The First Step

I've convinced myself of the following: Every trader begins with, and is subsequently defined by, his or her edge. Sounds like some hackneyed cliche, right? Not surprising. No other word in this game gets thrown around, glossed over, or assumed a priori like the term "edge". It's the four-letter word of the business; yet unlike expletives of a scatalogical nature, uttering the word repeatedly at a genteel thousand-dollar-a-head seminar, or reading the word in every other paragraph of every other magazine and online article on trader psychology won't raise any eyebrows. Instead, it's the explicit details, the functional guts behind that inscrutable word which are to remain hush-hush and behind closed doors.

An entire industry of self-help books and seminars for traders is built upon this mystery remaining a mystery. With sleight-of-word misdirection those selling a dream will have the buyer lay blame where any struggling trader would promptly assume it would be: in the mind. After all, the "tools of the trade" are all readily available from any standard quotes provider and data backtester; with such an arsenal of market thermometers at hand, the failure to consistently profit must come from some inner place, right? How else could that MACD convergence-divergence cross confirmed with trebly-smoothed and doubly-offset stochastics fail to generate millions by now? Deftly swapping one apparent enigma for another more readily dissected, the "can't do, so teach" crowd behind the word processors have diverted their readers from figuring out the markets into figuring out their own heads.

Now when it comes to making progress as a trader, I'm not knocking mental introspection at all, far from it. What I do take issue with is the assumption that once those psychological problems are "settled", success in the markets should soon follow. I believe instances where psychological stumbling blocks prove to be the main obstacles that prevent one from achieving his trading goals are actually very rare, and almost never true of those who have yet to achieve any level of consistent profitability. For the great majority of rational beings attempting to make a living from the markets, it's the lack of any real edge to begin with which gives rise to those mental issues that may serve as temporary scapegoats but can only conceal the truth for so long. No amount of positive visualization, group empathy, inner "focusing", or even plain willpower can help the trader lacking a defined and applicable edge. Futhermore, these techniques can even serve to mislead and retard any real progress by postponing that crucial first step most struggling traders probably need to admit to and accept of themselves: that they have not yet found an edge at all. Trying to remedy the symptoms before perceiving or conceding to the cause of illness can only result in prolonged frustration.

Over the Edge

I had long held the belief that once my psychological issues were resolved, I would finally become a consistently profitable trader. Instead, it was actually realizing just how wrong that belief was that pushed me through to the other side.

For years, I focused my attention on figuring out the "inner game" of trading. On the surface, I seemed capable of generating sizable returns over a short period of time -- figuring out the markets themselves didn't seem to be the issue at hand. The problem was the sharp collapse which would inevitably follow each parabolic rise; a chart of my account equity over this period in time would closely resemble a series of market "bubbles" strung together. This boom and bust happened with such regularity that I convinced myself the problem was somehow psychological in nature. There were a number of theories which sounded appealing at the time: subconscious sabotoge, fear of success, repressed traumas, the list goes on. I grappled with the hidden source of my angst for months on end, trying to decipher how a childhood humiliation could lead to me constantly pulling my stops at the last second or committing maximum buying power to the aussie right before an employment report. Was there really some connection there that could provide the answer? I searched to no avail.

Fast foward to my previous post, where things suddenly seemed to fall into place from out of nowhere. What was different this time around? Did the accumulation of all my past self-analyses finally breakthrough without my knowing it? I thought long and hard over this mysterious turning point, and when I finally hit upon the answer, that became the true "gestalt moment" for me. It all starts with the edge. I had the whole thing backwards all along. The moment I was capable of defining my edge was the moment I realized I'd been trading without one for so long, and that lack of edge was the real source of nearly all those mental issues that plagued me. With the clarity of that realization, a vision of progress crystallized hard and clear, and confidence returned anew. I think this subject is worth a few more entries, so bear with me if the posts seem to flow like molasses -- my muse be a fickle one.

Epiphany

For the longest time, I've imagined that the solution to my trading struggles would present itself as nothing less than epiphany: a bolt of white lightning, an earth-shattering realization, a blinding, mind-bending revelation. And who could blame me for this fantasy? What else could possibly snap me out of years of repeating the same mistakes over and over, despite having a very explicit list of trading "rules" right in front of me, gleaned from countless hours in front of the market screen? What else could it be, having pored over endless pages of published trading "wisdom", only to find those words which sounded so sensible, so practical, just somehow couldn't translate into consistent action? My issues defied logical reckoning for so long that I was left with only blind faith in the eventuality that these demons would be exorcised at some point in my future -- a vague and desperate hope at best, yet I had no choice but to believe, for I had no other reason to perservere.

But looking back now from the other side, I have to admit that for me, there was no magic moment, no flash of enlightenment that chased away the shadows, nothing at all that remotely resembled any climactic turning point of realization. I can't really recall when the necessary changes were finally decided upon and implemented, but the one aspect I can identify that made things different was that the impetus for those changes came entirely from within. The force that finally had the power to put principle into action was instinctual in nature, as opposed to adaptive in respect to some external source, or merely reactive as backlash against my past transgressions. I wasn't blindly following some guru's Practical Guide to Trading, nor did I need to make the mistakes first before I knew how to anticipate and prevent them. The changes just fell into place, step by step, as things that I knew I needed to do to achieve my goals; they were nothing novel nor especially noteworthy, and endless variations of them can be found in any of the "classic" trading manuals. But this time they finally made sense to me, perhaps only because I came to the same conclusions in my own way.

So what could it have been that finally turned the whole damned ship around? I'm not absolutely sure yet, but the more I think about it, the closer I think I'm getting to figuring out the exact source. But I'll save that for another post.