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The Sport of Trading - Part I

Last updated 10/5/2012 4:04 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

*** This is the first of a two part series I wrote earlier this year as a contribution to a publication which you can find here.  I’ll provide the second half of the series next Friday. ***

I have always believed that the best and easiest way to learn something new is to compare to the familiar.  For many people, a great analogy is sports, as the lessons learned on the playing fields of many games played can often be transitioned to daily living.    The sport of trading is no different. It doesn’t matter whether you trade spread bets, equities, currencies, or any other medium; there are some cardinal rules to live by for all:  

1.       Soccer – Sometimes a tie is really a win.

Being an American, I grew up viewing soccer as a fringe sport. Over the years however, I have developed a certain understanding and appreciation of the sport, including the beauty found in the match ending in a tie.   The doppelganger of a tie in trading is a break even situation. You might think that nobody wants to just break even on a trade as we shout, “We are here to make money!” However, as many traders begin to understand the sport of trading, they appreciate that ending in a tie can be considered a success. 

When placing trades, we can only assess the information at that moment. It is inevitable that the variables of a trade change as the trade develops. Therefore, the reason that you were in the trade to begin with might mature to reveal a completely different scenario than what was originally envisioned. Sometimes discretion can be the greater part of valor and you have to move that stop loss up to break even. Your caution won’t always be rewarded, but the alternative could be much worse.

2.       Football – Have the memory of a cornerback.

A common mantra heard on the gridiron  throughout the U.S. is that a cornerback has to have a short memory. They will get beat. Plain and simple. If they dwell on their past failures, confidence gets crushed, and the player becomes a shell of his former self. Traders have to take the same mentality. It is a fact of life…You Will Have Losing Trades! Never in the history of trader-dom has there been a perfect trader. If there were a Trader Hall of Fame, every inductee could tell you that they have had their fair share of absolutely lousy trades. However, they did not give up. They did not allow the memory  of failure to hamper creating their next opportunity.

3.       Skiing – Know your risks.

I often say that risk management is the single most important thing in trading. I don’t care whether you are a fundamental or technical trader or a combination of the two, if you don’t manage your risk in a responsible way, then you won’t be any kind of trader for long. If you have ever been skiing, risk management is probably something that was a paramount consideration. If your skill level says “bunny hill,” you better not try to go down the black diamond course. 

Same thing goes for trading. When you place that trade, you better know how much you could potentially lose. A general rule of thumb is to risk no more than 3% of the total value of your account on any trade that you place. Whether your stop is 10 points or 150 points away from the market, setting your position to equal the same total amount on every trade can be the difference between a successful trader and an also-ran.

4.       Tennis – Use the right equipment.

I find it amusing sometimes when catching some old video of John McEnroe arguing with a chair umpire at Wimbledon. Not so much that he was angry, but just looking at that wooden atrocity that he was carrying in his hands. The tennis racket has grown by leaps and bounds since those days, and the performance of the players has therefore increased exponentially. 

Traders today are in a similar situation when it comes to technology available to them when trading. Not too long ago, if you had an online platform that allowed you to pull up 3 charts and draw lines on it, you had the cream of the crop (and were likely paying thousands of dollars for it). These days, there are mobile platforms that blow the PC version of 5 years ago out of the water. Technology continues to march forward, so using the right equipment might be the difference between you making the right call, or the wrong one.

5.       Baseball – Keep it simple.

Baseball is a game that involves many side games. There are so many factors a pitcher must consider before he releases a pitch to the batter. Are there runners on base? Can this guy hit a curve ball? Where is his strikeout zone? Is he going to bunt? Should I walk him? How many outs are there? And on, and on, and on. In a game as complicated as baseball, there are many distractions that could take that pitcher’s focus away from the task at hand; which is to get the batter out. 

Trading is similar in that we have to stay abreast of many different factors to determine what the best course of action might be. How will tensions in the Middle East affect oil prices? How will the U.S. debt situation determine the price of Gold?  Sometimes you just need to ignore all the minutia, and follow a particular method. Tuning out the noise of everything else around you keeps the focus simple. 

Just as the batter can essentially take a simplistic methodology of “see ball, hit ball;” technical indicators or technical trading strategies can sometimes help us dull the noise of everything else happening around the world. It gives you the ability to concentrate on one thing, and one thing alone; winning this trade. 

As you can see, whether we realize it or not, from the days of childhood, we have been preparing ourselves for the sport of trading.   The discipline, perseverance, grit, strategy, creativity, and emotional control that allow you to participate and excel in the physical sport of your choosing, has been preparing you for the mental sport of trading all along. So take those lessons to heart, enjoy the fruits of your labor, and put that education to good use!

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.