[prev] - [1] - [2] - 3 - [4] - [5] - [next]
The Four Cardinal Virtues of Trading, pt 3 of 5
Temperance: The Virtue of Moderation
Futures trading easily leads to thoughts of excess. Let me offer a couple of recent examples. In July 2003, 10 Year Treasury Notes made a $10,000 per contract move. The margin requirement for one contract is well under $2,000. That was a 500% return on investment in one month. Feeder Cattle made a $5,000 move per contract in a matter of four days following the mad cow scare in Washington state. Feeder cattle have a $1,350 margin requirement. That's a 370% return, or approximately 100% per day. This market reality (the big move) is used to prey on innocent victims every fall. No doubt you've seen the television ads that say the fall is the time of year to invest in natural gas because it often makes huge moves in the fall and winter. That is true, but the big up moves only occur about half the time, and then one cannot predict what month the move will occur. While some people do indeed make huge profits in natural gas, many others lose huge amounts of money.
Stalking the Big Move
For many traders the majority of annual profits are made in just a handful of trades. Trading coaches say that one of the biggest hindrances to a successful trading career is a windfall trade early in the career.; especially a windfall trade that is the result of dumb luck. (For instance, being short feeder cattle a day or two before the announcement of mad cow in the United States.)
Visions of $10,000 here and $5,000 there can blind the trader to the more mundane $100 here and $50 there. A common mistake is for traders to forgo perfectly good trades because they are waiting for the big move which is just around the corner. A closely related mistake is losing a lot of money in a commodity because, against all common sense, the trader believes the commodity is on the verge of turning around and making the big move.
Stalking the big move can certainly be part of a trader's overall trading strategy, but there is a difference between a strategy that includes the potential of a big move, and a blind hope and desire that I will strike it rich.
The Tortoise and the Hare
Aesop's ancient fable is a fable of the virtue of moderation. Easy does it generally wins the race. The trading system that is all about huge price moves may make a lot of money, but it also will likely lose a lot of money. If you lose the money before you make the money you may be out of the game completely.
If common sense is the virtue that answers the vice greed, in turn I would suggest that moderation is the virtue that answers the vices of lust and sloth. Merely hoping for the big move speaks to our inner motivations to have it all and not to have to work for it very hard. If we hope to overcome these vices, we need to become tortoise-like in our thinking. We need to be willing to work hard a systematically for a little bit at a time. Over time the tortoise trader will be much more successful than the hare, and who knows, maybe dumb luck will cross your plodding path and you will be there for a big move.
Just don't make that your retirement plan.
Next: Justice, the Virtue of Being a Good Sport
Copyright © 2004 James E. Nelson (Just Another Jim). All Rights Reserved.
You are free to distribute as long as attribution and web address is included.
Site support by C T E K