Not long ago, an advertisement addressed the elephant in the room depicting how the worth on a person is determined by the brand of the mobile phone he carried, unfortunately that perspective is prevalent in society even today but now incorporating all things material. In an age, therefore, where our success in life is proudly individualistic and material, the word profit grows and claims an identity on ourselves and over ourselves. But before we start deconstructing profit altogether, we are reminded through experience that profit indeed is mandatory to survive. The questions, I believe, we need to answer are about the object and the methodology of our profit. Almost every one of us are drawn to the glitter and start on a wrong footing, so as I studied the art of market trading, I realised that there were many principles in trading that drew parallels to how you can profit in life, here are a few:
Should I jump into a pond when I do not know how to swim? No! Of course not, you are right if you say so because the outcome is obvious, I will drown. There are no two ways about it, yet when it comes to trading, statistics tell us 90% of people fail, jumping in the pond without learning to swim, but why? We are drawn to the exterior of a castle without considering the pillars that hold it, we are similarly lured in to the stories of profit without considering the preparation for it. We always prepare ourselves for the extremes, in a death or a life situation our experience with water informs us that we will drown if we jump in a pond and do not know how to swim, it’s wise to not jump, but what stops us to prepare in all situations of life. Understanding market fundamentals, trading patterns, charts and human psychology prepares us for trading, it is the same for life, we need to prepare. Plunging ourselves without preparation or on an agnostic platform will cost us in the long run.
Henry Mintzberg says it best, “Strategy is not the consequence of planning, but the opposite, its starting point.”. There’s an unwritten rule in trading that it’s better to earn a dollar ten times than ten dollars at once and the difference between the two is a well defined plan and the disciple to execute the plan and keep executing it. A thorough preparation should be followed by a thorough plan, we start by understanding the purpose of investing and the plan to achieve the purpose, this accounts for strategy. The entry point, the exit point, the return to book and the possible loss to digest are all well thought of before entering a trade. So we earn a profit from the market, we earn …. from life? That’s for you to complete, many of us leave it blank or we’ve allowed society and culture to fill the blanks for us, define what profit to us is and the way we are going to achieve it, that’s living life in short and it should be frightening that we all follow the lead here but never take one. Give this a deep long thought, least others gain their profit because you had no plan.
- Always Test
Churchill said, “However beautiful the strategy, you should occasionally look at the results.”, that’s when our plan, that sometimes linger 30,000 feet in the air, glides closer to the surface, that is why every strategy we make should always be tested. We call this backtesting, our initial premise is to never assume our strategy is successful but allow the test results to dictate the success rate of it. The market is unpredictable, however well we think we understand it, just like life. We need to be surefooted with our strategy to ensure it’s legitimate and profitable in the long run, just like life. The market always presents us with opportunities so do not worry that you missed one ship, take your time to think, plan and test because the profits in life are more valuable than anything material.
- Manage risks and accommodate failure
We are overjoyed with success and disheartened by failure, but we forget that it’s the many failures and learning from them that make us consistently successful. The price action of the market, however confident and surefooted we might be in our ability to predict it, moves against us. Life, like the market gives us no prior warnings, but what matters at these times is first the ability to constructively digest failures and second, to religiously be disciplined in following our strategies. Before a trade is placed, profitable traders always know the amount of loss they are willing to digest and the amount of profit they are expecting to take and they stick to these boundaries. They will take a loss when the price hits the loss threshold, without assuming that the price might improve, and they’ll take the profit when the price hits the profit threshold without assuming that the price might increase, further increasing profit. The risk that’s thus managed are the boundaries set and the action taken when the respective thresholds are hit. No strategy is assumed to have a 100 percent success rate, so when the thresholds are hit, it’s never taken as a failure rather as a part of the unpredictable nature of the market. The boundaries and corrective actions safe vouch against the unpredictable market. Have boundaries, plan actions and execute, in trading as well as in life.
- Perspective, Discipline and Patience
There’s a game we play with our children at home, “Say the colour, not the word”, where we write down a colour in words with a font colour different from what is written, for example imagine the word “ORANGE” written in green. You win and move ahead in the game if you say green, and not orange. That’s awfully difficult for my 8 year old who reads fluently, like many of us, but awfully easily for my 5 year old who is just beginning to read but can identify colours very well. We stumble once sometimes twice or probably thrice, then we get the knack in speaking the colour instead of the word although it still does not feel right in our stomach, but that’s the game and these are the rules to abide by if you want to win. Good traders practice this early, when most fall to the trap set by the price movements of the market luring us to move away from our strategy in fear of a loss, successful traders don’t they are disciplined and patient to wait for the price to hit either threshold. Life very much is the same, a correct perspective of life helps us in identifying these baits and traps, many of those are found out when we prepare and think about them upfront. But only through practice, many failures and discipline are we able to convincingly and consistently avoid these baits even though we might feel sick in our stomach sometimes doing so.
- Broaden and Narrow your vantage point
Ever since I was a child I loved watching the National Geographic channel, I payed close attention to patterns and behaviours of other creatures so intimately depicted by the producers. Above all, I always fancied the eagle, their flight and forage patterns to me, are still an outright majestic sight. I could spend hours looking at the flight of an eagle, soaring in circles as it ascends through the thermals to gain an elevated vantage point to hunt. It’s interesting to know though, that the strength of an eagle are razor sharp eyesight and swift agility as it attacks it prey. The elevated vantage point does not make an eagle a different bird, it rather enhances its strength, it broadens their horizon to scan and then as it set its eye on the prey it narrows its vision and attacks it. It makes the eagle what it was purposed to be, a masterful hunter in the air.
Professional traders use a similar principle while placing a trade, each trader have their own preferred time frame that they trade on, but before a trade is placed they always take a step back and look at it from a broader vantage point, a longer time frame. This helps the trader to gauge, accurately, the direction in which the price action is moving; but to place a trade, the trader analyses a time frame narrower than their preferred, this is to choose their best calculated entry point. Imagine that, successful traders have this engrained within them to broaden and narrow their perspectives to place a successful trade. In life, like the eagle and like the trader, we need to realise that we are a part of the journey of this grand scheme of life, it’s humbling and wise to know that we are a moment in life’s story and we can never overpower it. Thus having an elevated vantage point does not make us divine, rather elevates our strengths and broadens our vision, whereas narrowing helps us to focus on our target and complete our tasks.
- Book your profit
We hear, “The love of money is the root of all evil.”, what this means is it’s really not money that is a problem but the need to consistently have more of it and never really be satisfied in how much we have which is the problem. As a trader, we always encourage ourselves to book profits when the price of an instrument reaches our target, even though we might expect it to go higher. Aren’t we here to be profitable though? Shouldn’t we hang on to the trade when we expect the price action to move in the direction we intend? Yes, experienced traders do hang on to trades, but firstly that’s done after substantial research and secondly the profit and loss positions move accordingly. In essence, there are always targets, sooner or later traders book their profits, many times the price goes higher after profits are booked and many times still these are traps for the uninformed. That’s why experienced traders book profits and are never shaken when the price appreciates further in their intended direction thereafter. The desire to bite more than we can chew and many a times leads to undesirable circumstances. Good traders are content in the profit they book and from experience they know when the price should be followed and when it shouldn’t.
- Know what makes you profitable.
Well more money of course! How much money would make you happy? A million dollars, two I suppose or more? Think about the number and keep that figure in mind, let’s put it to the test. Now I’m married with a wonderful wife and two daughters and often as I sip my hot cuppa, I imagine what I would have done if my family and me were trapped in a life-threatening situation. I replay in my mind different scenarios and the sacrificial steps I might have to take just to ensure my family is safe. Now place yourself in my shoes, on a couch with a cup of tea in your hand and imagining a life-threatening situation with your family, but to this add a situation where you also have an option to bargain, a bag full of money, the amount you desire; or your loved ones. Or not and, what would your choice be? That’s what makes you eventually profitable, never put a price on the priceless in your life. Never!
As C.S. Lewis would say, “A successful voyage requires three things. First, the ships must stay out of each other’s way, and they must not collide. Second, the individual ships must be seaworthy, everything working in perfect order. Third, the fleet of ships must be on its proper course.”, in life then we need to learn how to sail in harmony, maintained well and head in the right direction, far be it that we take our instructions from trading alone, far be it that we be not wise with what we have learnt.