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Translating Trader Speak: How To Stop Lying To Yourself

1/22/2014 11:20:00 AM
By: Martin Tillier
Referenced Stocks:IBM;AAPL;GOOG

Growing up in England, I and everybody else were aware of the dreaded "Chairman's vote of confidence." When the Chairman of a soccer club’s board of directors expressed every confidence in the club's manager, it was generally accepted that a firing was on the horizon. It is hardly surprising then, that during my early days as a foreign exchange broker in London, I was taught to view the comments of the bank traders who were our customers with a healthy dose of cynicism.

If somebody said "Have you heard about this big buyer that's lurking around..." for example, that was taken to mean "I'm long and would like you to spread a baseless rumor for me." In all honesty we sometimes would, but only if we had the same position. Looking for hidden meaning in the words of others, however, did have a benefit to me. It taught me to look for the real reason behind things I told myself.

For a trader that is an important trait, and if you are reading these pages, then to all intents and purposes you are a trader. You may consider yourself more of an investor, but if you are interested in individual stocks or are prepared to act on a view of the general market, then you are acting like a trader. Your time horizon may be longer, but your aims are the same... to buy low and sell high. In this context many of your reactions, particularly in times of adversity, will also be the same.

I found over the years that there were certain phrases that frequently occurred and that could be translated. More importantly, I learned to recognize when I was saying them to myself.

"This has to go back up sometime..." Translation: "There is no logical reason to expect it, but I have an irrational hope that this will bounce back." There is no reason that a stock should recover lost ground. Even if they do, holding a losing position in the belief that things will get better eventually has an enormous opportunity cost. If you are looking at a long position in IBM (IBM) this morning and find yourself thinking along the lines of "things will get better," then translate the thought and re-consider. Are you better off hanging onto a giant attempting a major transition, or would your money be better placed in another mega tech company that has prospects of growing revenue and profits; Apple (AAPL), say, or Google (GOOG)?

"It shouldn't be here..." Translation: "I know more than everybody else and refuse to accept reality." This is closely related to "This has to go back up sometime," but can also be used to justify taking a contrarian position for the sake of it. It is also, at face value, one of the dumbest things that we regularly tell ourselves. By definition, whatever the last traded price of a stock was is exactly where it should be; that was the price at which both a buyer and a seller were prepared to trade. Do markets overreact and occasionally misread a situation? Sure they do, but wherever a stock is at any given moment is exactly where it should be. Your opinion as to the future value of it is just that, an opinion. "It shouldn't be here" is particularly dangerous when used to justify hanging on to a losing position. If you can honestly make a sound case for a move up in the near future, then hold on, but "it shouldn't be here" isn't enough.

"I was going to buy that just before the announcement that caused it to jump 25%..." Translation: "I was aware of, or maybe even looked at, that stock before the announcement, but didn't think it was worth buying..." In a dealing room, as at a racetrack, "I was gonna" is one of the most frequent refrains. We can all look back with regret when we miss an opportunity, but convincing yourself that you were really going to buy something that you found good reason not to is a dangerous habit. If you do it often enough, then you will find yourself acting against you better judgment and muttering another oft heard phrase.

"I knew that was going down..." Translation: "I really thought that was going up when I bought it, but I was wrong." This particular bit of self deception can actually be a good thing. Convincing yourself that you knew it was a mistake to make a trade makes it easier to do the right thing when things go wrong; cut and look for another opportunity.

These are all things that I have heard traders say on multiple occasions. In fact they are all things that I have said to myself on multiple occasions and still do. When we say or think them, we believe them, but they all have one thing in common; they are a denial of reality. While understanding that cannot protect you from a loss, it can prevent you turning a small loss into a disaster, so it is usually worth translating your own thoughts and mutterings. If you find yourself giving a position the "Chairman's vote of confidence" understand that the end is coming, accept a small loss and move on.