Self Development: Never ending – in a good way. When you think you know everything is when you are most likely to surprise yourself – and we don’t like surprises in this business. You must continually review the fact that is about probability and ultimately predictability for long-term success.
Thinking like a computer
Trading successfully is the result of an ability to manage your decision making process in a computer-like fashion; making a statistically significant number of trades in order to make a profit from your strategy over the longer term – by winning more than you lose of course.
It is easier said than done though!
Money and emotions
From an early age we are taught by parents, teachers and peers different values and requirements for money, and we develop an emotional response to gaining it and losing it.
In fact in modern life people have almost become allergic to money, they can’t wait to give it away as soon as they get it, keeping them continually hungry for more – but this is a habit that keeps people distracted from saving and investing in their future.
Trading is a process – it relies on probability to earn interest yourself by gaining a decision making edge to grow your savings and income.
However, because of this probability element, there will be a number of losing trades over any significant period and there is the possibility of the losing trades occurring in a run as much as the winners. This is where most people come unstuck and your emotions begin to question your abilities and distract you from the rather more boring probability mechanics of trading.
These drawdown periods are when you most need to be able to manage your fears of losing, greed from winning and avoid giving away your probability edge by trading too little, too much or with risk amounts per trade that cannot be sustained based on the probability of drawdowns occurring at random times with your strategy.
We have to admit that we hate drawdowns – hence our obsessive computer programming and analytics to increase our edge from average to very good. We find the best way to deal with drawdowns is to minimise them – by only taking the very highest probability ‘A-grade’ trade setups for entry, and exiting swiftly when profits are most likely maximised when approaching a medium-probability position of reversal.
Knowing your strengths & weaknesses in financial decisions
The modern world is becoming a more a difficult place to gain and keep financial stability, and ultimately independence.
The achievements of the advertising and marketing industries to study mass behaviour and individual psychology puts us all as a significant disadvantage by being continually fed with suggestions on how to give money away in ways fine tuned to getting the results that others want – for us to give them our money.
Nowadays, we are told we need to give money away that we don’t even have yet for a happier life – through increasing personal debt on cars, houses, furniture, phones, gadgets, holidays, schooling, the list goes on…
Without wishing to sound like the self-appointed voice of reason, it is necessary to accept that there are increasing pressures on us to make, keep, invest and use money wisely. And these pressures make us vulnerable to making rash decisions.
In a competitive world it is far easier to lose money than make it!
As traders we need to detach these life pressures from the automaton-like behaviour required to work statistical odds in our favour through trading and active investment management.
Competing against stacked odds
As each generation runs out of money from the currently available economic resources, they begin to borrow from further and further in the future – this is what they mean when they say that it is people’s children and grandchildren that will pay.
This is also the reason for the booms and busts in economic cycles – as the custodians of money can’t resist the temptation to want more and more due to the ease at which it can be take from those that aren’t watching. Banks do it with disproportionate pay bonuses paid from your deposits and little-understood higher interest rates on loans; and politicians do it with vote buying by spending too much of your tax money on inefficient crowd-pleasing projects and unnecessary public sector jobs. (Of course we do greatly appreciate and contribute to public services but that’s a conversation for another day.)
Wealth gets stored in fixed-asset values (like property, gold and pensions), removing it from access to those generations following. Money, as a measure and reward for economic achievement, therefore then needs further endeavour to acquire – but the young then need to create enough to match the value of that wealth already stored as well as compete for a comparable standard of living with a growing population and increasing requirements for finite energy and food resources.
Wealth stored in cash it is slowly eroded in value through inflation, so that as the old become less economically productive the young grow their economic value and money making abilities. And this is how the young then take it back from the old, through a socially acceptable stealth tax on prudent savers.
Both of these factors mean that as time goes by we all have to work harder to acquire and keep our savings and maintain or improve our standard of living.
Luckily, through the use of science and technology, we can still aim to be able to achieve the ultimate goal of a collective increase in standards of living and reduced environmental impact in relation to the time and effort required to make feed and entertain ourselves – but is is a gamble to rely upon that progress alone.
Trading is taking controlling your own financial luck
Once we understand the mechanics of what money is, and how if flows through the continual re-distribution of asset values through price, we can take more control of our own exposure to losing money through inflation or paying excessive interest on personal and government debts.
As Albert Einstein one said; the understanding of compound interest was his most lucrative discovery. It is for this reason that we, as traders, aim to be the ones compounding our earnings and not the ones paying compound interest for others to profit disproportionately from.
In our experience, ultimately taking control of your financial risks and rewards successfully is the best way to manage our infallibilities and liabilities in the world of modern money management.
You may have heard this before but the best way to make money is not to need it, it is no coincidence that wealth attracts wealth – money rewards success, not effort.
It is for this reason that that all trading and active investment products come with serious health warnings that they go down, as well as up, in value. Because the risk of losing money will affect different people in different ways, we must understand and manage ourselves to be able to improve our finances in the long-term and mitigate the risks.
Therefore it is with good reason that you are advised to only trade or actively invest money you can afford to lose (hopefully not all of it but even small losses in a down-turn can hurt, especially if it is at a time when we are close to wanting to cash them in that we can’t control, as with pensions).
When you are using your own money as your working capital for your trading account or investment, kept separate from your money for living needs, then you are much more able to think rationally when making buying and selling decisions than you are when you need to make a certain amount of profits or recover losses in amounts that are statistically difficult for your strategy and account size to achieve.
Knowing when you are successful is the ultimate freedom
There is a very good reason that we encourage active traders and investors to manage their account as part of a portfolio of investments and monitor its performance using trading log analysis – this helps you to see, over the longer term, your personal hedge-fund’s performance in each instrument you buy and sell, and manage your own professional behaviour accordingly.
Plus, having these detailed records enables you to call upon the assistance of an experienced mentor to analyse your trade decisions from an outsider’s point of view; to show you your strengths and weaknesses and how to improve yourself and your overall profitability.
Never stop learning
Markets change and can seem irrational, confusing, and often counter-intuitive – but computer-processed maths and statistics will give you emotional-detatched rational data and feedback to help you improve your understanding and quantify your trading analysis beyond your mortal human abilities.
This is the foundation for our evolution of Analytic Trading strategies, we continually learn from new market data and refine our approach to these markets – and it is this ongoing learning that helps us to profit in the long term. Making profits definitely is the best answer to your financial needs and aspirations.
But there’s more to life than just money, so remember to use your money wisely and give something back too.