I started trading a small account on the JSE in 2003. In 2011 I opened an offshore account. I have always had an absolute fascination with markets and a desire to try and work them out. This of course will never happen and even the brightest minds have blown up accounts and left the markets. However, back then, besides my fascination, I guess deep down, my idea was to have a side hustle that could spin off some cash so that I could escape the corporate march someday. That was always my aspiration as a young and free 20-something-year-old. Now, almost 20 years on, I have a wife and two sporty young bright boys. I have just left the corporate world after 6 years at Unilever and 15 years at SAB-Miller / AB-InBev. I work in a smaller organisation with exciting growth prospects but of late I have been thinking a lot about time and purpose.

The late Van K. Tharp, who recently passed said the following on episode 76 of Steven Goldstein and Mark Randall’s The Alphamind Podcast:

If you could have anything in the world, what would it be?

They might say: “I want $1 000 000”.

If you then asked them, “If you had that, what would it get you?”

They might then say: “I would be able to buy this, this and this.”

If you then asked them: “What would that get you?”

They may say: “I’d feel more secure.”

If you challenge them further and ask them what security would get them, they could say something like: “I’d feel more peaceful and happier.”

What if you could get peaceful and happy first?

Back in my 20’s it was all about a dreamier future. In mid-life, my wife and I find ourselves searching for a larger home so our boys can live out the rest of their school years. After that, they will be gone, and so will the school fees, and the nest will be empty and I will be in the next stage of my life. So, what am I actually saving for?

In 2018, Tom Canfield, a trader of 20 years, lost $500k in 1hr. It took him 18 months to make the money back and 3 years on, as he relayed the story on The Alphamind Podcast (Episode 62), the emotions were still stirred up. He returned to the podcast a year later (Episode 84) after having had a heart attack. On this podcast he spoke about how he didn’t realise how much of a toll full-time trading had taken on him. He was also always chasing some dream of a ski house in Aspen where he and his wife and kids could live someday. As the kids grew up and left home (and the private school fees and sports clinic fees lifted), he let go of this dream and bought in a new state closer to his kids. He is much more fulfilled, peaceful and happy.

Turney Duff worked on Wall Street and was enormously successful. Unfortunately, he got hopelessly addicted to cocaine and his career eventually came crashing down as he lived the high life on Wall Street. He wrote a book telling his story: The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess. Now divorced, as he relayed his story to Aaron Fifield (Chat With Traders, Episode 106), he stated that he went from being a guy who wanted to live the good life to a guy that wanted to live a good life. He states that when he made this shift, that’s when it all clicked for him. He now lives in Long Island, 40 miles outside of the city and 2 miles from his daughter. He writes and has a simple life, paying $1300 a month for rent, barely gets by and just tries to be a good father. He then goes on to state that he has never been happier!

I think it really is dependent on where you are in your life but my message to you is: know your purpose as a trader or investor. Is it to teach? Is it to raise cash to help Ukraine? Is it to feed your ego? Is it to gain some validation on Twitter? Is it to get filthy rich? If so, what will you do then? Know yourself and know your purpose, first and foremost. Don’t postpone contentment. Be obsessed about markets but have balance outside of that. Live each moment in life and try to do something good for others. Life is short.

This end goal oriented approach for measuring progress is flawed for one simple reason. When it comes to the outcome of any random trade you have zero control of whether the trade ends up profitable or not. Randomness and luck get to play that role. We have to measure our progress and the area of focus should be on what we do, not how we are doing at least on a trade by trade basis. In fact it actually doesn’t matter how the results of a trade turn out as. What matters is if we executed our plan. We need to observe and analyse results with detachment and nonjudgement. Learn what needs to be learned if any and move on. The result of the trade doesn’t tick your progress scale one way or the other. They certainly don’t define you either. You are not your results.

Your long term goal about the money you desire should only serve as a router. Guiding you along the way. Our main focus and goal should be the process of getting there.

Let’s say you have a reasonable goal of making a R1 million from trading in 5 years. Once you have that goal in mind. Use some imagination for a second and pretend it’s now 5 years later and now you’ve made your million. Ask yourself how you make that million. What did you do or not do, how did you grow your account, what was your approach, how did you handle risk management, try to throw in as much detail as you can. It’s okay to make some stuff up after all that’s what imagination is. It’s also okay if you don’t know how to get or do some of the stuff you write down.

Then look at the things you do, and pick the ones that you can achieve, the smaller the better. That with the resources and knowledge you have right now you can achieve, and make those your goal. If you do these things as your goal. Work toward just achieving those “small” things on the list. Make those your goal, because you know these are the things that bring me closer to my longer term goal. Most importantly, it helps build up the momentum and the feeling of winning and moving forward. It also puts your progress well within your control. You keep getting the positive feedback loop from achieving.

If we instead just look at the million is the only goal. If it takes 5 years to get there. We are going to spend 5 years without achieving any goal. For every second your account is not a million rands you haven’t achieved a goal. Another question comes, after 5 years and a million then what?

Once you have your goal, shelve it, start the process of getting closer toward it, trust yourself, your abilities and go for it with unconditional confidence and an unshaken belief.

Remember things change when you change

In studying and chatting to successful traders and analysing the difference in my own performance, analysis and trade execution. What others perceive is enormous discipline is really a natural extension of who they are. They don’t need discipline to do the right thing because they have no conflicts in their minds. For example cutting a loss short is a natural extension of who they are, there’s nothing else they would rather do. Running a winner requires zero discipline for them because there aren’t any other conflicting thoughts competing with the decision and execution.

This is why it’s essential to put as much if not more in working with your conflicts. Assess their roots, ultimately resolving conflicts at a root level. Because every decision you make in the market is 100% yours. Even if you followed or copied someone. Only you bear the responsibility of the consequence. So the conflicts referred to here are all in your mind all coming from within you. The expression “stuck between minds” should really be “stuck between beliefs”.

To quote Dr. Van K Tharp “We don’t trade the markets, we trade our beliefs about the markets”. Whenever you find yourself with conflicting thoughts in your decision making. It’s really just conflicting beliefs trying to get their way. This means in order to permanently resolve mental conflicts, we need to resolve the conflict between beliefs. While we use discipline in the short term to keep us steering in the direction we wish to go. We need to work toward resolving the conflicts at the belief level. Mindful meditation is one of the tools that could help. Paying attention to our thoughts, actions and emotions in real time

Our beliefs also drive our identity. Perhaps we can use how we identify ourselves as a signal to see how much more work is needed in resolving the conflicts. For example if you’re identifying yourself as someone who’s still trying to be a disciplined trader. Means you would still rather do something else other than what you believe you suppose to do (The right thing). But if you identify yourself as a disciplined trader, and there’s no conflicts when doing what you suppose to do. No discipline is needed because doing the right thing is a natural extension of who you are. Be Careful not to lie to yourself.

Which brings me to the most important part of conflict resolution. Knowing what is the “right thing” Which I believe is the main characteristic that separates winners and losers in our sport. Creating rules that define the “right thing” for you. The very first conflict that needs to be addressed is the conflict between creating rules to guide execution and not creating them. These rules will help you to chip away in the resolution. Until being a disciplined trader is a natural extension of who we are. For without rules everything we do is unintended therefore a mistake. (Please note a loss is NOT a mistake).

RESOLVE THE CONFLICT PROBLEM RESOLVE THE DISCIPLINE PROBLEM

Trading and investing is really a game of turning cash into an asset (long/short position) then back in cash. We typically look at a trade entered and a trade exit. We are either in a position or not. I say, we’re always in a position, remember cash itself is a position.

We only call it a trade when we turn cash into a position and the end of that trade ends when you turn the position back into cash. If we look at trading this way as a conversion of assets from one kind to another. We can safely say exiting a position is also taking a trade. How? Well let’s look at this concept a bit more.

When I’m going into a stock, I’m also implicitly short cash by the same amount I was long. When I exit the same position at profit or loss. I implicitly long cash and short the stock, even though I didn’t go and take a short trade. In other words I can express a short trade or idea by just staying in cash, meaning I’m short the stock long cash. The further and the longer the stock falls or stays in the range without me. The more profitable that trade is. Why? Because cash earns an interest not by very much but it does, secondly and most importantly the profit I gain is what I call an opportunity gain. Because I’m in cash instead of falling stock I have more in the pocket book and reserved my mental capital for the next opportunity. Being long a falling stock and implicitly short cash. Is a giant opportunity cost, and the market will let you run that bill for as long and as far as you wish.

Let’s look at some examples. I’m going to use my Anheuser-Busch InBev) trade as an example

Trade 1: Long Anheuser-Busch InBev short cash at R1022.24 Exit at R981.01 result R70.09 loss

Trade 2 (The implicit trade) Long cash short Anheuser-Busch InBev at R981.01 result? Let’s look at the chat below

So what is the profit here you ask? Assuming I didn’t take the second trade and exited the position at a small loss. The small R70 loss would have been a R225 loss today as I write after the close 4 August 2021 the stock closed R889.87. A loss 3X bigger. So my profit on the long cash short the stock at R981 is R155 in counting (R225 – R70) 2X the loss on the first explicit trade. That’s the hidden profit no one is talking about. I had no idea the stock would continue to fall. But I didn’t have to lose any more capital to find out if I would recover. Most importantly my account is R155 healthier than it would have been had I stayed with the position for any reason whatsoever. If the stock recovers I will be in a healthy position and take the opportunity. The risk is quite small for the reward.

Thinking of exiting a position especially a losing one as another asymmetric bet. Instead of just taking a loss, and also looking at these hidden profits. It makes it easier to take the loss while it’s still small. The most important rule of survival in the market. CUT YOUR LOSSES SHORT, or rather KEEP YOUR LOSSES SMALL.

Trading from the state of “I have to make money” or worse “I have to make X amount” on a particular trade or over a series of trades will cause us to narrow our focus to that. Instead of being fully aware and being in the present moment. It’ll take us away from the things we need to do in the present moment. Like recognising when it’s time to exit a position because the move is over.

This state of mind can also easily trap us into the mindset of “I know that this trade will be profitable, otherwise why would I put the trade on in the first place”. Causing basic trading errors like not predefining risk, because what’s the point of predefining the risk if we “know” the outcome of the trade before placing it.

Your job as a trader is to recognise what you define as your edge, and execute. Truth is even if you can see your edge in the market. You still don’t HAVE to do anything. Just as when it turns out that the trade is actually a loser, you don’t HAVE to do anything to continue to lose money.

If your focus is too much on the goal. It will inevitably take you from the things you need to do to achieve your goal.

Sure our main objective when placing a trade or just generally as a trader is to make money. But we can’t trade from the state of mind of HAVING to make money. If we do, we’re setting ourselves up for a slap in the face.

Instead we need to be trading for the state of mind of.

“Okay I can see the pattern. This means there’s a good chance this trade will be profitable. But I know that potential will diminish at this price or for these reasons (stop loss, predefining the risk). I’m willing to lose $X to find out if this trade will be profitable (position size). If it works out in my favour, this point or reasons will signal to me the trade is over (profit target). I accept anything that happens after I place the trade including the possibility that I will lose money on this trade, because I know over a good enough sample size I have an edge that puts the odds in my favour. I don’t have to make a certain amount, I will make what I make”

If you HAVE to make $100 what happens if the market only offers you $50? Or if you HAVE to make money what happens when the market offers small losses? Are you going to reject those offers ? Ignoring what the market is telling you because you HAVE to make money or a certain amount? Well, it’s up to you.

You don’t HAVE to do anything and the market doesn’t have to do anything for you. You’re responsible for everything that happens in your trading account