Friday, January 23, 2009

Trading lessons from rock climbing

Rock climbing is fun because you’re taking a controlled risk, which gets the adrenaline flowing. For adrenaline junkies attracted to trading, rock climbing might actually provide the risk-taking fix you need. That would remove the need to get excitement from trading, allowing you to make rational trades.

I’ve outlined a few similarities between trading and rock climbing:
1. You have to prepare and learn

Rock climbing requires preparation, including tying ropes, putting on harnesses and helmets, safety checks, putting on climbing shoes and analyzing the rock face for the best way up. There’s also an element of mental preparation for the challenges ahead.You can’t just turn up and start climbing without taking life-threatening risks.

With trading you also have to be prepared before trades, including analyzing the market and working out how much you’re prepared to risk. Failure to prepare leads to emotional, unplanned and overly risky trades.

2. You need risk controls

You don’t climb unless you are protected by a rope, which catches your fall. So while there is an element of risk, you’re not going to die if you slip off.Similarly you don’t trade without a risk management plan, which will prevent you blowing up. While you take risks on individual trades, stop losses and diversification mean you won’t lose so much money you won’t be able to trade again.

3. You have to know where you’re going

When you climb a cliff face, you need a broad strategy – on our first climb we basically followed a crack, which provided footholds and crags to grab on to.With trading you also need an overarching strategy: are you trading short-term breakouts? Reversals?

Aggressive-growth stocks?
4. But you also need to focus on the present moment

One of the tricks with rock climbing is that, while you have a general direction you’re heading, you need to focus on exactly where you are.

You have to be looking – not at the top of the cliff – but for the next bit of rock to grab, or the next foothold you can heave your body up on.Thinking of how high you are, or the risks you are taking, only distracts you and causes you to falter.

The times I got stuck were often when I started thinking: ‘this is ridiculous being so high on a cliff’.It also means you can’t obsess with getting to the top. You only get to the top by making a series of good moves up the cliff.

The pleasant thing is you often surprise yourself. A number of times I felt stuck, but by focusing on the next move, eventually you make it to the top.With trading you also have to focus where the market is right now, rather than projecting your hopes onto it. You also can’t be obsessed with making profits or reaching a certain target.While you should have a profit goal, at the same time you have to let go of it and trust that by focusing on the here and now and implementing your strategy you will make it.

Another mistake is to over plan and over think trading and become trapped in your mind and not take any action.5. You have to be prepared to fallThe fifth and final climb was particularly challenging. An interesting thing one of my fellow first-time climbers said was that he got to the top by being prepared to fall. In difficult areas, each move of the hands or legs means a potential fall, which is scary despite the safety net of the rope.What he was saying was that to keep moving, he accepted that he may fall. That acceptance led to action and got him to the top more quickly.With trading, you also have to accept that each trade you put on could be a loser. Accepting that means you’ll put in a stop loss each time because there’s no guarantee it will be a winner.

If you refuse to accept you could lose, you’ll end up paralyzing yourself. You will begin looking for the perfect trade, or that extra bit of information, or the perfect indicator to remove the risk that you aren’t accepting. In the end you’ll be bogged down and will miss good trades.

No comments:

Post a Comment