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First rant of 2011. Surprises and Control in Trading

01/21/2011

Welcome to the first rant of 2011!!!

THERE ARE NO SURPRISES IN TRADING. There I said it again. Come on Tim, you’re nuts. People get their stops run all the time. People make and lose fortunes in this game. News or NFP or some excuse we make up in our heads goes against us all the time and we get taken out by only a few pips. The “big evil brokers” and Ben, and Trichet, and Goldman Sachs, and Obama, and Bush and Cramer are all out to get us and make sure we lose money in the market. We have to trade the opposite of what they say in order to have a chance. We get surprised all the time and we lose thousands.

Sure, some of that is true. But here’s the shocker, none of that should be a surprise to us and none of it should matter. When we lose money in the market, we shouldn’t get surprised. We shouldn’t blame “them”. There is only one person to blame and we see him every morning when we brush our teeth. He did the analysis. He placed the trade. He set the stop. And HE lost the money. Cramer and even the big evil brokers didn’t make money because we lost it. The forex game doesn’t work that way (stocks and options and such are a bit of a different story but that’s for another post).

Let’s talk about that guy in the mirror. What can we control and why shouldn’t we be surprised. We can control the account size (at least at first). We can wire $500 – $5,000,000 to the evil broker of our choice. Next we can control what chart we use. Which one feels comfortable? I use e-signal mainly, but also use Metatrader here and there. Next, we can control where to put trendlines. Sure, price doesn’t always respect our magic little red lines, but then we can control the eraser and where we draw the new ones. We can control what moving averages and fancy technical stuff we want to use. We can control where we put our fibs and how we analyze our Elliot patterns if we want to feel good about our amazing analytic abilities (if you’re more interested in making money than analyzing, stick with the fibs though).

We can control the hours we want to trade. Maybe we like London session. Maybe New York is more our speed. Maybe we like Asia (I have no idea why… but hey, if you have an Asian fetish that’s your issue). We can control what we watch on tv, where we get our information from and what we do with it. We can control when we turn on the computer, fire up our screens hit buy or sell. And we can control when we turn off our screens and when we shut down the computer.

We can control how much we drink in celebrating our win, or how hammered we get when we end a really crappy week. The only thing we can’t control in our trading is price. We can’t control which way the Euro will go. That’s it. Everything else is all about us. Sounds like a pretty good deal if you ask me. With so much stacked in our favor, this game should be easy. We can even control our emotions if we want to. If we’re emotionally attached to all the money we’re making or losing, we’re trading with way more leverage than we should.

In my prior life I was a real estate investor. Real estate is a game for control freaks who want to become the next Donald. Who doesn’t want to be that guy? He’s got his own Jet, tv show, and a great haircut. Back in the day, I had “control” (ownership) over a few hundred apartment units. With this control though, came a great deal of responsibility. First, lets talk about the things that were in my control. This list is not as long as you might think. Basically, I had control over all the things that could get me into trouble. Getting myself back out of trouble, I had a lot less control over. I had control over what I bought, who I hired, who we approved for leases, what contractors we used, and that’s about it.

Everything else I really didn’t have control over. And all the things outside my control cost a lot of money. I couldn’t control when contractors finished work, if they finished work, or what quality their work was. I couldn’t control how well my employees worked, if they did their job at all, or if they drank on the job. I couldn’t control if tenants paid rent. I couldn’t control the lending environment, the banks (and their honesty issues). And I sure couldn’t control the turnaround in the economy. Since commercial property is only worth as much as it brings in, subsequently, I had no control over the value of my account statement (equity in the property).

Anyway, I don’t need to make an exhaustive list, but the bottom line is, I couldn’t control how much money I lost. Every vacant apartment, or overrun with a renovation, every month delay in a refinance cost a lot of money. I could do my best to hedge against these things. I could fire people, I could screen applicants, banks, contractors, employees, etc. But, then the ball was essentially in their court. It’s interesting in a game dominated by control freaks, there is really so little within the investor’s control. And without being able to control how much I lost, I couldn’t accurately predict how much I would make.

Now, how does this apply to forex? There was one thing conspicuously absent from my first list of things within our control when we trade. I was saving the best for last. WE CONTROL how much we lose. No, we can’t control price action, but we can control our drawdown, our stops, and our risk. If you ask me, that sounds like a pretty good game. I wish I had that type of control in real estate.

In Forex, nothing should surprise us, because the ONLY thing outside our control is price action. Of course it’s only natural to expect price to move to our take profit area. Why else would we enter a trade than under the expectation of price going in our favor and making us money? But if prices moves against us, that shouldn’t surprise us. If the news announcement takes us out by a pip or two right before jetting to our target we shouldn’t get surprised. We drew our lines, we entered the trade, we set the stop. If we are wrong, maybe we should have done a better job with our due diligence. (as they say in Real Estate)

Sure, we can get upset, throw things, yell at the screen, pray to the almighty, kick the cat (though not recommended) and get thoroughly pissed off if we want to, but we shouldn’t be surprised. Each time something goes against us, ask yourself, what factors in my control did I screw up. Then we make money. And we can make a lot of money if we choose to take control over the things within our control and not get emotional over the things outside our control. Thomas Jefferson once said “I find the harder I work, the more luck I seem to have.” So, take responsibility for the consequences of your actions.

I’m a bit conflicted regarding topics for my next rant post. I’m always open for ideas and suggestions.

One thing that stands head and shoulders above other possibilities is something that really pisses me off. There are all sorts of analysts or “finance guys” or average people telling me how much I should or shouldn’t make. In this game, we hear things like “Oh, if you’re making that much money, you’re taking way too much risk.” This will probably be a multi part rant. But something to think about is what return are you happy with? 5% a year? 5% a month? 5% a day? 5% an hour? How about my personal favorite, an infinite rate of return on money invested throughout the life of the investment, and a lump sum payout at the end? Impossible right? No, these are all very possible. I know. I’ve done each of them.

Coming from my background, I’m used to the latter and don’t understand why people settle for the first option. But a lot of people smarter than me are happy making their 5% a year on their investment. In trading as in life you we undoubtedly run across individuals telling us something is impossible or too risky or a bad idea. Sometimes they’re right and sometimes they’re wrong. The trick is to do our research and make our own decision. Then sometimes we’re right and sometimes we’re wrong. I’ve had my fair share of being wrong by the way. Don’t be discouraged by people who’s opinion you otherwise respect telling you
something is or isn’t possible. Sorta like Yoda once said, your focus determines your reality. But like I’ve tried to emphasize in this post, make sure you know what is and isn’t in your control and plan according, otherwise you will get burnt.

Thanks for reading,
Kosentrade

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