Why Do Traders Trade?

Here is a quick quiz.

Why do the majority of traders trade?

If you answered to make a buck then you are unfortunately wrong. The overwhelming evidence is that the majority of traders trade for entertainment value. If allowed to make a lesser gain but trade more versus trading less but making more traders generally opt for the former. They may lie to themselves and tell themselves that they treat their trading like a business but their deeper motivation is to be involved in the game. Being involved in the game makes them feel they are doing something. To reference David Thoreau – all men lead lives of quiet desperation. Feeling as if they are in the game relieves this desperation.

It is sometimes worth making a point by referencing the absurd. Consider the chart below of Lotus Bakeries (LOTB) – is a Belgian stock so you will need to view it using TradingView or an equivalent.

If you had invested $10,000 in LOTB in 2012 it would be worth $301,398. For this period the stock generated an annualised CAGR of 35.37%.

It would be a remarkable investor who had the patience and foresight to hold a stock such as this for this long. Even using weekly charts and a longer-term moving average there are periods where you would be thrown out of the stock. This would either be a profound conviction bet or you were a long-time employee holding shares in escrow. But it does illustrate a point.

It is possible to find outsized gains in the local market – the chart below is of ALL during a particularly powerful trend.

What it does show is the power of simply letting trends go. Big trends make big money. It is as simple as that. I understand that the Instagram generation has been brought up to believe that you have to be constantly buying and selling instruments to make outsized gains.

However, even experienced traders have trouble holding trends. I believe that the process of scaling out of profitable positions that are not exhibiting manic behaviour is simply another facet of wanting to be entertained. In this instance, the foundational myth is that you will never go broke taking a profit. The question you have to ask is whether you are trying to avoid going broke or you feel the urge to do something. Alternatively, you are frightened of any form of give back.

The intriguing thing about the human psyche is that the most effective lies we hear are those we tell ourselves. So if you tell yourself that you are scalping a few percent every week and that will add up to hundreds of percent over the year then you will find arguments to justify that. The reality is you are probably just paying to play.

Likewise, if you think that scaling out of profitable positions is a mechanism of avoiding going broke then you will find reasons to believe that.