Patience

When novice traders enter the world of trading they are bombarded by all sorts of rubbish about what to do and how to do it. Unfortunately, very little of this material covers what is actually important and none of it seems to mention the words courage and patience. I have spoken about the notion of courage numerous times, it takes courage to do this as it is not as easy as people make out. There will be numerous times when you want to toss the teddy out of the pram and this is precisely what most people do. People are where they are because thats where they want to be – if they wanted to be different they would summon up the courage to make their lives different.

Closely allied to the notion of courage is patience, which in some ways is probably harder to muster than courage. To take no action is an action, the problem is most have been convinced that you have to always be in motion as a trader. The implication is that the noisier the market the more you  have to be in motion and the more profitable you will be. Unfortunately, this idea does not stand up to scrutiny in much the same way as the notion of FX being the most volatile market in the world doesn’t stand up to scrutiny. From my perspective patience is defeated by the notion that for the majority of traders entertainment is their prime driver. My favourite study in this area ( which I have referenced before) is An Analysis of the Profiles and Motivations of  Habitual Commodity Speculators by W.B. Canoles, S.R. Thompson, S.H. Irwin,  and V.G. France.  The key findings are worth repeating and i have highlighted the points that stand out to me in red.

“The typical trader assumes a good deal of risk in most phases of his life. He is both an aggressive investor and an active gambler.

 [He] does not consider preservation of capital to be a very high trading priority.

As a result, he rarely uses stop loss orders. He wins more frequently than he loses (over 51% of the time) but is an overall net loser in dollar terms. In spite of recurring trading losses, he has never made any substantial change in his basic trading style.

To this trader, whether he won or lost on a particular trade is more important than the size of the win or loss. Thus he consistently cuts his profits short while letting his losses run.

 He also worries more about missing a move in the market by being on the sidelines than about losing by being on the wrong side of a market move; i.e., being in the action is more important than the financial consequences.

Participating brokers confirmed that for the majority of the speculators studied, the primary motivation for continuous trading is the recreational utility derived largely from having a market position.

Numerous indications in our survey indicate that they are not trading solely or even primarily for profit, but may be maximizing excitement or the number of winning trades.”

It is worth repeating that for the majority of traders entertainment is their key drive – not profitability. This seems profoundly contradictory until you begin to think about the inability of traders to sit still. Consider the chart below –

I keep gold in my universe of instruments and from my perspective gold is locked in a range and has been locked in this range for sometime. Despite this there are still traders who are looking at this chart and are trading gold. Granted, some will be looking at different time frames to me but speculation must be worth the risk and the effort and trading instruments that are locked in narrow bands is neither worth the time, effort nor risk that accompanies such an activity. Yet there will be traders who are simply unable to control themselves and who will take positions simply because they cannot sit still and wait.

Trading is hard enough without setting yourself up for failure by attempting to trade churn, preempt a move or simply believe that your presence will somehow galvanise the market into action.

The final word should probably be left to legendary speculator Jesse Livermore –

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:  It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”