I’d like to share a couple of my favourite, recent posts from Daily Speculations. This site is so rich in content it hurts that I can’t find the time to go through it’s voluminous archives.
– The first post is by Haany Saad, who tells of his interesting journey of how he left accountancy (he was the youngest ever manager at Price Waterhouse) and liquidated his businesses to become a successful trader. Despite his clear success, Haany realised that all was not well with his approach and he went on a quest for the truth. Here are some snippets:
I was living alone and didn’t work for a long time. I survived on the capital from the businesses I liquidated. I read every book on technical analysis. I learned about every pattern. I programmed every indicator known to man and developed a system that weighted indicators by their success rate. Even then, unwittingly, I was trying to be scientific. I invested everything I had in the markets and was making more money that I dreamed possible for someone my age. I started living large. I once owned every model of the Rolex watch ever manufactured. No exaggeration. I owned a violin that was auctioned for the equivalent of five years of my audit manager salary without a blink. I still have my tax bills to prove it.
It always worried me that it came so easily. Even then I guess I was smart enough to have my doubts. The more money I made, the more I wanted and the more I worried. I worried that my system might be flawed. The more I worried the more I studied.
I had charts everywhere in my bedroom. More quote machines and news feeds than a mid-sized fund operation would need. Financial journals scattered all over my floors. Books everywhere. I was a genius. If you wanted a picture of illusion de grandeur, I was it. I always felt I should enjoy it as best as I could, as it could be taken away from me without a warning.
… I didn’t like my game even though it was profitable. I didn’t have an edge. Making money doesn’t mean you have an edge. But, what’s an edge? How do I know I have one? I studied history. I read about wars. I tried to develop a philosophical framework of what edge really is. The more I read, the more I realized that whatever an edge is, I didn’t have it.
I really admire Haany because I don’t think that many trader’s would continue to search and question themselves after they have proven themselves successful. This kind of humble but enquiring attitude is surely invaluable in protecting a trader from becoming a victim of their own success and eventually handing back their profits to the market through hubris.
– The second piece is titled How to Survive a Rip Current by Steve Leslie. In this piece Steve advises traders on what to do when caught up in a financial rip tide:
… Similar events occur when speculators gets caught in a rip market. The natural inclination is to fight back and try to swim back to shore or, in this case, try to get even. They exhaust their capital by overtrading until eventually they drown in their losses.
The correct strategy when faced with a powerful force is to swim alongside the turbulence rather than engage it before re-entering, until you find the proper entry point and things have calmed down. This is taking the path of least resistance and it ultimately leads to a more harmonious and profitable conclusion.
I find this advice particularly relevant in these times of heightened uncertainty. Personally, I have already been dragged out by several rip-tides during my short trading career. On these occasions I have tended to struggle frantically, often adding to losing positions or widening my stop to illogical levels, with a large drawdown usually being the final result. On those rare occassions when I have managed to rescue myself through this approach of desperation , I know these trades fall under the dangerous ‘lucky bad bets’ category. These days, I am much more cautious on my entry, and when I get pulled away from the shores I don’t automatically ‘double-up’. Patience really is a great virtue when a market is in panic.