There is no question that having some athletic background
will give one an edge in the trading game, all else being equal. For instance, golfers have to learn how to be
levelheaded and control their emotions.
They have to be able to perform well under pressure. That is something all traders struggle
with. Baseball provides my favorite
analogy, however. Knowing when you
should hit a single, double, triple, or home run, is applicable to trading. Should you let this winning trade keep
going? Or is it time to get out because
the trend is going to turn? In my
opinion, knowing when to hit the single versus the home run is what separates
the good trader from the great trader.
While I am not personally a huge football fan, a lot of guys at my old
prop firm were big into the Madden videogame series and likened the strategic
aspect to trading. And fishing has some
obvious parallels as well. You have to
sit and be extremely patient, waiting for the perfect opportunity.
I can’t claim to have any extensive experience in any of the
above sports with the exception of golf.
But one sport with which I am very familiar, and may actually provide a
very apt analogy, almost never gets compared to trading: boxing.
To the untrained eye, a boxing match simply appears to be
two humans attempting to hit each other in the face. To the more experienced patron, it is a game
of chess in which everything comes down to technique, measured risk-taking, and
knowing when to go for the kill.
Most casual fight fans like to watch brawlers go at it. They like to see fights such as
Rios-Alvarado, Ward-Gatti, or Corrales-Castillo. These were wars were the opponents put it all
on the line. These guys came to
entertain. People love fighters like
Manny Pacquiao who relentlessly attack their opponents with flurries of
devastating punches. They want to see
knockouts and perhaps blood. I do enjoy
these fights as well, but not nearly as much as I enjoy watching a masterful
performance from a fighter like Floyd Mayweather, Andre Ward, or Guillermo
Rigondeaux. You have probably heard of
Floyd Mayweather who is the “Pound 4 Pound” best fighter and highest paid
athlete in the world. Ward and
Rigondeaux are known well by hardcore fans.
All three have the same things in common: they are absolute masters of intelligent
risk-taking, fighting on balance, and adjusting in the middle of a fight. They are the masters of the “Sweet Science.”
“Good trading is boring trading.” Have you heard that before? If not, you might be missing out on some
great trading literature. The point is
that trading comes down to a grind. You
sit there; you wait, and then you take a trade.
Then you take another. And
another. The glamour that is often seen in movies and
other media just doesn’t exist in the real world of trading. Trading is a tough, tough business and you
have to be mentally fit to sit through the hard times, the boring times, and most
importantly, the good times. After all,
it is during the good times that you may be prone to overconfidence and as a
result, dropping your guard.
People who don’t understand trading are sometimes drawn to
it because they expect this sense of glamour, but those who do understand
trading know what the reality is. The
same can be said about boxing. The top
fighters all have styles that seem boring, but if you know what you are
watching, then it is truly a thing of beauty.
Watching Andre Ward set up his opponent to make a mistake that leads to
a left-hook KO two rounds later; Guillermo Rigondeaux schools one of the
hardest hitters in the sport with his incredible timing; Floyd Mayweather
proves to be more elusive than the ‘Holy Grail’ is in trading. These are all beautiful, quiet qualities of
these boxers. Distracted by the blood and guts, the casual
fans don’t get to witness the marvelous technique that makes the Sweet Science
so sweet. . Imagine watching one of the best traders in
the world get out of a trade with a small loss in order to avoid a larger
one. Is that exciting? Not really, but it is proper risk
management. Imagine watching another
trader take huge risks and making big profits.
That is exciting to watch, but with that lack of money management (think
about a boxer using proper defense, hands up), the trader is bound to get blown
out (like the boxer would get knocked out for the lack of defense).
Take a look at Floyd Mayweather, one of the best defensive
boxers of all time. He is a master of
protecting himself and taking intelligent risks. Every time a boxer drops his hands, he is
open to being hit. Every time a trader
takes a trade, he is open to taking a loss.
Knowing when it is time to take the risk and when it is time to protect
yourself is vital. If the market is not
providing an opportunity, then you keep your hands up. If there is an opening, you take it, and then
get right back to protecting yourself.
Some boxers will keep their hands down and throw less-than-stellar shots
hoping to score a knockout. This leads
to a lot of unnecessary risk being taken as a result of hope. Good traders don’t hope. Floyd Mayweather doesn’t hope. This brings us to the next point…
…Staying on balance.
If you are not on balance in the ring, you can’t throw a proper
punch. If you are not mentally on
balance, you cannot make objective trading decisions. Staying on balance, both mentally and
physically, is difficult, but few things are more important. This is what discipline is all about in both
endeavors. Throwing a punch off balance can easily lead
to the puncher being knocked out. Taking
a trade when you are not seeing the market clearly can lead to a blowout. You don’t see the best boxers taking wild
swings. If they miss a shot, they get
back to the proper form and prepare for the next one. Likewise, if a good trader takes a loss, he
realizes it is just part of the game and prepares for the next trade. Less experienced traders will take a loss and
then immediately take another, lower quality trade to try to make their money
right back. Elite traders don’t take
those trades. They get back to playing
defense and then wait for the next solid opportunity. Taking
a loss or getting hit with a punch is just the nature of these activities. Taking multiple losses or getting tagged with
combinations over and over might be an indication that your discipline needs to
be checked.
Adapting to changing conditions is tough and requires an
open mind. Staying defensively
responsible and not wasting your energy or capital helps you keep this mind
set. The markets are always changing
their tune. They will change when you
are in a trade and you might have to adapt right away. A fighter might try a different approach
against his opponent and then the opponent must adjust. If you don’t adapt, you lose. Mayweather is known for being able to adjust
in the middle of a fight. When he was fighting
Miguel Cotto, he slightly adjusted his straight right to hook it around Cotto’s
glove and hit his face. Similarly, a
good trader will recognize a change in volatility or market state and adjust accordingly.
Sports analogies are generally very helpful when it comes to
trading, especially for the former athlete.
I never played baseball but I see the wisdom in knowing when to hit a
single or a home run. I have never
fished but I know that being patient is important. Whether you have boxed or not, hopefully
these analogies will help you see your trading from a different
perspective. Adapt or else. Don’t waste energy on foolish
opportunities. Never strike unless you
are on balance. Taking a shot here and
there is okay, but don’t get hit by combos.
And finally, keep your hands up and protect your capital at all
times.
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