Posted: November 21, 2008
No matter how clever your trade entries are, successful trading is mostly a mental game. This treatise on trade psychology is appearing in a series of installments (and modified for use on this site) and has been excerpted from chapters of the book Pivots, Patterns and Self Recognition. The excerpts appear here by permission of the publisher, valhallafutures.com.
This is the ninth installment in this series, whose purpose is to examine the internal decision environment the trader faces within his mind. On the assumption that a better understanding of the mental conflicts we face will improve our trading results, the three modes of conflict are personified in separate "voices" inside of us. These are the Trader, the Accountant and the Analyst.
Chapter Eight
The River Kwai
Every beast is driven to pasture by a blow. Heraclitus
I've always wondered why it is that, when traders can't take a profit after a substantial gain, it is always attributed to greed for even more. Having acquired much experience in helping clients to exit positions as a futures broker and trading coach, I seem to have seen that the presence of greed was more of a factor when taking too small of profits. Or, it was the motivation behind discussions about the cost of commissions rather than the culprit behind holding positions beyond reasonable gains.
My conclusion is different from what is usually put forth on this subject. The Analyst has a need to gloat about having been right. And, he needs to extend the moment of dwelling in that place about being in the right as long as possible. As long as the position is open, the trophy is still in hand, so to speak.
Whereas, taking the profit would actually remove from view the symbol of the accomplishment, the true object of the Analyst's affection. Holding the position is, for him, a far better accolade of glory than the positive change in the account balance that liquidation would bring. You see, profits are the opposite of glory.
As a young man in the early 1980s, I once had the pleasure of playing golf with Joe Granville11. He was fond of telling a story back then about an analyst at the brokerage house that he first worked for who was so proud of the stock recommendation he'd made some weeks earlier that he took extra pains in the formatting and presentation of the document that contained his conclusions. He had it printed on special bond paper, encased in an expensive binding, and even took the trouble of gilding the title page in gold, so eager was he to emphasize the value of this successful stock's run-up in price.
The day he distributed the copies of this document to the firm's best clients and its internal executives and staff turned out to be the exact top in the price of the stock — or at least that's the way Joe liked to tell the story. And, in the days and weeks that followed, the stock fell progressively lower. In fact, this stock eventually fell well below the price where the analyst's first recommendation came out — and yet fell further. But, still, he could not let go.
At some point many weeks later, when enough information about the company's earnings problems began to filter out to the analyst community, Joe's analyst was forced to capitulate and recommend the stock's sale. Shortly thereafter, or so the story goes, the stock made a bottom and began to come back up. In truth, this story happens everyday on Wall Street and was especially common at the time of the NASDAQ millennium bubble.
Another famous example of this can be found in the movie A Bridge over the River Kwai. In it, Alec Guinness — playing an engineer for the British Army in the Pacific during World War II — is forced, during his captivity as a POW, to build a bridge for the Japanese enemy.
He is so proud of his accomplishment that, when Allied soldiers stage a raiding party to blow it up, he finds himself defending the bridge's survival.
It's the same thing with the Analyst. For him, it's not about taking profits; it's about the accolade of glory. It's about the feat of accomplishment. It's about the feeling of having been right. Don't let your Analyst build a memorial to your positions by holding them past their targets. Profits are the opposite of glory.
11Joseph E. Granville, Granville's New Strategy of Daily Stock Market Timing for Maximum Profit (New York: Simon & Schuster, 1976).
*Reprinted (and modified) with permission from M. William Scheier and the publisher, valhallafutures.com
