In his chapter on luck, Bob Rice says: “The expression ‘the harder I work, the luckier I get,” is not just cute; it is mathematically correct.” In short, if we follow a plan, and execute it consistently, then we’ll place ourselves in a position to ‘get lucky’. While Bob is speaking about chess and business, the same can be said about trading.
Given the nature of the markets, we are at the mercy of randomness (luck) on a trade-by-trade basis. Our edge operates over a large sample size and we never know what ‘this’ trade will bring. Many ‘newbies’ confuse ‘luck’ with robust trading. In tonight’s blog, I’ll illustrate this idea by telling you two true stories.
For the first, let me introduce Abe. Abe is a ‘newbie’ in the sense that he has not had three consecutive profitable years. I met Abe in Singapore after he had bought the first edition of the “The Nature of Trends”. He told me that as a result of the book, he was now making money hand over fist and he wanted to apply for the mentor course. After the preliminary screening process, I told him he could not afford the course. He argued that since he had made ‘$X’ over the past few months, he could pay it in no time.
I told him he was overtrading and the foundation of his success would prove to be his undoing. “Reduce your size; trade more conservatively and you will survive. Don’t confuse being lucky with being good”. I turned him down for the mentorship.
After that, I saw Abe from time to time – at the presentations I do in the region and at a couple of my seminars. Each time the ‘rags-to-riches-to rags’ story repeated itself. I am told Abe is convinced that I am hiding the ‘real’ secret to trading success.
What Abe doesn’t realize is that success will continue to elude him until he realizes that ‘the secret’ lies in accepting that the market is a probability game; as such luck (randomness) will play its part. Sometimes we’ll be lucky, other times unlucky. When the latter occurs, we rely on our planning to insure that the loss is within tolerable limits. Trading this way does mean we won’t turn $10,000 into $100,000 in 3-months; on the other hand, trading this way does mean, we will accumulate wealth over time, and continue to trade for as long as we are physically and mentally able.
Now let’s turn to Bob. Unlike Abe, Bob is a true newbie and has just started trading. He is one Ana Wang’s first subscribers (www.awanginvest.com). Like Abe, Bob has to learn to formulate and implement a plan rather than trade aimlessly.
In her first recommendation, Ana shorted gold on stop at $912.4. Abe entered at $910.00. The target was around the $850 to $860 zone and the stop around $946.6. When the market rebounded off $876.3, Ana sent out a recommendation to lower the buy stop to $910.00. This was a defensive measure to protect the position.
Abe did not stop out; in fact he may not have had any stop because he wrote to Ana after gold come down from $956.2 to ask if he should hold on to his short at $910. The day before Ana had put out a recommendation to sell gold at $924.6 with a stop at $951.7 and a target of $851.7. A few days later, Bob wrote in to say that he had taken a $4.00 profit on his shorts.
Bob was lucky: Gold may have moved to the Primary Sell Zone at $1025 to $1000 on the first rally off $876.3 – the fact that it did not was the result of luck. Then, having borne an open loss of over $3,600.00, he grabbed a profit of US$400.0. At a risk reward of 9:1, Bob would need to have a win rate of 90% to secure an edge of a measley $0.40 per trade.
I would not like Bob’s chances of achieving that win rate.
The difference between Bob and Abe is Bob is still open to learning and, if he is prepared to accept the role of luck and the need for planning, can still make the grade. It will be harder for Abe. Unless he has changed (and one can only hope), he’ll continue to confuse luck with ability – and he’ll never make the grade’ at least not until he learns this lesson.
More on luck tomorrow.