The word “trading” by itself is not very specific as it can refer to a variety of financial instruments and strategies. Think of the following questions you may ask yourself or be asked by others:
· What kind of trader are you?
· Do you trade stocks, options, futures, currency, etc.?
· Are you a scalper, day trader, swing trader, or position trader?
· Are you a fundamentals or technical trader?
· Are you an automated, mechanical, or discretionary trader?
This list could go on and on but I’ll stop here. I don’t claim that there is anything wrong with these questions, I believe they are all questions that we should ask. However, as traders we must not get distracted and lose the big picture.
In one of my business classes, I had an assignment to read a book called “The Goal.” The book was written in the 1980’s but it remains relevant today. I would recommend reading it, the authors (Goldratt and Cox) do a good job keeping the fictional story interesting while embedding much learning into it. Anyway, today I want to talk about the most basic concept in The Goal and apply it to Trading.
In short, the story is about a man named Alex who is an overwhelmed Plant Manager with lots of problems. He runs into one of his old professors, Jonah, in an airport. Jonah is now a business consultant and agrees to help Alex pro bono. Alex explains a lot of what is going on in his business including the recent implementation of robots to help production. Among the myriad of problems, Alex is quite proud of the robots and claims that they have increased productivity by 36%. Jonah asks Alex what his goal is. Alex initially says that the goal is to increase productivity, then modifies his answer a bit and says to increase efficiency, then changes it to increasing market share. Alex dwells on the question of “what is the goal” for quite a while (in my opinion way too long, but this is a fictional story written to teach). Finally Jonah helps Alex arrive at the right conclusion. The goal is to make money! Production is important, efficiency is important and I can list many other indicators that are important but if they don’t contribute towards the end goal of making money, they are wasted effort. You are probably thinking that this is obvious but when you think about how infatuated we can become with improving these various indicators it is not tough to realize that it is easy to lose the big picture and forget the goal.
So how does this apply to trading? I believe that the most likely pitfall traders can fall into is to put themselves in a box. In other words, trying to live up to a label that you or someone else has put on you. Over my next few blogs I’m going to discuss what “boxes” we can tend to put ourselves in to and how and why we should avoid that. One of my favorite examples is automated traders. I would consider myself a member of the automated trading community. One thing I have done and seen others do is to not take a manual action given evidence that it is required. An example may be that I have strong evidence a trade is going the wrong direction but I choose not to close it for the sake of “letting the system work.” I will discuss this stigma among automated traders in detail in my next blog and then we will move on to some of the other labels that can steer us away from the goal.
You can preview "The Goal" and other books on my website.