Friday, December 15, 2006

Trading is Like the Grouse Grind

There's a hiking trail in our city which has been nicknamed as Mother Nature's stairMaster. It's called the Grouse Grind, and it is an unrelenting, unforgiving, 2.9 km uphill climb to the top. Most hiking trails have many flat spots where you can catch your breath as you hike your way, but this Grouse Grind is clearly not one of them - it is a continual uphill slope, there are no resting spots. There is actually one section of the Grind where it is so steep that it is a good idea to climb up using all four limbs.


Back in the good old days when I was young, and in much better shape, I would regularly go to conquer the Grouse Grind. I remember there was one summer where I would go at least twice per week, because I had bought this season's pass for the gondola ride back down to the base, and since I've invested some money into this exercise, I just **had** to do the Grouse Grind in order to recover my investment.

In that summer, I remember that one of my best times ever was 47 minutes to complete the Grouse Grind. I would be sweating so much that even my nose would start sweating, and collapsed from exhaustion once I made it to the top. But it was a very satisfying feeling of accomplishment to know that I had conquered the Grind.

In his book "Trade Your Way to Financial Freedom", Van K. Tharp deconstructed the most important components to successful trading as follows:

  1. Trading System - 10%
  2. Money mgmt / position sizing - 30%
  3. Psychology - 60%
In this prior post, I broke it down even further and now update it as follows:
  1. 10% Trading System and market/sector/chart analysis
  2. 30% Money management
  3. 20% Patience
  4. 20% Emotional control (emotionally detachment and objectivity about your trade)
  5. 20% Discipline (acceptance, hard work, working hard, persistence and willpower)
Most people will say that Money management IS the most important aspect of trading. But for me, I feel that the psychological aspects (Patience, emotional control, self-discipline) are the most important. Those are the keys behind driving successful sound money management principle and best practices.

I used to think that it was hard to find the high probability patterns and setups. Now what I've learned is that it isn't that difficult. The harder part is acquiring enough patience to wait for those patterns to come to you.

I used to think that the key to success in trading is finding the Holy Grail - the one system/methodology that will bring me never-ending truckloads of profit. There is a Holy Grail alright - but what the market is teaching me now is that the true Holy Grail is mastering the psychological part of trading. Indeed, it is a challenge in itself to be consistently patient and emotionally detached from my trading positions, accepting responsibility for my own actions, putting in the hard work to continually look for the low risk setups, and to be persistent in learning new tactics and approaches to trading, to be vigilant in avoiding mistakes but more importantly, to learn from my own mistakes once I do make them, and to be constantly remaining alert and focused on the trade, and the setup. For me, this is hard mental work, and sometimes the mental work is, or seems to be as hard, if not harder, than physically climbing a 2km flight of stairs like the Grouse Grind.

But it can only be conquered by not letting that 2km flight of stairs defeat you in the first place. I've read from Van K. Tharp's book that someone once claimed that the market creates victims. It does seem easy to draw that conclusion when you hear stories like the Amaranth Hedge Fund blowing up. In reality however, the market didn't create the victim, the victim created the victim scenarios for themselves.

So like the Grouse Grind, this game of trading is tough, but what I'm really saying is that mastering Patience, emotional control, and self-discipline is tough. But it can be done, because I've observed on numerous occasions that when I follow my rules, I make better decisions, and my losses are small and greatly exceeded by my wins. To those who have mastered the psychological aspect of trading go the rewards of consistent profits.


Simply Options Trader said...

Great post!

Btw, those tall trees remind me of those that I see in Tasmania, great natural environment for hiking or getting away from the city, pity we don't have this in Singapore.

I see you have doll up your site...looks great, esp the table of content, cool!

Phileo said...

Hi Simply,

Thanks for the praise!
Yeah, once you reach the top of the Grouse Grind, you also get the additional reward of a great view overlooking the whole city.
I've never been to Tasmania - what brought you to that part of the world?

Simply Options Trader said...

I was there on honeymoon :) Lovely place!