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Trading Hubris

March 29, 2010

Trading can be a very addictive game. If losses are heart wrenchingly painful, then gains can rock your composure right from the base. Its interesting to see people undergo, such a huge swing in the emotional equity curve.Something akin to, the famous quote, “…they lose to win again, they win to lose again. They dont know the folly they commit…”

But, for professional traders, it is paramount that they keep their emotions under a very strong check. I have  heard about people, who have such strong emotional resiliency, that even if they are up 10% in 10 minutes or down 10% in 10 minutes, they will evoke no facial expressions.At all.

I dont know, if its a trading urban legend. Perhaps it is. Perhaps no such person really exists in India. Oh by the way, the person I have heard about, he is supposedly very much Indian. Telugu actually.But exist or not, its a very worthy goal to chase.Its not that they are devoid of pain and ecstacy. But from my personal experience they get a lot muted and of course evolved. Deep inside them, they perhaps allow themselves to grit a bit perhaps. But from a distance, they are just the same ol’ guy, who presses some buttons on a keyboard.

In my experience, novice traders when they win, they allow themselves to become a very willing victim of the trading highs. Its written all over their face, that they have won, (doesnt matter big or small).You can sniff ’em out. Letting others know about it, and well, overall making a mess out of it. 🙂

In my first trading days,Lord knows, I was guilty of it. But, I have realized and learned to do the right thing- to just shut up and work harder.

Plus, I think, a great helper had been the realisation that when you losing is part of the game and winning is just a tiny part of how should you be defined as a trader.Controlling this,and having this emotional and mental maturity to ride the rough waves is important.

So much for emotional maturity. This will certainly help you to move from rank novice to better off ones, but there is a huge gap needed to be filled if you want to jump from the “nice-little-consistent-Ramesh-who-trades-and-wins-and-never-shows-it” to “truly-fantastic-mindboggling-trader-who-pulls-the-trigger-even-when-everybody-else-is-frozen”. Greatness has a great charm to it. But it takes sacrifice!

And the sacrifice in my opinion, is to consistently train yourself to do the tough thing out. Not, in the trading arena but outside it.

Consider this, how many times have you promised yourself, that if this trade turns out profitable you are going to buy that Prada for your gf?

Or perhaps you are doing good, and just resolved, this (closed) trades’ profits is going to go for your new ipod?

Or perhaps, after a great month, you just bought a new jazzy car out of the month’s profits.

See, the progression of the situation? When you consistently think only about money and profits, it doesnt prepare you for the losses thats gonna come your way.

But if left unchecked, the next progression in this game is, the greatest sin of all in thistrading game called HUBRIS.

Greeks named Hubris as oneof the three greatest sins. I think,I will spare the theatrics. I will call it the only sin a trader faces.

Hubris, is the false illusion and pride that you are truly infallible. So complete is the lie, that you believe it with all fervent might. And that includes, your belief that your opinions are right, the belief that going is good and it will stay like that forever etc.

Often what happens as a translation of such mental setup is, you buy flashy stuff with your just acquired profits. Small time traders buy, ipods and iphones, big time traders buy jets and yachts. But buy they all the same.

Did you know, institutional money managers who manage fund of funds often withdraw their money and very strongly, after a trader has a truly fantastic year.

Partly because such F2(fund of funds) believe in the law of mean reversion. But also due to the fact,that the manager will be so much more full of pride and a false sense of infallibility that a loss can no more hit them. But guess what. Its closer than they think it is.

You see, I dont really blame the professional good traders. Trading as a business is such a demanding one, that we can put out best efforts, and still not get rewarded. And then, one day rewarded so violently that, all the pain seems worth it. And then, one manager pulls in a big year, he is bound to cut himself some slack.

My advice: Take a break. Come back, but dont buy that yacht just now
This is on a personal level. Have you noticed that so so traders listen intently to what others say, because he thinks he might glean in some tips. But fiercely self independent traders dont take contrary opinions very kindly. And if he had been on a roll, recently, God! save the person who is opposing him. That trader will be so full of hubris, that he will just not listen even if you are speaking sense.

I notice such an attitude, even in people who are connected with capital markets in India.

My advice would be to curb it.

  • Dont think you are infallible
  • Dont instantly link and connect a good trade, month with gratification
  • Dont argue and try to prove you are right about a trading opportunity, even if you know, you are right. Its extremely seductive to do this, but control this urge.
  • Dont open your mouth and let everybody know how many lakhs you won today.Its tempting trust me, but check it.
  • Dont give tips. Trust me, we are not that good, to kill somebody elses money. You think you got an opportunity, manage his or her money yourself, but for fucks sake dont give tips.
  • In general, emotionally do the tough thing.

Its so very easy to do the easy thing. The crowd does it all the time. Then why would the markets reward you if there is no difference between them and you.

Lord knows, this mutedness of mine is often interpreted by my relatives as nikammepana(a Hindi word which means: total uselessness).But guess what, I would rather risk being misunderstood by others than misunderstood by myself.

I am trying to reach my emotional goals.
Lord knows, I am trying!

Jump Up!
P.S:The “famous” quote in the very first paragraph, is not by any Byron, Shakespeare. I just made it impromptu 😀

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