By M. William Scheier, a futures trader and analyst in the E-mini Index contracts*
Posted: November 7, 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 seventh 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 Six
Is It Greed...or Glory?
Nature loves to hide. Heraclitus
You hear a lot of talk about the chief motivating factors in trading being Fear and Greed. I just don't find this to be the case. And, I think that old viewpoint fails to explain most of us most of the time.
Most traders I know are not greedy people at all. They seldom, if ever, display that attribute. In fact, I've known relatively few persons in my life truly suffering from this malady. I don't think it's as common as portrayed by the media at all. And, those I've known who demonstrated this attribute in their lives weren't necessarily bad traders.
Ironically, many of those I've met along the way who purport to spend their energy in service to the needs of others seemed more to be serving the need to feel good about themselves than about their proclaimed cause. In such people, so-called generosity is its own form of greed. It is the same profile in a type of trader who habitually attempts to project his own will onto an unyielding marketplace.
Most of the traders I have come to know are just the opposite of greedy. They are thoughtful, generous and selfless to a fault. Why is it, then, that in order to explain why these same traders often lose their profits, or leave them on the table, do we invariably blame a sudden and uncharacteristic greed for their behavior?
My observations have led me elsewhere. Most of the traders I've worked with over the years — and I've worked with hundreds — over-traded or over-stayed their positions because they believed they were right, and wanted to prove it, not because they were greedy. They didn't care about the money at all.
In fact, they often didn't even seem to care about the money after losing it. But, they did care a lot about not being shamed as wrong or being thought of as a loser. They did care a lot about the glory of being a winner, about getting the prize, about winning the accolade. That's not really the same thing as greed.
Being wrong was a lot more painful to these people than losing money. My observation is that being wrong can be so devastating as to reach down and hurt us in a place so deep that nearly nothing else but the loss of love comes even close to it. Being wrong in the here and now, especially about something in which we've put great store, can call into question every decision we've ever made in our life, not just making us wrong, but putting us in the wrong.
From such devastation, some people never recover. Shamed, they run and bury their faces.
Let's look at this subject from another viewpoint so as to further dispel this notion of some driving presence of greed behind our trading. Let's take as examples those whose access and temptation to greed can be enormous, such as high net-worth individuals.
Let's take Sumner Redstone, for instance, founder and CEO of Viacom. His estimated net worth is approximately 10 billion dollars. At the time of this writing, he's nearing his 70th birthday and still running the company he founded and built from three little movie theaters into one of the largest media conglomerates in the world. He could have quit or sold out long ago.
It might be easy to explain away his relentless pursuit of acquisitions as greed for more money and power. But, he doesn't carry much money, goes to work everyday and spends most of his evening dinners with department heads of his companies to whom he delegates most of the daily decisions.
Money? You want to tell me he's motivated by more money, by greed? Like most of the wealthy, he invests the bulk of his money in the business lives of other people.
Or, ask Julia Roberts why she loves her job so much. She makes some 12 million dollars plus per movie and admits openly — even with those with whom she must negotiate — that she loves her work so much that she'd gladly do it for the free sandwiches they offer around the set.
And, you think people are motivated by greed? I don't think so. Redstone will tell you that what he's most proud of is the reputation that Viacom is the best media company in the world, and his daily work is a way to make this come true. Julia will tell you that — at 12 million each and with free time on her hands to do much more than she does — she has made the same number of box-office-busting productions as great scripts she has read — exactly the same number.
These two people have clearly discovered a satisfaction in living right. And, the outcome just happens to be glorified with profit.
These people don't do their work for the money. They don't suffer from greed, nor do most of the traders who over-trade or over-stay their positions, whether infamous by their success or just plain folk. These traders make these mistakes because they are trying to take shortcuts to glory. They're trying to prove that they're right, in the know and, perhaps, better than the markets they're trying to beat.
Our job as the Trader is to keep this tendency of the desire for glory clearly in view. If we can identify it within ourselves, then we have a chance of behaving outside of it. When we make the mistake of over-staying a trade, it's the Analyst who is in control. He's not affected by greed. He's not affected by money. He doesn't really care about money at all. He lives to be right. He lies about being wrong whenever confronted. His characteristic gesture when forced to admit he's wrong is denial.
The Analyst is all about self-assertion, about getting recognition, about controlling the voice, about being right. Whereas, being wrong means having to admit not being good enough for the recognition he feels he deserves. And, that thwarts the Analyst's prime directive: Glory. Being right is only his tool. Being right is all about getting the glory.
The Accountant, too, is only indirectly motivated by money. You've assumed he is fearful of losing it. But, it's not the fear of losing your money, it's the need for more security. He can't get enough of the feeling of security. Everything he is is based on it. Everything he does, he does to focus attention on it.
And, Fear? The Accountant isn't fearful. As we shall see shortly, the Accountant will even dance at the edge of total financial annihilation, braving all the capital you have, if it means he can make security the only issue in your life. His pheromone, fear, is his personal tool for regaining the podium in your head. Fear is his means of acquiring security.
When you first started trading, it was the Accountant who thought he could control cash flow by imposing his fixed minimum profit-takes on trades, regardless of the outcome of the market. Did that notion ever bomb quickly! The characteristic gesture of an Accountant in control is setting a high dollar value on each trade, as part of a goal system. He then acts as though the markets must come to him.
I have watched traders who acted so demanding of the market in serving profit goals for particular trades that they have refused to liquidate in the face of clear market warnings. While still short of those goals, they leave all the profits of the position on the table rather than accept what the market has to offer.
This is the Accountant in charge. He refuses to take profits because, mentally, he has already acquired the security value of the trade emotionally and can now live with no less.
It's the Accountant who wants to get his money back, lost in previous trades. And, it's the Accountant who won't let you feel you've actually gotten it back yet unless it comes from the same stock or future the money was just lost in — especially if it was just a few minutes ago. He now wants back so desperately what he once (just) held so dear.
Whatever the Accountant has accumulated in the way of security is the minimum amount of security he can tolerate living with. Whatever he gains anew in security is then the new base line of need. Whatever he acquires, he owns. Whatever he loses in the way of security is security he cannot now live without. What he loses he is deprived of.
It's the Accountant who crowds out the position with too tight a stop; it's the accountant who is seduced into options because he can eliminate ahead of time the uncertainty of how much he's liable to lose; and it's the Accountant who, after a series of losses, takes profits on subsequent trades too soon, violating our exit rules to do so.
These are all signs that it's the Accountant who is in control, not the Analyst, and not you, the Trader. And, it's the want of security, not the fear of losing money that drives him to do it.
When the Trader negotiates a compromise between the Account and the Analyst, he creates a code of conduct. He establishes a rule.
Here is example of such a rule:
There is a right place for the stop-loss order based on pivots, pattern failure, resistance / support, average true range, whatever. If — after determining the right place to stop the trade — the amount at risk exceeds an acceptable limit, then find a smaller-size contract or a less volatile comparative instrument, or don't take the trade at all. Moving the stop closer in order to meet the desired risk is not an acceptable alternative.
*Reprinted (and modified) with permission from M. William Scheier and the publisher, valhallafutures.com
