- 2002: Volume 11, No. 3 Mind Over Money: Fighting the Trend

"If you want to make money in the markets, go with the flow."

Going with the flow is a difficult strategy to master because it requires eliminating sabotaging thoughts so you can follow your rules. However, successful traders who stay in the game learn to run with the Bulls, as well as the Bears, and have developed an instinct for which group to follow while they are running in one direction.

If traders can learn to go with the trend in their approach to the markets, why do they not do so in their approach to trading? Confused? Take a quick look at some of the traders who fight the trend in their style of trading. See if you can recognize yourself in this article about fighting the trends.

Fighting the Clock Trend
Kirk was a brilliant trader in the morning but a losing trader in the afternoon. He woke up each morning filled with energy and a keen intelligence ready to take on the markets. Like many traders, he was at his best before noon. If the markets ran, he rode the trend to the end. As a result, Kirk made big money before lunch, but as soon as he finished lunch, he was tired and ready to take a nap. Unfortunately, the rest of the trading day loomed ahead and Kirk felt obliged to trade. After all, he told me, "I'm a trader, not a dilettante."

The trend that Kirk was fighting was his own internal clock, which was set for a specific period of productive trading time.

Kirk's story is not unique. Based on my experience, most traders have a specific time window during which they trade their best. In fact, most of the traders that I have worked with give back the money they make in the afternoon. I have also worked with a trader who only traded well in the beginning of the week. By Friday, he was working on a sinking foundation of energy that failed to support his trading. The result was an all-too-familiar Saturday morning hangover following a Friday trading debacle.

Fighting the Bad-timing Trend
A variation of the clock trend is the bad-timing trend. Traders who are going through a bad time in their lives often insist upon trading, even though their focus and energy is directed somewhere else. Rex was in the process of leaving his wife and family. He was moving in with an exciting young woman that he had met at a stag party. The emotional roller coaster ride that trading can take a trader on was nothing compared with the emotional roller coaster ride that Rex was on in his personal life. At home, he was experiencing guilt, a sense of loss, and wrenching emotional scenes. In contrast, he was experiencing heightened excitement, passion, and a new sense of joy with his new love. Unfortunately, the timing for his trading was very bad and Rex was adamant that he could not take time out from his trading. Predictably, the results were catastrophic.

Although divorce and separation are the most common bad-timing trends for a trader, other bad timing trends also occur when a trader is:

• grieving over the death of someone close to him,
• recovering from a serious illness or accident,
• regrouping after a major loss in the markets,
• dealing with a major transition in his life that requires his full attention such as a move and/or a change in partnership,
• positive changes like a new baby or moving to a new location.

Fighting the Talent Trend
If Kirk fought his internal clock trend, a fair number of traders fight their talent trend. Instead of focusing on the things they do well, they insist upon trading against their talents. Richard has the talent and disposition to be a highly successful long-term trader. He has the patience to wait out a position until it takes the direction he wants and the insight to pick highly profitable trades. In fact, Richard's father was a very successful long-term trader who showed his young son how to make money in order to bring him into the family business. But when Richard grew up, he was determined to do things differently than his father did in order to demonstrate his independence.

Day after day, Richard stared at his computer screen, unable to take the short-term trades that he was determined to make. Fear welled up inside him, preventing him from following his system. Instead of making money, Richard played computer solitaire for hours. Two years went by with Richard making no more than a handful of trades. Had he been taking long-term positions, he would have made more trades than he did while he was telling himself and everyone else that he was day trading.

Of course, Richard is not the only day-trader fighting his talent trend. Some traders do it because they think that day trading is more macho, more exciting, or more profitable, guaranteeing them a higher income. Although day trading often involves taking more risk and involves more adrenaline-pumping action, it does not guarantee more success. While there are day-traders who make $10 million a year, there are also day-traders who make only $25 thousand a year. And there are long-term traders who make millions of dollars a year while leading much happier, less anxious lives than their more frenetic counterparts.

Another trend-fighter that I have worked with was determined to be a long-term trader, but could not allow himself to go on vacation for fear that his position would either reverse itself or take off while he was gone. So, he dragged along his computers, phones, fax machines and satellite dishes while his family was relaxing at the beach. Finally, he realized that he needed to be in a position to close out all of his trades at the end of each day because he did not have the constitution to hold positions overnight, much less for months at a time. Now, he is much happier in his trading and actually making a good living.

Other common counter-talent issues for traders are:

• The Non-Businessman Businessman—Becoming a successful trader requires a certain degree of business acumen and organization. Some traders have little of this talent but insist upon taking on the responsibilities of conducting the business functions of their trading operation. They try to do the bookkeeping and accounting functions, the planning, the legal work, the office organization, and equipment purchasing instead of seeking out expert assistance where they need it. The result is a trading business that does not run like a quiet, well-oiled machine, but more like a squeaky jalopy serviced by a blind mechanic.
• The Corporate Entrepreneur—It takes a special talent to assume the risks associated with starting a trading business and working alone. The personal qualities of an entrepreneur allow him to function alone in an environment of limited resources, insoluble problems and obstacles plus high-levels of risk and uncertain income. Someone who is raised in a corporate environment, where needs are often met by someone else, can have a terrible internal fight on his hands when he is forced to deal with the demands of the entrepreneurial environment of a trading business. The trader who has no entrepreneurial talents should be trading for an institution and not forcing himself to take on a world of risk that he cannot handle.
• The Undisciplined Stay-at-Home Trader—Some traders have the self-discipline necessary to be able to trade from home and deal with the potential distractions all around them. But, many traders want to trade from home so that they can actually succumb to those very distractions whenever they feel the need to escape their trading. The results are predictable for the trader who does not have the internal disciplines to trade from home. The ones who eventually win this losing battle are those who accept their defeat and return to their offices in the city.
• The Talentless System Designer—Not every trader has the talent or inclination to design his own trading systems. Nevertheless, in order to succeed, a trader must have a system or methodology that he believes in and is able to follow. The trader who cannot design such a system but who continues to work on it, sometimes for years, is fighting a losing battle. Instead, he should hire someone to create it for him or take the time to investigate and buy one of the excellent systems that are on the market.
• The Wayward System Follower—Once a trader has a system, he does not automatically have the emotional and personal talent required to follow it. This talent is the most essential one in making money in the markets. Going against this trend is likely to undo any of the other fine qualities and talents a trader might possess. Some very successful traders who have designed brilliant systems no longer trade their own systems. Instead, they have hired others to pull the trigger because they came to terms with the fact that they cannot do it themselves.

Fighting the Resource Trend
Another common mistake that traders make is to fight their resource trend. A trader has a great desire to trade full-time but only the resources to paper trade or to trade only part-time. However, his passion for trading overcomes his common sense and he soon finds himself trading full-time using his family's only financial resource, their home, as a source of trading capital. Soon, he is out of business and out of a place to live. When you have $20,000 between you and starvation and have no other means of support, you must realize that you must follow the trend in your resources. At this point, trading full-time and needing to live off of the income is the equivalent of playing the lottery for most people.

Going with your Personal Trends
As you can see from the examples, traders can fight the trends in their trading the same way they can fight the trends in the markets with similar results. What traders think about are the markets and not about their personal resources, both in terms of financial, talent and disposition. However, when traders are willing to look at their trends and go with them, they find that they can turn around a bad trading situation into one that works for them.

Here are examples of traders who examined their personal trends and decided to go with the flow:

• A trader who was unsuccessful using time frames from five to 15 minutes succeeded when he changed his time from to a range of 15 minutes to a full day.
• A trader who looked at the screen all day and suffered with an obsessive-compulsive disorder that allowed him to be compulsive about trading succeeded when he shut down his screen and just followed daily charts.
• A trader without adequate financial resources but wanted to become a full-time trader. Once he agreed to paper trade using a service, he developed trust in himself and learned what it was like to trade. He lessened his chances of incurring the initial losses that most traders have and was eventually able to trade successfully.
• A trader who could not thrive on his own, but was successful once he began to trade other people's money.
• A trader who could not trade other people's money felt free to trade well once he was responsible to no one but himself.
• A trader who could not pay attention to all of the stocks he was following succeeded when he narrowed his focus to a single stock or a set of related stocks.

Conclusion
Following the trend in trading means more than just following the trend in the markets. If a trader wants to be successful, he must also follow his own inner trends. To find out about the natural trends in your trading, you should begin by asking yourself the right questions about how you trade best. What time frames are the easiest and most profitable for you and in what environment do you trade best? What are your talents and what do you do well? What are your financial resources and what will they allow you to do? Ask yourself what is good for you and not for someone else, because each individual has a different set of resources that he brings to the trading table. Then, once you have found your strengths, build on them and flow with them. Turning those analytical skills that traders apply to the markets on themselves is a difficult assignment for most traders. But, it is the same strategy that any great general applies to a war—he understands his enemy's strengths and weaknesses, but he knows his own as well.