I’ve just finished re-reading the interview with Paul Tudor Jones in the first Market Wizards book. That and many other interviews in there get quoted a lot in the financial blogosphere, and with good reason, they’re just a goldmine of wisdom and insight from some of the greatest ever traders.
In response to the question ‘What are the trading rules you live by?’ he talks about not averaging losers, position size, risk, and entries, before saying: “The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown.”
He then goes on to say “Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do you’re dead,” and “If you made a good trade, don’t think it is because you have some uncanny foresight. Always maintain your sense of confidence, but keep it in check.”
Those last two quotes in particular have always appealed to me, because I often need reminding of them.
My ego and my trading were married for many years, but things turned sour and they got divorced several years ago. It was fairly bitter at the time, but we’re all OK now. They got joint custody of me and they now know not to get together when I’m around as it only makes me get upset and lose money.
In choosing to be a trend follower I selected a form of trading that severely tests my need for ego gratification. I’m wrong more often than I’m right, and getting through lots of small losers to run that big winner tests my resolve. I’ll often appear to be buying something right at the top, or exiting it at the very bottom. I have occasionally done exactly that. To anyone who hasn’t traveled the same journey to appreciate my process, those trades appear unwise and open to ridicule. Finally, when I persist in still doing it, rather than being lauded for showing great discipline, I may be portrayed as stubborn, for not recognizing a need to adapt or change.
Truth is, I’ve always believed that trading, when done right, should actually be one of the most boring occupations in existence. There’s no place for my ego. I’m fairly sure any excitement or pleasure I get from trading doesn’t help my performance. Confidence can quickly turn to cockiness. Like PTJ said, ‘be confident, but keep it in check.’
Think of when you are at your most confident in your trading. If when exiting, it’s probably a winning trade, not a losing one. Could the thought of ringing that register be affecting your judgment?
For most people the point of maximum confidence for every trade is at the entry. When you think about it, once you’ve identified a setup and seen it triggered (or even when anticipating it), that’s probably the best you can ever feel about it. Even once you’ve entered and you’re profitable, your confidence ebbs and flows with your P&L.
Have you ever been in a hurry to put a trade on? I bet if you were, when it came to exiting you took a little longer before you pulled the trigger. How do the trades you’re most confident about correlate with their final outcome?
All of these questions are useful in determining to what extent your ego may be affecting your trading. We often talk about the psychology involved in trading, those situations are there for all of us, but I think how we deal with them as individuals comes down to our own personal mindset, and for me the ego plays a large part in that.
Personally I’ve found it helps to have other outlets for my ego, but that’s maybe a subject for another post. I try to recognize what my desires and wants are, and find something else to satisfy them. Teach, write, sing, do whatever is a good outlet for you, quite frankly it doesn’t matter where you get your ego gratification from, just as long as it’s somewhere, anywhere, other than the market.
Divorce your ego from your trading, or your money will divorce you.