The Pattern Trader

THE LIFE OF A PROFESSIONAL TRADER. HIS MOTIVES, INSPIRATION AND VISION.

Weekend Food For Thought – Mar 24, 2012

DEFENSIVE TRADING – LESSON 5

Over the last four weeks, we’ve looked at some of the most effective ways to avoid getting our trades into unnecessary risks including ~

• how we position ourselves in the market in Lesson 1,
• why losses are more important than profits in Lesson 2,
• what we can do to lower our financial risks and increase our financial gains in Lesson 3 and
• when we should or should not be trading in Lesson 4

… the “How”, “Why”, “What” and “When” to trade.

In this penultimate installment, we’ll look at the one element that puts it all together – the “Who”.

Who you really are is how you will be trading.

Your trading results reflect who you really are.

In other words, the market is going to open you up to the truth and you may not like what you see about yourself. It is because of this last lesson that I decided to take the path I took toward my trading goals.

KNOWING

In 1664, legendary swordsman, Miyamoto Musashi wrote The Book of Five Rings (Go Rin No Sho) made up of five books; The Books of Earth, Fire, Water, Wind and Void. The books were about Musashi’s various thoughts and lessons on the art of war and individual combat. Today, it represents some of the finest methods used in business, sport and of course, trading. Of the five books, the Void is the shortest book but the one with the most meaningful and lasting impression for me.

The void is where nothing exists. It is about things outside man’s knowledge. Of course the void does not exist. By knowing what exists, you can know that which does not exist. That is the void.

People in this world look at things mistakenly and think that what they do not understand must be the void. This is not the true void.

It is confusion.

In the Way of strategy, also, those who study as warriors may think that whatever they cannot understand in their craft is the void. Someone like that will continue to be distracted by irrelevant things. This is not the true void.

To attain the Way of strategy as a warrior you must study fully other martial arts and not deviate even a little from the Way of the warrior. With your spirit settled on your duty, you must practice day by day, and hour by hour. Polish the twofold spirit of Shin [heart] and I [will], and sharpen the twofold gaze of ken [perception] and kan [intuition]. When your spirit is not in the least confused, when the clouds of bewilderment are cleared away, there is the true void.

Until you realize the true Way, whether in religious or in worldly laws, you may think that your own way is the one correct and in order. However, if we look at things objectively, in the light of the Straight Way of the Heart or in accordance with the Great Square of the World, we see various doctrines departing from the true Way.

What you believe in often proves to be contrary to the true way, distorted as it is by tendencies to favor your own thoughts and views. Know this well and act with forthrightness as the foundation and keep the true Heart as the Way. Enact strategy broadly, correctly and openly.

Then you will come to see things in an all-encompassing sense and taking the void as the Way, you will see the Way as void.

~ Miyamoto Musashi

Read that whole script again. This time, void your mind of any thoughts and read it as a trader. Replace “warrior” with “trader” and you will see why this meant so much to me.

LEARNING

Having read so much and having learned from so many people, my mind became clouded and influenced and so did my trades. What I had been learning were the various strategies and techniques to trade. These were the “irrelevant things” Musashi was talking about. I kept thinking that I was missing something and that something would be the secret to my trading success. I kept looking at that “void” which was not the true void.

It wasn’t until an obvious fact hit me that I realized that I had been doing everything from the wrong approach.

What you believe in often proves to be contrary to the true way, distorted as it is by tendencies to favor your own thoughts and views.

I had been learning and adopting methods and strategies from gurus whom I had foolishly believed to be successful traders when they were nothing more than businessmen who made money from selling seminars. I was gullible enough to believe that I could become as good as the best in only three days of “education”, when the best are those you find in Wall Street who have spent three to four years in the finest universities to learn their craft and spent another three to four years in mentor-ship in some of the greatest financial institutions in the world to hone their skills.

So what I had learn and believe to be the way was in fact contrary to the true way and distorted by my tendency to favor my own thoughts and views.

… you must study fully other martial arts and not deviate even a little from the Way of the warrior.

It is necessary to learn everything. And this meant that I had to learn what the Wall Street trader learnt and know what he knows and do what he does. Without going into a very long drawn and detailed account of what I did and how I did it, let me just say that it was an eye opening experience and one that made me feel so foolish and gullible for believing that a three day workshop could have made me as good as the Wall Street warrior.

In Musashi’s day, this would have been akin to me taking a weekend workshop on sword wielding by some self-proclaimed Samurai and believing that I could have taken down Musashi after that crash course. I would have been psychologically unprepared, unskilled and too inexperienced to have taken on even one of Musashi’s junior students, let alone the man himself. I would have been killed on the first stroke of his bokken and he wouldn’t even have drawn his Katana.

Thus, in spite emptying out all that I thought I knew and relearning everything that a Wall Street warrior knows, knowledge alone was never going to be enough.

APPLYING (TAKING ACTION)

In battle, it is often said that wars are won or lost even before the first shot is fired. This implies that the mindset and psychology of the generals and soldiers were foremost in achieving success. We know from history that the victors were always the side that was motivated, disciplined and hungry. The vanquished were always the ones that lacked discipline, self-esteem and courage.

Technology never always secured victory as was the case with the Germans in WWII. The machines were only as good as the men who used them. Toward the end of WWII, the Germans had far superior weapons than the allies yet they failed to regain any sort of superiority as the men who operated the machines were hastily and ill trained and certainly resigned to failure and eventual surrender. They had lost all motivation to fight.

Taking this lesson from history, I recalled Musashi’s text and practiced in all earnestness.

… you must practice day by day, and hour by hour …

I focused on becoming a disciplined exponent of my craft. I became passionate about what I did and thus was naturally motivated in my intentions. I focused on specializing and picked a handful of securities at which I chose to excel in. The idea came from a simple fact – in any profession, a true professional always has a specialized skill and is never a Jack-of-all-trades. After mastering his skill, the professional then goes on to learn other skills and masters each one, one by one, slowly and steadily.

Traders on the floor of an exchange also specialize. They know everything there is to know about the markets and will use all that information to help them in their specialty trade. They draw conclusions by looking across all the various instruments such as bonds, currencies, commodities and equities. They use macroeconomics as their indicators and fundamentals as their defense. They feel the pulse of the economy and are always in the know of where the smart money is flowing. They are always more than a step ahead of everybody else.

Then I realized that to become like the Wall Street trader, the skill and knowledge was only the tip of the ice berg.

… Polish the twofold spirit of Shin [heart] and I [will], and sharpen the twofold gaze of ken [perception] and kan [intuition] …

The skill alone was never going to be enough without the right psychology. I practiced to master the Shin (heart) and I (will) and sharpened by Ken (perception) and Kan (intuition).

True heroic warriors went into the battle with no fear of death and were able to perform at the highest level of stress and pressure and emerge victorious. Their business was the business of life and death. There was no room for doubt and no space for fear. There were no allowances for mistakes and the price of a lapse in concentration, discipline or confidence would have cost him his life. He had to know the enemy, he had to understand the nature of the battlefield and he had to know the extent and limitations of his abilities, his weapons and his fellow warriors as a team. The Shogun too had his work cut out for him as he needed to be shrewd with his battle tactics, know how to use his army to full effect and also preserve the bulk of his forces. He was never going to win every battle but his focus was always to win the war.

As a trader going into the market, I cannot let myself be afraid of losses. Like the Shogun, my focus is to preserve my capital and cut my losses to live and fight another day. I am never going to win every trade but I will make my annual income. To do this, I learnt about my own weaknesses and shored up my strengths. I reduce as much risk on my trade as possible before I take the trade and I keep my discipline of financial management to keep my confidence high. I put extensive research into the trade and the market I am trading in to understand its nature and protect myself from the risks. I stay focused on what I am doing to avoid mistakes and I am aware of the tactics available to me so that I can maximize my time in the market to optimize the duration of my trade. I do not wish to stay in the fight for longer than I have planned so that I do not over extend myself and lose my edge. I never over-commit myself by over-trading and I never let my losses lose more than I will allow.

Know this well and act with forthrightness as the foundation and keep the true Heart as the Way. Enact strategy broadly, correctly and openly.

Then you will come to see things in an all-encompassing sense and taking the void as the Way, you will see the Way as void.

Needless to say, it took a long time to get to the minimum level of expertise that I sought – much longer than any book, guru or workshop said it would and it definitely didn’t happen overnight as I was led to naively believe when I started.

It took the right attitude, the correct mindset, lots of hard work, much patience, hours upon hours of practice, astute psychological management, strict discipline, financial management and continued learning to get me to where I am. This is how the Wall Street trader did it too. There is no short cut to success in any business and definitely not in this business.

Isn’t it strange that no other profession has gurus conducting three day workshops? You’ll never get a crash course in surgery, there are no weekend workshops for law or accountancy and certainly no seminars for architecture and engineering. But you will get plenty of workshops and seminars about trading and they always make it sound so easy and achievable.

And the results of such workshops are obvious for all to see. There are always a few initial successes but these few never last for long. In most cases, more than 85% of the time, there are losers.

If you have been losing on your trades, then it is obvious that what you have learnt is not the way and you are confused. In order to achieve success, you will have to clear your mind and start all over again as I did and learn the way of the true successful practitioner.

Thus, if ..

Your trading results reflect who you really are

… and you have been losing, then who you are is very obvious.

I think it is time for change.

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