Everyone knows the story of the Tortoise and the Hare,
but what you might not know is that it can be a very effective metaphor to
describe the differences between winning and losing traders. Like the Hare, you
probably experienced a lot of excitement and success right out of the gate, as
you began trading your first live account. However, because you probably did
not pace yourself by being consistent in your approach, you saw your early
success evaporate as time went on, just as the Hare did. The Tortoise was much
slower than the Hare, but because he was consistent and unemotional, he
eventually won the race as you probably know. Thus, your goal as a trader, is
to trade more like the Tortoise and less like the Hare, because that is how the
trading game is won…
Are you a “Tortoise” or a
“Hare” in the market?
In the fable of The Tortoise and the Hare, the Hare begins the
race by ridiculing the slow-moving Tortoise and then leaving him behind in the
dust as he sprints off from the starting line. The Tortoise, unemotional but
sure of himself, begins the race in a slow but consistent manner, pacing
himself from the start. The Hare gets distracted by other animals along the
way, stopping to show off his speed as he tries to impress some lady rabbits
(in the Disney video version) and as we all know, stopping for a nap along the
way as well. Unfortunately for the Hare, this inconsistency and emotion gets
the better of him and ultimately is the reason why he loses to the much slower
Tortoise, even though he started with a huge physical advantage. The Tortoise
may have had a disadvantage physically, but because his mindset was more
consistent and in-sync with what it took to win the race, he out-lasted the
haphazard and emotional Hare, and ultimately made it across the finish line
first.
This fable of the Tortoise and the Hare really does a good job
of describing the primary differences between traders who consistently lose
money in the market and those who consistently make money. Traders who trade
with a lot of inconsistency, haphazardness and emotion, are the ones who
struggle and suffer through the pain of continuously blowing out their trading
accounts, these traders are trading as if they are the “Hare”. Traders who take
a slower and more consistent approach, like the Tortoise, tend to do much
better in the long-run and don’t experience the severe emotional and financial
ups and downs as the “Hare” traders.
Anyone who has followed my blog for a while knows that I am a
huge proponent of the low frequency trading model. It is a pretty well studied
fact that day-traders and other high-frequency traders make far less money over
the course of their trading careers than lower frequency traders who take a
slower and more consistent approach, like the “Tortoise”. In fact, for most
people, taking a low-frequency approach to trading and trading like the
Tortoise, is really the only chance they have at making significant money in
the market over the long-run.
Trading is a marathon, not a sprint
Note, in the section above I ended with talking about the
“long-run”, this is a key point in this whole lesson. It is not difficult to
get lucky and hit a few nice winners early in your trading career, just as the
Hare got off to a good start against the Tortoise. However, what differentiates
winning and losing traders is not the ability to get lucky or use up all their
trading capital in the first month of live trading, but the ability to remain
disciplined and patient even in the face of constant temptation to over-trade
and over-leverage their account, in other words, you need to pace yourself as
you trade.
The Tortoise paced himself in the race against the Rabbit, and
this ultimately allowed him to beat the Rabbit, who didn’t prepare properly and
who clearly under-estimated the importance of mindset over ability. The Hare
blew all his energy in the early-going (trading money) and got over-confident
(very common among struggling traders), so much so that he literally fell
asleep halfway through the race, which ultimately led to him losing to the much
slower Tortoise.
Many traders tend to focus too much on the short-term, treating
their trading as if it is some all-out sprint to the finish line. When they hit
upon a couple of winners, they tend to then over-estimate the role that their
trading ability played and underestimate the importance of remaining consistent
and not doubling up their risk on the next trade. Traders tend to do the most
damage to themselves right after a big winning trade or multiple winning
trades. Like the Rabbit, they become frantic and over-excited, instead of
remaining calm and collected like the Tortoise. This typically results in them
over-estimating their trading ability, which causes them to start cranking up
their risk per trade and over-trading, also known as burning up your trading
capital.
Just as the Tortoise did, you have to preserve your energy to
win the trading race. In other words, you need to preserve your trading capital
for high-probability setups, rather than blowing it on random gambles in the
market. Furthermore, I want you to think of trading as a marathon, not a
sprint, because you need to pace yourself if you want to make it through to the
land of successful trading and win the “marathon”. “Sprinting” has no place in
the professional trader’s trading approach; slow and steady truly does win the
marathon of trading.
The Tortoise reaped the big reward
Despite the odds seemingly stacked against the Tortoise at the
beginning of the race, he ultimately takes home the trophy. This is exactly the
same as two traders starting out with different size trading accounts, one
large, one small and the trader with small account might find after 3 years of
trading he has a lot more money in his account than the trader who started with
the large account. This happens all the time in the market, and it’s because it
doesn’t matter how much money you have, what matter is your ability to trade
and your ability to manage your emotion and your money. Consistency always wins
in the end.
As I discussed previously, you need to preserve your trading
capital for the obvious trade setups, and not blow it all soon after you star
trading live. The Hare expended too much energy in the early going, whereas the
Tortoise stayed consistent. You need to save your money like the Tortoise so
that you can stay in the game long enough to hit enough big winners so that you
end the year profitable. Many traders do so much damage to their trading
accounts early in the year that they have no chance of ending the year in
profit. You need to try to have less trades but more certainty in the trades
you do take, think about eventually becoming a “baller trader” with lower
overall risk and higher rewards. This is how you make money over the long-run,
it is not done by trading constantly until your money is gone. If you do this
you will surely get passed up by trader who had smaller accounts but who had a
better trading mindset and who understood the importance of trading with
consistency.
Reptiles rule
Crocodiles and Tortoises can both teach us a lot about trading. We
need to be patient and stealthy as traders, like a Croc, waiting for the easy
“prey” and then acting on it with confidence. The theme is clear here; slow and
steady wins the race. If you do a bit of research on both Crocodiles and
Tortoises, you will see that both have been around since the time Dinosaurs
walked the Earth; hundreds of millions of years ago. This clearly tells us that
their slow yet consistent approach to life is one that pays off with great
rewards in the long-run.
