A Canadian on Wall Street

I’ve been following a lot of trading and investing blogs as my professional life has moved more into this realm, and I find that it’s solidified my own philosophy about the markets, especially in the past several months. One of the things I still find fascinating is the incredible faith people have in systems trading, “technical indicators” and algorithms they’ve created for themselves, that they stick to rigidly. It seems like such a strange thing to be wedded to, especially when the only thing that is clear about the markets is that they are often unclear, changing, mutable.

When their system points them to some trade that they don’t take, these people grumble that they should “always be following the system” and it’s their lack of discipline in doing so that causes the issue. When their system starts to put them in harm’s way, they get defensive and stop using it and begin to doubt themselves. When the system puts them in a bad trade, they often blame their mistaken reading of their system: “it needs tweaking”, “I’m misusing it”. In some way, it seems almost religious, the need to devote oneself to a rule-set and the self-flagellation that happens when one fails to follow it.

In fact, for me, the need for discipline is not in following a system, but in money/risk/bankroll management, which all refer to the same concept. One, don’t take outsized risks and two, cut your losses. It’s the simplest thing in the world, but also the hardest thing in the world; saying it is one thing, but following it is a whole ‘nother story… and where human behaviour lies. In Vancouver’s frozen property market, with its record level of homes for sale, I’m sure there are more than a few people who aren’t willing to take their losses and will wonder why they weren’t able to, in retrospect. Everything seems so obvious until you add in human nature. People have been doing the same thing for years; they haven’t changed in aggregate, and they probably won’t in any of our lifetimes.

I try to bite my tongue around people who advocate a system that doesn’t revolve around the mechanics of defensive trading — it’s bound to encounter a market that’ll teach it a few lessons. These people are cultivating the wrong thing, I believe. They want, like good religious folk, to subsume their wills to something they feel is bigger than them, that they can abdicate their responsibility to. I think being open-minded towards the markets will be much more profitable in the long run than being close-minded; if you can learn adaptation, you’re much better served when the environment starts to turn.