Wisdom and Trading

This is the fifth and last column addressing the relationship of Socrates’ values–truth, justice, courage, moderation, and wisdom–to trading. Of course, we all want to be wise traders. Unfortunately, most wisdom comes from experience, our own, or others, usually our own. Getting wisdom through experience is like taking the exam before you read the book or take the course. As Benjamin Franklin said, “Experience keeps a dear school, yet fools will learn in no other.”

We can read the rules, but until we endure the misapplication of those rules or overlook them entirely, we don’t ground our trading in the sound employment of good trading principles.

The problem often is further enhanced by getting the lesson once and then needing to get the same lesson again, and again. Something there seems to be that resists learning the helpful lessons with a one shot deal.

We can, however, acquire a phobia with a single experience. A trader can have a huge loss, and instead of implementing good money management and proper risk control, he becomes phobic of pulling the trigger to enter a trade. Learning the wrong lesson does not constitute wisdom.

“Get wisdom and with all thy getting get understanding.” says Proverbs 4:7. When we understand the reasons behind our collective trading wisdom, it’s easier to implement our own personally chosen guidelines. Some of these rules are so commonly known as to become cliches, and yet there is a good, solid reason underlying them. Let me list a few.

Cut your losses, and let your profits run.

  • Look at your trading as a series of probabilities, don’t focus on any single profit or loss.
  • Want what the market wants.
  • Do your homework. Come prepared to each day’s trading.
  • Never take a trade on the open in the direction of a that day’s gap.
  • Don’t risk too much of your trading capital on any single idea.
  • Remain flexible.
  • Believe what you see. If the market’s going up or down, it’s going up or down.
  • Anything can happen. The wildness lies in wait.
  • Verify your trading methods or systems.
  • Caveat emptor (“Let the buyer beware.”) when buying a trading system or hiring a mentor.
  • Your own personal psychology will express itself regardless of your chosen method.
  • An opinion isn’t worth much, your own or someone else’s.
  • Watch how the markets react to the news.
  • Learn from your mistakes.
  • Stay in the now. Don’t trade yesterday, today. Don’t trade tomorrow, today.
  • Don’t worry about a missed opportunity. Another one is on the way. Besides there were several that just passed of which you were totally unaware.
  • If you don’t risk, you can’t make money. If you lose all your trading capital, you can’t trade. Find balance.
  • Markets don’t go in a single direction. The trend will wobble on it’s way to its destination.
  • The trend is your friend. Unless you’re a counter trend trader, and then only it’s end is your friend.
  • Tomorrow’s another day, a whole new trading opportunity. Be optimistic.
  • Forgive yourself. Take the lesson, and move on.

    There are many, many more. Read books. Learn from other traders’ experiences and observations, so you don’t have to learn only from your own. Remain in a state of constant and never ending learning and improvement. Because as Job 1:8 says, “The price of wisdom is above rubies.”