Why I’m So Passionate About Trend Following
Money and Trading How do you judge money? How do
you define fulfillment? Do you drive ahead knowing what you are doing is right
or do you allow the voices of "player haters" make you feel guilty for achieving
success? Take for example investment banking. It was the number one career
choice for graduates from Princeton University’s 2005 class just as it was for
graduates from a number of leading educational institutions around the world.
Droves of young men and women are eagerly establishing themselves as they train
in stocks, bonds, private equity, banking, real estate, funds of funds and so
forth. For some the motivation may be the thrill of learning how to play the
game from the so-called " best of the best" in the fast-paced highly competitive
environment of Wall Street. For others it may be a fascination with the
economics of world markets.
In conversations with several of these budding
investment professionals, I hear, along with pride, excitement, and ambition, a
need to justify their career choice. Is working to produce profit a meaningful
enough activity to achieve happiness and fulfillment? Some seem worried that if
judged they will come up short in terms of producing goods and services that
benefit others. They struggle with the question: "Is it ethically "okay" to be a
trader and make lots of money?" If you’re a trader with even a hint of
self-reflection you’ve grappled with the idea that for you to be a winner and
make money someone has to have lost it. We trade a zero sum game after all. My
suggestion: before you spend too much time worrying about the moral "rightness"
of what you are doing is to read Atlas Shrugged and pay close attention
to the lessons on "money". "Money is a tool of exchange, which can’t exist
unless there are goods produced and men able to produce them. Money is the
material shape of the principle that men who wish to deal with one another must
deal by trade and give value for value. when me live by trade -with reason, not
force, as their final arbiter – it is the best product that wins, the best
performance, the man of best judgment and highest ability – and the degree of a
man’s productiveness is the degree of his reward." Do these insights help you
put trading into the proper context? Because my guess is that when the nightly
news tells you that you are wrong for making money, you may ponder the morality
of trading but if you are successful at it, you will not stop. Ask yourself, do
you really believe for a second that your chosen profession is in anyway wrong?
Gibbons Burke of
MarketHistory.com, gives traders a
real world perspective when observing the function of markets: "The market
serves a valuable function in our economy not often talked about: It provides an
efficient mechanism for transferring precious capital from those who are
ill-equipped to steward its growth to those who are adept. A variety of market
participants provide this service up and down the food chain. The financial
markets are voluntary arrangements. No one is compelled to purchase a piece of
trading software. No guns are involved in herding investors into seminars.
Advisory letters are sent to those who willingly subscribe to them, and may be
cancelled at will. Investors who avail themselves of these services without
exercising due diligence and taking responsibility for their own actions are the
true dangerous lot — they are a danger to themselves. They blame others for
their bad decisions and misfortunes; they delude themselves about the true
nature of their problem, so the solution remains ever beyond their ken." What a
lesson on accountability! At the end of the day you can’t worry what others
think when you know you are playing the game the right way. For example, when
writing about management, Bill Swanson, CEO of Raytheon suggests that you
"constantly review developments to make sure that the actual benefits are what
they are supposed to be" and "cultivate the habit of making quick, clean-cut
decisions."
One reason I’m so passionate about trend
following trading is that it is anchored in reality. And reality is
unpredictable and uncertain. Great trend followers believe that, in the words of
Carl Sagan, "It is far better to grasp the Universe as it really is than to
persist in delusion, however satisfying and reassuring." For example, trend
followers know that if you don’t cut your losses short, there’s a good chance
the losses will get larger. The more you struggle with your small loss, the
larger it may become and the harder it may be to deal with if your
decision-making is delayed. By holding themselves accountable and accepting a
loss, trend followers are able to cope with uncertainty. They avoid behaviors
that almost guarantee losses in the market such as lack of discipline,
impatience, greed, self-delusion and subjectivity. If you’re a trend following
trader, you do not attach emotional baggage to the concept of money. Charles
Faulkner, an expert on behavioral finance elaborates: "Some problems run deeper,
springing from limiting, unconscious beliefs. For instance, a trader who has
labeled himself one-for-trader, or who learned as a child the biblical story
that it’s easier for a camel to pass through the eye of a needle than for a rich
man to enter the kingdom of God, may subconsciously sabotage his trading to
respect his beliefs. They’re deeply engrained in us, but if all the ethical
people think money is bad, who’s going to get the money?" Once you’ve made
yourself comfortable with the answer to Faulkner’s question, I’m guessing you
want to move on. You’re saying to yourself, "Okay, now that I admit I find what
I’m doing fulfilling, where are trends?" "Where is the money?" "Give me some
examples of markets where trend followers are hitting home runs.
Michael Covel
Michael W. Covel is the founder and President of Trend Followingâ”