and followed a clear-cut plan. I had learned what a man must do in order to make big money; I was permanently out of the gambler class’

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Stock Gambling vs Stock Speculation

29 08 2007

V

Noting the behavior of a stock and studying it’s past performance is a very old art form. Even at the turn of the century, traders were keeping monthly charts and intra-day charts, they studied seasonal patterns as well. But it is easy to suffer from over-specialization if the analysis doesn’t appraise the market conditions as a whole.

Larry tells us his main trouble – that he was blind to and that cost him so dearly – was in not recognizing the difference between stock gambling, betting on fluctuations, and stock speculation, anticipating inevitable advances and declines. This is one of the mistakes that the average trader makes year in and year out. One his third entry into the New York Exchange, Larry’s expectations were more patient and long-term. For a paragraph, the author explains his perspective on how trading is balanced with other aspects of living once the markets were closed. Though he lived well and denied no wants, he knew that could never afford anything that kept him from feeling physically or mentally fit, and emphasized the importance of a good nights sleep for Balance in the rest of his living. He was not over-specialized. His first change in trading was in the aspect of time. He looked for the long-term advances and declines and studied trade reports, railroad earnings and other statistics. In a Bucket Shop, he only considered studying the past hour of price activity!

If I had lost oftener, it would have lead me to more continuous study… Larry says, and gives us his method of studying new ideas; Before I can solve a problem I must state it to myself. When I think I have found a solution I must prove I am right. I know of only one way to prove it; and that is, with my own money. Later he adds that there is as much to learn from partial victory as there is from defeat.

Larry found a mentor among the crowd of average customers. An old man who listened politely to everybody, but traded differently. He sat unconcerned when minor price fluctuations made everyone else flee. He held a long term perspective on the direction of the entire market, knowing that the big money was not made in reading the tape, but in sizing up the entire market and it’s trend. Here, Larry reflects over his life of trading and confirms this reality stating:

It was never my thinking that made the big money for me. It was always my sitting

Men who are right and can sit tight are uncommon, he explains, because most become impatient or doubtful when the market takes it’s time doing what you figured it must do. It takes brains and vision to put on a position at the beginning of a reversal of general directions. It is against the opinion of the majority. This emphasis on longer-term trading in the book makes me re-think the value of TWMPMM, and makes me think a Book Report on the Edward’s and Magee classic; Technical Analysis of Stock Trends would be a great addition to my list. The major reversal patterns and consolidation patterns, along with volume, divergence’s and relative strength patterns, should be studied more closely.

Larry comments that the intelligent patience to sit tight was the hardest thing for him to learn. It is very difficult to un-learn bad habits from the past. With faith in your judgment, you can sit without a twinge of impatience, even in the face of a set-back. He began to treat his paper-profits differently than his initial equity – more willing to risk open equity for the opportunity of catching the big swings, that’s what makes you the big money. Larry makes a remark that closely parolees Dan Millman’s ‘Stages of Awareness’ in learning.

If I learned all this so slowly, it was because I learned by my mistakes, and some time always lapses between making a mistake and realizing it, and more time between realizing it and exactly determining it.

Outside of trading, the book’s character lives the high life of style and taste. He is not yet looking at his life in the long-term, and has not yet seen the value of a nest-egg.