Elephant in a China Shop

Mr. Cool just plugged his trading exam.

Big time, and for the umpteenth time.

It all started out like this. He partied late night. Had one too many, of course. Slept till late morning. Woke up with a headache.

Then he made his first mistake of the new day. He decided to trade.

Why was this a mistake, you ask? After all, trading is his profession.

Two mistakes here, I’d say. Firstly, there was no market preparation. Secondly, health was not up to the mark. Deciding to trade after this backdrop – hmmm – bad call.

The next set of mistakes came right after that. Coolers asked his broker Mr. Ever So Clever the wrong question, this being “What’s moving, mate?”

True to his form was Mr. Cool-i-o. Two mistakes here again. Firstly, you don’t ask your broker technical questions. You tell your broker what to do. You instruct him or her. Asking your broker to instruct you is like asking the second hand car dealer to start ripping you off.

Next, if you are asking Mr. Ever So Clever anything at all, it can be about your funds in transit, or your equity in transit or basically something mechanical. You are not in this business to give Mr. Clever even an inch more of space by asking market questions like what’s moving or what’s going to move.

If you still do, as Mr. Coolovsky obviously proved, then of course Mr. Ever So Clever is going to tout to you what his other clients are squaring off. Specifically illiquid scrips. These need buyers, and if you’ve just announced yourself as a buyer and are asking what to buy, illiquid scrips that others are selling will definitely be touted to you for buying.

Also, a scrip doesn’t have to be illiquid to be touted. One can even be dealing with a very large order which a big player is looking to off-load at a relative peak. A whole set of brokers then does the rounds to get buyers interested.

The bottom-line is this – you are not giving your broker any kind of leeway with regards to what you are buying or selling. You need to do your own technicals, or fundamentals or whatever it is that you do, to gauge what is moving. You don’t ask what is moving.

On many occasions, rallies wind up soon after big players square off. This time was no different. Coolster had loaded himself with a scrip which had already peaked. With no buying pressure to push it up any further, its price started to sink.

Next set of mistakes.

He’d marked a vague stop-loss in his head because everyone had been ticking him off for not applying stops. Specifically our friend Mr. System Addict, remember him? He had been very vocal about it. Because the stop was vague, Mr. Cool wasn’t motivated enough to feed it into his trade as the price neared his stop.

Not feeding in a mental stop – mistake.

As the scrip’s price undershot his mental stop, Coolins did nothing except to hope it would climb back to his buy level, which is when he would exit.

Hoping in a trade – big mistake.

Not taking your loss once stop is undershot – even bigger mistake.

What happened after that can’t be called a mistake anymore (on humanitarian grounds), because Coolinsky had gone into freeze mode. The reason was the sinking scrip. Huge losses were piling up. Coolitzer answered two back to back margin calls in this frozen state of body and mind. He was frozen. Didn’t know what he was doing. Scrip didn’t turn back up before Mr. Cool was cleaned out.

This chronology of events is a kind of worst-case scenario. A grade F minus in an exam.

Every trade is an exam. One needs to tread carefully from step to step, from pre-trade preparation to actual trade to after-trade emotional wind-down.

Remember that, so you fare much, much … much, much better than our F minus candidate. And don’t worry about him, Mr. Cool-Dude will be back. He’s always able to get back, you’ve gotta give credit to Mr. Cool for that.

Survival Basics – Building a Baseline

Who are you?

Do you really know that?

What’s your core reaction to stuff, let’s say market stuff?

How do you react to a crisis? Do you freak out? How much do you plan to avoid a crisis? How do you feel after hitting a home run? Do you get over-confident and start doing irresponsible things?

What happens to you when the scenario is dull? Do you get depressed? Can you take it?

If you’ve dealt with these and more of such questions, well, bully for you, because you’ve already gone about building your market baseline. And that’s a really proper / solid approach to Mrs. Market.

A baseline is a basic point of reference. It tells you how you normally react to a particular situation. It also lists the emotions you went through, and the consequences you had to suffer owing to your actions. As experience piles up, the number of situations you can refer for also increases.

So, let’s say something unusual happens in the markets. Hmmm, let’s say Greece officially goes bankrupt, and let’s say that you are net-net long, and have been caught unawares. What do you do with your positions? With all the mayhem around you, right, what do you do?

Basics of survival in the markets – in a crisis, refer to your baseline.

Your baseline takes you back to the Lehman default. You remember being net-net long, being caught unawares. You remember ignoring your stops, waiting for a rally. Futures wiped out your principal, didn’t they, because you answered margin calls and waited? You remember the long period of depression after that. Worth it? Naehhh.

So, after referring to your baseline, you don’t ignore your stops. Taking the immediate loss, you bail out of your positions. A large portion of your principal is still intact, living to fight another day.

What about euphoria? How do you deal with euphoria? A position turns into a winner, and you are sitting on a 25% profit in a few days. You are feeling really kicked, and are walking with a swagger. What do you do next?

Basics of prosperity in the markets – at the onset of euphoria, refer to your baseline.

Your baseline tells you, that your behaviour during your last big-winning trade was far from exemplary. In your euphoric state of mind, you were already imagining all the things you would buy with your notional profits. Then, you panicked at the thought of losing any of those notional profits, and you squared-off the trade, taking those profits home, only to see the scrip soar another 80%.

Right! You snap out of your euphoria because of your baseline memory. Then, you install a trigger-stop 8% below the scrip’s current market price. Good. In an effort to capture even more profits, you have put a small part of your existing profits at stake. That’s exemplary behaviour, because now there’s a good chance of capturing a part of the scrip’s further rise.

And boredom? What do you do when Mrs. Market bores you? As in, stops being hit both ways, going nowhere, no market strategy yielding profits? Happens, sometimes for many months in a row.

Basics of maturity in the markets – when Mrs. Market goes nowhere, refer to your baseline.

Oh how you wished you hadn’t ruined that family holiday, right, by continuing to take pot-shots at Mrs. Market the last time she went nowhere. That’s what your baseline is saying.

You switch off, go on another (this time enjoyable) family holiday, and come back refreshed to see that Mrs. Market is now trending, ready to take you for a drive in one set direction.

There’s no limit to baseline referrals.

Systematic players build a baseline, and keep referring to it.

Later, we remember them as successful players.

So, … What Made Peter Jump?

The buck generally stopped with Peter Roebuck in the world of Cricket journalism.

Professionally speaking, Peter was cutting edge.

Though he was described as a complex person outside of his professional sphere, the only blip that seemed to punctuate his 55 years was a 2001 common assault charge on some 19 year old cricketers he was coaching.

As per the media, Peter’s is a confirmed suicide; he jumped six floors to his death, from his hotel window. Just before he jumped, he was being questioned by the South African police on a sexual assault charge. A police officer was in the room when he jumped.

Was it extreme shame over something he’d done? Perhaps just one big blunder in an otherwise good, successful and recognized life? If that’s really the case, one needs to reflect on things.

Sometimes a good human being can make a huge blunder. Let’s cite excruciating circumstances that drive the person to such an act. For example, extreme loneliness can result in a moment of madness, in which one loses self-control and crosses the line between decent and indecent behaviour. Let’s please not behave as if this does not happen. Don’t know if this was the case with Peter. As of now I’m just looking at the general applicability and the consequences of such moments of madness in our normal arena of life. Also, I’m gonna try and apply this to market play.

Before I do that, let’s stay with Peter for a bit. If it turns out that Peter was pushed over the ledge, this whole discussion will need to be discarded and the investigation of match-fixing will come into play, since Peter had just finished reporting on arguably the most unusual Test match in the History of the game. As of now, murder is being ruled out, so let’s stay with our original discussion.

Who feels shame? A human being with a conscience does. Who feels so much shame, that he or she can’t face society, family, spouse, kids etc. anymore? A human being who has probably committed a grave folly and who has a conscience that is now powerfully confronting him or her.

The media has not reported any History of sexual assaults in Peter’s case, so we are probably looking at one grave act in a moment of madness that became the complete undoing of an acknowledged soul called Peter Roebuck.

How many of us are in the same boat, where one grave act can become our complete undoing? All of us are. Please be very clear about it. That’s how unpredictable life can be.

As of now, I’m going to focus on this one grave act unfolding during one’s career in the markets. All you have to do is to activate huge amounts of leverage (= few button-clicks), and then ignore a few stop-loss levels (= 0 button-clicks) while you answer the margin-calls, and you have already committed the grave act that is potentially life-threatening. If the resulting losses clean you out, that’s one thing, but if they put you deeply into debt, contemplation of suicide can well be on the cards if yours is even a slightly melancholy personality.

See, that’s a very short route to where someone like Peter Roebuck ends up, irrespective of one’s arena in life.

All I can say is (and I’m saying this to myself as well) that please let’s take that smug look off our faces, and let’s please reflect, because a moment of madness can trap and terminate the existence of any human being, no one excluded.

Moments of madness occur in everyone’s life. We need to train ourselves to not react to them. That’s easier said than done, but it’s better to say it out loud and activate one’s system to become aware of such moments of madness when they are happening.

Only if one is aware that such a moment is unfolding can one actively choose not to react.