This is a great story that was published in SFO magazine
http://www.sfomag.com
This magazine should be on your reading list and you should be a SFO subscriber.
Enjoy!
Tales of the Promiscuous Trader
by: Peter Kaplan
It is tempting to experiment with multiple trading approaches in the
hope of success, but how worthwhile is it?
When it comes to achieving consistency as traders, there is an
obvious strategy, though one that can easily escape traders in the
heat of battle. Achieving consistent results in the market comes from
taking consistent actions. Period.
There are, of course, an endless number of ways that traders can be
inconsistent in their actions; however, in this discussion I focus on
one syndrome in particular. Over the course of many years training
other traders, I have periodically seen trading students get off
track by carelessly experimenting with and switching between
dramatically different approaches to the market. Understand, I’m not
talking about a healthy level of open-mindedness to different and
better ways of trading. Nor am I suggesting that one should act the
same way at all times, irrespective of conditions. Rather I’m talking
about the following sequence: first making some serious headway in
one approach, then hitting a rough patch and eventually ditching the
plan altogether because “so and so” says his or her technique is
making a fortune at the moment. (Do you know how many “so and sos”
I’ve met over the years? These people, services or gurus make a heck
of a lot of noise when they’re doing well. They go strangely silent
when they’re not.)
The Wanderer
Let me tell you a little story which illustrates my point. I once had
a catch-up phone conversation with a guy who had been a trading
student of mine years earlier (I’ll call him Bill for the purposes of
this story). Bill was one of the best students I ever had. He came to
me with a decent amount of training already and we worked together
intensely every day for several months. I basically taught him
everything I know, and indeed, Bill began to achieve success,
transforming into a consistently profitable trader right before my
eyes. And yet, he had one little tendency that I did not particularly
appreciate. About once every two weeks or so he would show up for the
day’s trading and say something like this: “Hey Peter, this weekend I
was perusing such and such website and you know, those guys are
really making a killing doing this, that and the other thing. I’ve
been looking at their stats and they look awesome!”
OK, so I’m as jealous as the next teacher and I was a bit offended
by my student’s wayward attentions (wasn’t he getting everything he
needed at home?). However, since it’s never been my intention to
create little trading clones of myself, I let it slide at first. But
as Bill’s periodic “extra-educational affairs” carried on month after
month, I began to crack the whip more forcefully. You see, I had
witnessed this tendency before in other traders, and I knew that if
Bill’s attention was wandering when things were going well, he was
going to have little capacity to stick with his plan when the
inevitable rough sledding arrived. At least on my watch, I was able
to keep him on a short leash. However, even by the time we were
finishing up our work together, I was aware that he was starting to
flirt with several other styles on the side. Past a certain point, it
was up to him. I could only beat him over the head with my message a
couple dozen times.
The Odyssey
Alright, fast forward a few years to my recent phone conversation.
There I was, having a nice catch-up chat with Bill, listening to the
stories coming out of his mouth, which belonged on an episode of
National Geographic’s “Extreme Trading Adventures” (currently in
production, I’m sure). Essentially, Bill had gone on an extraordinary
trading odyssey in the two years since we had worked together. He
laid out such a hair-raising itinerary of disparate styles, teachers
and time frames that he sounded like an investigative journalist
conducting research for a big trading industry exposé.
And had it all worked out for him? Did he come away from the two
years of pell-mell “research” as some sort of mega-trader? Bill hemmed
and hawed a little, but in the end he finally admitted the truth.
While he had made some decent progress in almost every one of the
approaches he had studied, he had not achieved consistent
profitability in any of them. In fact, the only consistently
profitable stretch of trading he had ever experienced in his life was
the time we had spent working together.
Now I turn to you, dear reader, and ask why do you think that was?
Was it because I am the world’s greatest teacher? I can tell you
right now that I’m not. There are always better teachers, better
traders, better approaches … better everything. So why, in all of
Bill’s searching, had he not stumbled upon them and become a better
trader? Or, more accurately, when he did stumble upon them-which
almost certainly happened in the course of his many travels-why did
the encounter not launch him into super-traderdom?
To answer the question, one need only look again at the period which
directly preceded Bill’s odyssey. The reason Bill’s results were
consistently positive during my tenure as his instructor had less to
do with my abilities than the fact that Bill whole-heartedly focused
on a single approach to the market (or rather, a small selection of
styles that he and I fused together seamlessly). As I said, Bill came
to me with a fair amount of experience already; however, what he had
never experienced was a hard-nosed New Yorker getting in his face on
a regular basis, effectively acting as his trading conscience.
Apart from his bimonthly blabber about other methodologies, this guy
was not able to stray from his plan or shift his attention from what
was working for even one minute. This was the first time he had ever
experienced anything like it, so suddenly all of the formidable
ability and knowledge that he had accumulated during the years was
able to finally manifest on the P&L screen. His worst tendencies were
no longer running loose like a pack of wild monkeys, sabotaging his
best efforts every time he made some headway. Conversely, when he
ventured off on his own, those same monkeys re-emerged.
Once again, consider the assertion from the start of this discussion:
Achieving consistent results in the market comes from taking
consistent actions.
Don’t Over-tinker
Bill’s (not-so-excellent) educational adventures did not work because
he never performed a consistent enough regimen of actions to become
consistent in his results. Only during our time working together was
Bill forced to stay on track long enough to realize the full
effectiveness of his approach. The stretch of market through which we
traded was generally good, though it certainly contained its rough
spots. When we hit those periods, Bill was able to make some minor
adjustments to what he was doing, scale back his activity and absorb
whatever small hit the market delivered. He did not run away; he did
not panic. He did not switch methodologies entirely to try and make a
killing during the rough patch. He waited it out and was ready to
pounce again quickly when favorable conditions returned.
Once he left my browbeating presence, however, he clearly did not
show any of this same poise.
Some of you reading this may not be able to relate to Bill’s story;
you have been successfully practicing the same general approach for
years and your affections rarely, if ever, wander after the
next “hot thing” in trading. If so, good for you, this is not an
issue that’s causing damage to your trading results. However, most
traders suffer from at least some small aspect of this syndrome, even
if only the simple tendency to over-tinker with the trading plan.
If you find yourself constantly changing rules in your plan every
time you have a bad day, there may be something here for you. You
should thoroughly evaluate your plan periodically, but only make
changes after you have acquired reams of hard data, not as a
compulsive reaction to a few painful losses.
Some Pointers
Because I am rather fond of lists, I have decided to lay out a few
points that might prove helpful to those prone to market promiscuity.
These are good to keep at hand when your trading hormones get
overactive and you feel the overwhelming urge to cheat on your
primary style!
1. Above all else, you need to operate from a clearly defined plan
(this really goes without saying, but I’ll state it nonetheless
because everything else is moot without this point). For those who
deliberately operate in the market without a clear plan, here is a
message for you: Go philander to your heart’s content with every
style ever invented. You are not going to make money anyway! Or, if
you happen to stumble into some initial gains, you certainly will not
keep what you make. This discussion only has value for those who
possess enough discipline to operate from a clearly defined plan.
2. If and when you do achieve success with a particular style and are
now looking to add another style to your arsenal, do this
sloooooowly. My friends, it is difficult enough to master even one
single approach to the market, let alone multiple approaches. What’s
the big rush? Perhaps you are quite exuberant with your newfound
success and figure that by adding more styles, you will add more
success. Trust me, it rarely works that way. Usually, a trader makes
that jump too soon and he or she ends up sabotaging the style that
was actually working.
Although no set rule exists for how long to wait before you can
declare a profitable style as fully mastered, the following is a
decent guideline:
a. If you are an intra-day trader, give your successful style at least
three months before you consider it “in the bag.” Although you may
think you have seen everything the market has to offer after a month
of trading, you probably have not. Three months are likely to take
you through several cycles of market expansion and contraction-at
least from a day trader’s point of view. At that point, you can
determine if you truly have the approach mastered.
b. If you are a position trader, give the style a full six months at
the minimum and ideally, you should wait a year. The cycles in the
swing and core trading time frames take much longer to play out, so
you simply will not experience the full gamut of market mischief
until all phases of the annual calendar have come and gone.
3. If, like my student Bill, you begin to struggle with a formerly
winning style, pause before you go looking around for a better
approach. The vast likelihood is that a style that was once
successful will be successful again. Perhaps you have loosened your
stringent criteria and a bit of review will reveal places where you
have allowed bad habits to creep into your trading. Or maybe you have
not changed a thing. Maybe it is the market that changed and you are
now looking to add a style that will work better in the new type of
market. Fair enough; there’s a time and place for that. However,
consider that if the approach you were using worked well under one
set of market conditions, there is a distinct chance that it could
function adequately under the new conditions if you only made a few
simple adjustments.
Although this is beyond the scope of what I can cover in this piece,
it’s amazing how relatively minor changes to your time frame, the
specific setups you use, your method of entry, profit-taking and the
manner in which you implement stop losses can make all the difference
in a new market environment, as can the frequency with which you
initiate trades (fewer!). So before you go throwing the baby out with
the bath water, see if a few simple adjustments to your style can help
put you back on track.
4. And, finally, never forget that there is absolutely nothing wrong
with standing aside when you enter a stretch of market that does not
favor your chosen style. Don’t fall prey to the myth that you are
required to make the same amount of money under all market conditions
simply by shifting between different trading styles. This is harder
to do in practice than it appears in theory.
Often a far easier approach is to alternate between offense and
defense. Attack aggressively when there is money to be made, then
defend your capital with equal fervor once conditions turn sour. For
the vast majority of market players, this is the far safer and better
approach.
I hope this list will help those of you who struggle to control your
wayward impulses to remain monogamous with your trading plan. Believe
me when I tell you that there is no way to truly master a trading
style unless you have stuck with it through thick and thin and
weathered a whole host of different market conditions. Fidelity (as
it is in other areas of life) is a great virtue in trading.
May you and your chosen trading style live happily ever after!