Napoleon, when hearing good things about potential senior officers liked to ask, “but is he lucky”?

I’ve known people who have traded the markets for years with only red ink to show for it. From a technical standpoint they seem to know what they’re doing, but they are just unlucky. Or are they?

Napoleon’s question was astute because it’s possible for someone to apparently know what they’re doing but, in the heat of the battle (or in the middle of a trade) deficiencies emerge resulting in defeat. Someone who in battle or trading seems to be consistently lucky is either very good at what they do or is enjoying improbably good fortune.

When someone commented on how lucky he’d been, Arnold Palmer replied:

“It’s a funny thing, the more I practice the luckier I get.”

Unfortunately, this doesn’t seem to work for would-be traders who lose money without fail. No matter how much they practice, they can’t seem to trade consistently profitably.

Clearly the consistently lucky battlefield commander or trader enjoys an edge on his less fortunate colleagues.

Jesse Livermore - in contrast to many self-made men - was happy to put some of his successes down to luck.

Of his 1915/16 comeback from bankruptcy, and his $3 million profit, he said:

“I was very lucky. I was rampantly bullish in a wild bull market. Things were certainly coming my way so that there wasn’t anything to do but to make money.”

And

“As you may remember, I was busy ‘coming back’ in 1915. The boom in stocks was there and it was my duty to utilize it. My safest, easiest and quickest big play was in the stock market, and I was lucky, as you know.”

Speaking of luck in more general terms, he said:

“Of course, if a man is both wise and lucky, he will not make the same mistake twice. But he will make any one of the ten thousand brothers or cousins of the original. The mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line.”

Avoiding Mistakes

Jesse is pointing out that successful traders need to minimize mistakes. It’s the same in war, or in sports contests. Most battles and sports games are not won by moments of genius - these are few and far between. The contestants who make fewest errors win most contests.

The “lucky” trader is one who minimizes mistakes AND, if they do make a mistake, acts to minimize the damage by exiting from the situation quickly. In practice this means having a written plan for each trade you enter, the most important element of which is the stop-loss.

Jesse Livermore described the emotions of hope, greed and fear at various times as:

* The speculator’s chief enemies
* His natural foes
* The speculator’s deadly enemies

Livermore’s views on hope and fear lie at the heart of successful trading. He describes how traders fail when they allow hope of recovery to prevent them cutting their losses and fear of losing a small profit to make them sell prematurely, when more profit would have been available if only they had the nerve to stick with the trend.

“The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day—and you lose more than you should had you not listened to hope….

“And when the market goes your way you become fearful that the next day will take away your profit, and you get out—too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses.

“Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.

AND

“I am fairly immune from the commoner speculative ailments, such as greed and fear and hope. But being an ordinary man I find I can err with great ease.”

AND

“The speculator’s deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rules of all the Exchanges on earth cannot eliminate these from the human animal. Accidents which knock carefully conceived plans sky-high also are beyond regulation by bodies of coldblooded economists or warm-hearted philanthropists. There remains another source of loss and that is, deliberate misinformation as distinguished from straight tips. And because it is apt to come to a stock trader variously disguised and camouflaged, it is the more insidious and dangerous.”

How Important is all this?
What I’m talking about here is probably the most important aspect of trading. If you can control your emotions during trades, you have a good chance of success. If you can’t, you’ll almost certainly fail.

Quick Thinking

Christian Siva-Jothy was Head of Proprietary Trading with Goldman Sachs. (Prop trading is when firms trade for themselves rather than on behalf of customers for fees.)

Siva-Jothy made his name on seemingly high-risk trades he made in the immediate wake of the first airliner crash into the World Trade Center in 2001.

“The first thing I noticed on the TV was that it was a perfectly clear blue sky day. I’m a helicopter pilot and I’ve been flying for 14 years. I know that when you’ve got a plane that’s going down, you don’t aim for the tallest building to fly into.

“I immediately thought, ‘terrorist act’. I figured this was going to whack consumer sentiment… I bought Eurodollars…

Markets can be Unbelievably Slow to React

“Strangely, I think they rallied no more than 13 basis points on the day. Markets can be unbelievably slow to figure out the consequences of big events.”

The capacity of markets to react slowly to events was also noted by Jesse Livermore, who said:

“The Street paid no attention to the earthquake the first day or two. They’ll tell you that it was because the first dispatches were not so alarming, but I think it was because it took so long to change the point of view of the public toward the securities markets. Even the professional traders for the most part were slow and shortsighted.”

Christian Siva-Jothy’s Favorite Book - Reminiscences of a Stock Operator

Interestingly enough, it turns out that Christian Siva-Jothy is well acquainted with Jesse Livermore. When asked – by Steven Drobny, in The House of Money – “Are there any books that you recommend to your traders,” Siva-Jothy responded:

“My favorite book in relation to markets is Reminiscences of a Stock Operator, by Edwin Lefèvre. I’ve probably read it four or five times, and I love it every time I read it. He talks about everything, about risk, about hubris, about passion, everything.”

“Prices rise because there are more buyers than sellers.”

This is a hoary old saying that needs to be put to bed once and for all. It’s absolutely incorrect, yet it’s everywhere.

Just type “more Buyers than Sellers stock market” or “buyers outnumber sellers stock market” into a search engine for plenty of examples.

In reality, prices rise when buyers are keener than sellers, not because buyers outnumber sellers.

Example

For example, imagine a case in which Livermore Inc. shares have been trading at $100. The situation is that:

• There are two sell orders at $101 for a total of 35,000 shares.
• There are ten buy orders at $99 for a total of 95,000 shares.
• There are more buyers and sellers - so our hoary old saying tells us that the price will rise.

In fact, the situation unfolds with the price falling to $98 because one individual comes along and sells 100,000 shares at market – taking out the 95,000 shares bid at $99 and eating into the shares bid at $98.

Our seller who dumped $100,000 shares at market was the keenest market participant.

Repeat, after me ……

The keenest participants determine the market direction.

Prices rise when buyers are keener than sellers.

Prices fall when sellers are keener than buyers.