
A young trader named David is about to lose his job and does not see the end coming. Losing his job will be a great personal, professional and financial blow. Because of his loss, he will probably lose his apartment and credit. It will take him a long time to get back on his feet.
I happen to be friends with the top management of the company where he works and I am privy to his impending fate, but I am unable to warn him.
The two questions that have been nagging at me for days are:
? How did this happen?
? And why is he unaware of it?
Actually, I know the answer to both of these questions. The answer is that despite all of his hard work and good intentions, David has failed to play by the rules of the game he is playing.
The Players and the Clueless
Every human endeavor operates on the basis of a set of unwritten rules. In the modern world, we often resist the notion that we must adhere to a set of rules that we did not establish. Each of us has the illusion of being in control of our lives, but those who are ?streetwise? are well aware of the nature of the games, what is at stake and what the rules are. These savvy men and women are the ?players.? The rest of the participants in the games of life are the ?clueless? ones. These are the individuals who fail to understand that they are playing a game, what the rules are and the consequences of not playing by those rules.
No game I know of is as cruel to the clueless as the school playground. From personal observation, it appears that some of us are hardwired to catch on early (the players) and others are hardwired to never catch on (the clueless). Players do not chafe against the rules. They learn them, master them and win most of the games they play.
In the prestigious company where David works, the unwritten rule is ? It does not matter how much money you are making for the clients. What matters is how well you communicate with them. David is a very good trader who has consistently made a respectable return for his company?s investors. Unfortunately, he is a particularly poor communicator.
To make matters worse, he does not see the point of being a good communicator. Despite all of the advice he has received about returning calls to the company?s clients to provide them with updates and feedback, David sees it as a waste of his time ? time that is better spent doing his research and making better trades. One could easily assume that the bottom line is what the investors care about most, but in this particular game, one would be wrong.
Although each game has its own rules, there are some general rules that should always be kept in mind. Sadly, David has flaunted nearly all of these general rules, to say nothing of the specific ones.
Here are the Rules:
1. Every human endeavor is played out like a game and each has its own rules that are specific to it.
2. Do not assume that you know what the rules are ? especially if you are applying logic or past experience to a new game. Learn the rules of the game you are playing.
3. If you want to find out what the rules are, look for the most successful player and study him. He will be a master player.
4. Develop relationships with the successful players. Ask them for advice and seek their protection until you become a skillful player.
5. Step into the game slowly and only after much preparation and practice. DO NOT LEAP into the game unprepared.
6. Bring enough chips to the game so that you are not forced to leave the table before you have learned how to play.
7. Make a clear list of the rules in your head and/or on paper so you know what they are. Then, set them to memory.
8. Commit to following these rules, as you understand them. Acknowledge the cost of not following them.
9. If you decide that you do not like the game and do not want to play by its rules, be very clear that you must leave the game.
10. NEVER whine because you were forced to leave the game for failing to play by its rules.
There is no shame in leaving a game when you do not like or agree with the rules. Find a game where you can excel and the rules are consistent with your values. On the other hand, no points are ever awarded for being clueless or for staying that way. David is a nice young man who flaunted the most sacred rule of his organization and he will soon be paying the price. My hope is that someday he will seek me out as his coach and I will be able to teach him how to play any game he chooses and emerge as a winner.
If trading is a game that has its own rules, and if washing out of trading is the price you pay for failing to play by those rules, exactly what are those rules?
I have listed below some of the most important general rules of trading as a profession. These rules are not the technical rules that can be mastered through reading, taking a few courses, and practice in paper trading. Nor are they the trading rules that you will develop for entering and exiting trades. These are the rules of the game that allow you to enter the game and stay in it long enough to become a successful professional.
Here are the Rules:
1. In trading, the winner takes all because trading is a zero-sum game. There are no second or third place prizes handed out in trading. There is nothing warm and fuzzy about the markets. For people who have ever played in arenas where an effort is made to support the loser and to humanize the game, this is a difficult and painful concept to wrap oneself around. There is much at stake in trading and losing can mean losing everything and being forced to leave the game. If this level of risk is unacceptable, you are getting a clear signal to find another game to play.
2. You cannot play to win without the admission price. This ?no-tickee-no-washee? rule is another of the painful realities of trading. Attempting to trade without sufficient capital is the equivalent of fighting the U.S. military with slingshots or taking on the Mensa club with the patients from the Alzheimer?s wing. Sufficient capital for entering trading falls in a range with the very bottom being approximately $25,000 and has no upper limit. This capital cannot be money that is needed to live on.
A new trader must have another source of income that can be counted upon to supply his family?s needs for at least three years. You will hear traders argue that these figures are too high, but they are the few who have survived. The others are already out of the game, having lost all their capital. If a trader is playing with too little capital, he will have no room to experience the losses and remain in the game. In addition, he will be playing scared, which is a like dueling with both arms tied behind your back.
3. Preparation is required. The trader who has read everything, taken every course, attended every workshop, done endless research, developed his own trading system, back-tested it thoroughly, paper-traded for an extensive period of time is a prepared trader. Match this prepared trader against a cowboy trader who is shooting from the hip without any target practice and you can apply Rule Number One. The professional can start counting his money before the first volley is fired.
4. Psychology is more important than smarts and/or formal education. I have worked with incredibly successful traders who did not make it through high school. What they had going for them, in each case, was the right psychology. And what is that ? They were trading with confidence and focus with a sense of calm, with a love of the process, and without the baggage of fear, greed, and unresolved psychological issues that lead to self-sabotage.
This advanced state of psychological balance is rare. Some individuals are born with it but most acquire this state through commitment, effort, the willingness to do the hard work and confront their fears and the willingness to make the investment in money and time to deal with their issues.
5. Develop discipline. This rule is a subset of Rule Number Four, but it is so important that it deserves its own category. Discipline is what motivates a trader to do the hard things that must be done rather than taking the easy way out, which, in trading, is usually the wrong way. Discipline allows a trader to say ?no? to destructive behavior and ?yes? to the scary things in trading like dealing with loss and money management.
6. Find a mentor or a trader to use as a model. The fastest way to learn all of the rules of trading and to become successful is to model a successful professional trader. Mentoring and modeling allows you to bypass all of the mistakes that novice traders make. It provides you with the authoritative guidance and support that breed confidence, which is key to successful trading.
7. Write a business plan. Traders with business plans are entrepreneurs and businessmen. Traders without business plans are just one step above gamblers and in some cases that one step can be eliminated. A business plan spells out all of the resources, trading methodology and/or rules, operational plans, budgets, money management and feedback mechanisms that a trader uses to run his business. A well-written business plan signals to both the trader and to his family and associates that he is serious about being a professional. It is also the document that allows a trader to look for investors when the time comes to do so.
8. Take care and beware of your relationships. This is a complex rule because it advises a trader to make certain that his important relationships are in good health so they can support his professional life. Nothing can interrupt a successful trading career as quickly as a broken marriage. And this rule is also a warning to traders to let go of toxic, risky, and unsupportive relationships that can damage self-confidence and health and lead to risky behaviors.
9. Take care of your health. Far too many traders wash out of the game because they fail to apply this rule to their trading. Bad diets, lack of exercise and sleep, and too much stress all lead to the diseases and conditions that can end a career. I have counseled many floor traders disabled by stress-related illnesses as well as traders who can no longer work productively because of alcoholism, drug-taking, heart problems and other disabling diseases.
10. Enjoy the process. There is no point in becoming a professional trader if you hate what you do and if each day drags on to the next. Find a way to enjoy the process or the process will find a way to end your career.
If you can master these ten rules of the trading game, you are a ready to play to win.