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Hi,
In London, there are many 'lines' in the Underground (metro) system.
One of these is the Circle Line. As its names suggests, the line circles
around parts of London. It goes to many of the popular places and is
popular.
But some get stuck on the train.
It matters not how much you paid for your ticket, how much you wish
otherwise, or how much you strive - as long as you stay on the Circle Line
you will be limited to travelling through those parts of London the Circle
Line traverses.
Of course there are other lines and other train systems that allow a
greater range of experiences and more opportunity.
As a trader, if you insist on travelling on the trend-following line you
will be limited to its potential:
- reward to risk ratios of typically 4 to 1 or worse,
- paying of slippage,
- seeking of service,
- occasionally your stops not limiting your losses - generating fear,
- errors having relatively large impact on profits and associated emotions,
- runs of losers sometimes wiping meagre profits and so evoking emotions.
Of course there are other trading systems with a greater range of
experiences and higher reward to risk ratios and simultaneously a lower
level of stress.
But so many like to repeatedly traverse trend-following trading systems to
the exclusion of all others.
Sad really - but there are so many friends on the Circle Line!
Oh yes, alternative trading systems/methods include spreads of various
kinds, market making, volatility breakout, insurance strategies, option
based volatility plays....
As always there is more to life than the most popular in any field of
activity. But by definition, a majority do the most popular.
The most popular activities usually suffer from being the most expensive
and any benefits tend to be shared with many others.
This corresponds in trading terms to:
- higher risks and costs (slippage for example),
- lower rewards (as rewards shared by more people).
So now you know why the most popular style (trend-following) typically has
such a poor reward to risk ratio.
That is why masters at trend-following are so celebrated - they have
achieved what so many find difficult. Because making and keeping money
at trend-following is perfectly possible, but it is relatively difficult
compared to making and keeping profits at other styles of trading.
So those who have mastered the difficult deserve all the congratulations
and adulation they get - they are truly masters of the difficult.
But is this a reason to try to emulate the masters of the difficult - to
continue the hard way - trend-following? Apparently the answer is often
'yes'.
One reason is our ego - if they (the celebrated masters) can do it then we can!
Also the answer is often yes, we will continue to strive even harder, for
this means we do not have to accept we have wasted so much time and effort
and need to move on.
Also that way, our comfort zone is not threatened. Our ego is
protected. And this is always much more important than any realistic
chances of success.
And anyway, the price of emotional turmoil is not a price at all - my ego
sees having my body swung from adrenaline highs to low as a great benefit
not a cost.
Any of this sound like you at all?
May your potential be realised, Ric.
www.traderscalm.com
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