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One of Twitter followers wrote today,”Markets are Markets,if people removed the emotion, they could make money in any market, who cares if its NOK,T-Note,GLD,ES etc.” True I thought, but if markets removed emotion from the game then they would eliminate most of the trading profits. Trading profits come from emotion. It’s the skew in asset values that creates mispricing and allows the cool and the swift to profit at the expense of the sloppy and the excitable.
My tweep then replied “So true,I guess that’s why the cool heads take the money from heavily emotive traders. Hugh Hendry idea=good trades are contentious.” That may sound good on the surface, but I have to disagree. Hugh Hendry is a maverick hedge fund manager for whom I have nothing but respect, but actually believe the opposite is true -good trades are NOT contentious.
To understand my thought process allow me to quote another titan trader – Larry Hite – whom I mentioned in last week’s column. Doing some research last week, I came across a Larry Hite quote that blew my mind. Stated simply Larry said, “If you argue with the market you will lose.” This I think is one of the best most succinct descriptions of what happens when you trade.
If you are on the opposite side of price ( You are short when the market is rising or long when its falling) you are in fact arguing with the market. Now think back on every argument you’ve ever had in your life. If you are at all like me you will lose your temper almost instantaneously. You will become …. emotional. Emotion in real life is necessary. It is what gives us color and spice. Who wants to be a monotonic robot? In trading however, emotion is poison. The more you argue with the market, the more emotional you will become, the greater the possibility that you will blow up your account.
That’s why Larry Hite’s quote had almost a Zen like impact on me. Once I realized that I was arguing with an entity far bigger, stronger and smarter than I – I stopped. Don’t get me wrong. I still hate to lose. I still get mad at any and every stopout, but at least I understand why they happen. Instead of taking losses personally I accepted the fact that I simply lost the argument for now.