Holding Out for More

When it comes to dealing with the good things in life, the majority of people always want more—a bigger house, a shinier car, perhaps even a newer and better spouse. I remember being stopped dead in my tracks at a party where I talked to a couple; the husband had just received an important promotion and the wife spoke of wanting to “upgrade our friendships.” The entire advertising industry pushes us to reach for ever more. No wonder so many people spend their lifetimes in a mindless race, like caged animals chasing their tails. This endless race tends to become very dehumanizing.

When people who have bought into the rat race come to the market they also tend to reach for more, more, more. Even a profitable trade brings them no joy; it burns them to see that they neither bought at the low, nor sold at the high, but left some money on the table. This bitterness drives them to either buy too early or sell too late. People who keep reaching for more usually gain a lot less than those who follow their tested methods.

Those who reach out for more than the market is willing to give often end up with much less.

The power word in life, as well as in trading, is “enough.” You have to decide what will make you happy and set your goals accordingly. The pursuit of your own goals will make you feel in control. To always crave more is to be a slave to greed and advertising. To decide what is enough is to be free.

Do not get me wrong—I am not suggesting you take a vow of poverty. I like flying business class, living in a nice place, and driving a powerful convertible as much as any other guy. What I am saying to you is this: find the level at which you will be satisfied and be happy when you get there. This is so much better than always feeling off-balance, short, chasing after an ill-defined “more.”

And what to do if “more” somehow falls into your lap? What if one month you hit the market just right, and super-profits drop into your account? The experience of super-profits unhinges most people. Craving even more, they climb farther out on a limb and take wild risks the following month until their super-profits turn into super-losses. In order to stay cool and calm you need a personal plan for managing profits—we will return to this topic in the chapter on the personal dividend.

For a trader who craves more and more, the idea of taking profits near the upper channel line can feel very stressful. Some trades do not reach their target while others overshoot it.

You cannot become fixated on the channel as an iron-clad profit target. If the market starts acting weak, there is nothing wrong with accepting less than your initial target. Neither trade shown above quite reached the upper channel line. EXTR missed it by a bit, gold by a wide margin—but both ended up being very profitable. Paradoxically, being willing to accept less often gives you more. See a recent trading example in Figures 4.16 and 4.17.

An even greater source of stress for greedy traders comes from powerful moves that overshoot their targets and keep on going. A trader looks at a market from which he exited with a nice profit and starts kicking himself as that market continues to move in the same direction—only now without him.

Let us review another trading example. In January 2007 I became very bullish on sugar, on the basis of weekly charts (not shown). I began building a long position in the March 2007 contract, eventually taking profits and rolling over into May (see Figures 4.18 and 4.19).

Figure 4.16 Wheat, daily chart

A. Bullish patterns on weekly and daily charts—go long.
B. Took profits on 1/3 of the position, held the rest.

This chart of wheat shows a very nice purchase near the lows, following multiple bullish divergences. Prices accelerated and punched above the upper channel line. I was so bullish on wheat at the time (based on the weekly charts—not shown) that I took only partial profits. I violated my rule and did not sell above the upper channel line.

Figure 4.17 Wheat, daily chart, follow-up

Wheat continued to reward greed for two more days after my partial exit.
Prices kept hovering above the upper channel line but then collapsed. I had to scramble as my open profits melted away. The entire profit for this wheat trade would have been much greater had I gratefully accepted what the market was giving me, instead of reaching for more.

I am sure that we could find many examples of prices rising above the upper channel line and continuing “to walk the line,” rising with the line. Of course it happens, but that is not the point. My point is that “enough” is better than “more.” It leaves you feeling calm and in control—and these feelings lead to greater profitability in the long run.

This brief discussion raises one other important point. Not all my trades are successful—some lose money while others, such as the ones shown above, earn much less than what was available.

Figure 4.18 Sugar, daily chart

Sugar prices jumped soon after the rollover. The chart above shows that the entire day’s bar popped above the upper channel line. In the face of such great strength I took only partial profits on my longs, but held the remaining two-thirds of my position. I was so impressed with sugar’s strength—which confirmed my bullish forecast—that I ignored the fact that the bar above the upper channel closed near its low—a suspicious sign of weakness.

Figure 4.19 Sugar, daily chart, follow-up

The following day, sugar prices collapsed and I had to scramble. My total profit on this trade would have been much higher had I sold the entire position on a break above the upper channel line. I missed a great opportunity by taking only a partial profit.

When I recognize that I have made a mistake, I do not beat myself over the head. I create a diary entry, analyze what happened, and learn as much as I can from my failings. I accept my imperfections, and as long as I learned something from a trade, that trade was a good, productive experience.

No comments: