For this installment I thought I’d write something of a follow-up piece to the previous article. In that article [Looking Forward to this Coming Year], the focus was on the market going forward. In this article, the focus will be on our mindset going forward. It’s my aim to examine the way in which valuation works, and if at times it may seem a bit theoretical this is only to achieve in turn a more practical result for the active trader/ investor. First we’ll have to ask what the goal or objective of the trader exactly is, and then illustrate the way in which we mentally place value on something, in the first person, may help or hinder that goal.
It may seem obvious to all of us that the goal of the trader is to make and take a profit. But a further question remains - what do we actually count as profit? Is it the further accumulation of Bitcoin? Is it the further accumulation of USD? I’d say neither of these, and that the ultimate taking of profit has to be in the accumulation of real assets, real wealth in the real world. The obvious reason being that monetary digits on the screen, of whatever variety, are just that - money. And money is the means to the ends… with the ends [at the material level] being the acquisition of real wealth.
Of course, what might seem an abstract point is actually a most practical one - enjoying real assets is the practice of wealth, sitting only on digits is the abstraction of it. But I hope to illustrate a further practicality to this, and specifically insofar as it concerns our careers as traders, where the right perception of taking profit enables us to actually trade more effectively.
We need therefore before our mind a real asset that we desire, and proportionate to our station in life, whether it be a boat, a property, land or a business we would like to acquire. This is the temporary end goal for which profit taking from trading is the means. Value [our own in contrast to the market’s] here is orientated away [or re-balanced] from the monetary digits of our persuasion, and toward the object we wish to own. The more we value the asset, the less we will value the digit [simply the means to the asset], and this in turn facilitates more effective trading as I’ll look to sketch in the following.
The Facilitated Trade
As traders we all know that what most often hinders us most in our trades, is an overly concerned state of mind that incapacitates us from a more clear and objective process of decision-making. What ‘pollutes’ the process is emotion - we become unable to take on the [calculated] risk of a trade, one way or the other, due to anxiety, or fear of loss. Of course, there is every reason to be cautious, but risk/ reward must always navigate between timidity on the one side, and recklessness on the other. The anxiety, in my opinion, is often due to an over-valuation on say USD.
Of course, the trader’s goal is to make profits and preserve those profits, but the over-concern [or anxiety] of preserving those profits can hinder new trading opportunities. What I am getting at here is that a re-focus on that real asset you have in mind [re-evaluation] will do much to reduce that anxiety toward what was in effect your ‘most precious’.
In a deliberate re-evaluation, all emotion should be taken out of the trade. Instead, [ideally] a rational calculating process takes over. If there be any anxiety involved [and we are all too human] it will instead be shifted to a fear of not acquired those real assets to which your trading activity is directed. This shift, away from an over-valuation on the digits, should in fact further motivate you to trade [within rational risk management/ strategic parameters]. … for that is the means to your end.
The Facilitated Trade [Take 2]
There is another way in which the activity of trading is facilitated by a re-evaluation [of the norm]. People largely put a high value on [the desire for] certainty, which in turn leads to comforting narratives. But beware the sweet siren call of the narrative. It proves itself the most seductive as it saddles up to the simplicity of our desires.
Rather, if one re-evaluates this desire, and in the process becomes comfortable with uncertainty… and indeed with contradiction, they will become more effective traders in my opinion. ‘What? Contradiction?’ the reader asks. Yes, because at the heart of hedging, which should be second nature to the trader/ investor, lies contra-diction… not one narrative or monologue. This uncertainty-based contradiction is also comfortable with ‘cognitive dissonance’… no anxiety there, i.e.; no need for a comforting closure as far as future [price] events are concerned.
Of course, certainty is the norm, and is something that we have all been largely indoctrinated into thanks in part no doubt to the popularity of mathematics. Don’t get me wrong, I’m as much a fan of the power of math as the next person [and geometry] to aid us in navigating the real world. However, I think our enthusiasm [over-valuation] for numbers all too often gets the better of us - we start imagining that besides a power over the natural world around us, it can grant us a power over the future; that is, that it’s only a matter of crunching the numbers, or data, and the mysterious future will unfold before us.
Or that if some such number-crunching fails, it is a failure in application, not a failure of principle per se; that is, that we are only in need of a mathematical wizard who can crunch those numbers better than the rest. What’s really going on here, over and above an intellectual failure, is a failure of the imagination in my opinion. We fail to imaginatively perceive that the future is in actual fact indeterminate, that there are always various possible outcomes.
In this respect, a re-valuation of [previously existing] values would involve for the trader/ investor a rejection of the popular paradigm of determinism - the idea that the future is simply linear. Sure, we can imagine [or intellectualize] it as linear in hindsight, but in practical terms, from the perspective of the trader in real time, we need to act as if the future is to a large extent indeterminate [and for all we know, it could be]. Here you’ll gain a savvier outlook on trading that while still engaging in risk [no risk, no reward], will be less ambitious and will always look to hedge.
And practically, what I mean here is that you’ll not expect too much of your technical analysis, it will be as much about risk analysis as it will be about identifying opportunities and reward. When a trade fails, you’ll pragmatically take it on the chin… as your expectations were realistic to begin with. With something of a more stoical attitude you’ll not become demoralized with a trade or a set of trades should they go wrong [nor would they have been too ambitious]. There will always be that sense of proportion, which comes first from a critical examination [re-valuation] of what is and is not possible in this space. You’ll lose a few skirmishes while still hoping to win the battle.
It’s been my aim here to focus on our own mindsets, and in particular the role in which our own valuation plays in the active process of trading/ investing. Sure, this can be one serious activity for many of us involving serious sums of money, but I’d also like to suggest that this activity can become too serious [always a matter of proportion] to the point that it hinders our trades and investments.
Without wanting to say that we should take a flippant [or degenerate] attitude to trading/ investing, which would in effect be gambling, I do think a slightly more playful or disinterested attitude should be allowed to creep in… to balance out the seriousness. All of which may involve some re-evaluations on our own part.
Until next time,
Stay [relatively] safe out there,
Dave the Wave.