This past week I had a great conversation with trader and founder of Stockscores.com Tyler Bollhorn for the podcast.
In our chat we talk about this idea I call the “fallacy of setting daily trading goals”, which I’ve written about here.
However this got me thinking about one of human nature’s most powerful drives and that’s the desire to seek certainty – to make predictions, to make plans, and to expect linearity.
If we take a look back at our evolutionary roots, for most of our existence as a species we existed as hunter gatherers until about 10,000 years ago when we discovered how to cultivate crops and moved towards a more agrarian lifestyle.
The life of a farmer had a lot of perks over being a hunter gatherer.
Hunter gatherers were usually nomadic, constantly foraging for food and always pursuing the next big hunt – feast and famine.
Farming on the other hand provided a measure of consistency and reliability. A farmer could settle down in one place, plant his crops in spring and if the weather permitted then he would reap a bountiful harvest in the fall. The only danger was that in times of drought, disease, or pestilence farmers suffered greatly as evidenced most recently by the Irish Potato Famine of 1845 which killed nearly 1 million people.
So using this evolutionary backdrop, as it pertains to trading what do you believe? Do you believe you can approach trading as a hunter gatherer or a farmer?
Do you believe that you can plant the proverbial crops and expect to reap consistent gains?
Or is trading more akin to being in the hunt, where you “eat what you kill”?
I’ll tell you what I believe. Nature abhors linearity and I’m of the belief that in a dynamic system like market, the idea of linear returns is self serving and unrealistic.
Common sense tells us that there will be days when there is more opportunity and less opportunity, hence we would expect the distribution of returns to be truly random. This is by definition an environment setup for feast and famine.
A lot of traders unfortunately approach the markets as if they were farmers. They carry the puritanical work effort that they must work hard – in fact equally hard day in day out.
The life of a hunter is the exact opposite. When the opportunities are plenty the hunter’s job is to take down what he can kill or capture as he won’t know when the next big meal will be.
On the opposite end of the spectrum, if there is little opportunity a hunter will relax, play, enjoy time with friends and family, and prepare himself for favorable conditions.
So let’s tie things up get back to the topic of trading goals.
While it’s tempting to set daily goals and then calling it a day when you’re up a pre-determined amount, realize what you’re doing is being motivated by a base desire to feel good – that is the desire to exert control over an unknowable outcome, to seek certainty.
The true outcome is that you’re setting a cap on your profits.
So let’s invert this approach. Let us not cap our profits, but rather let us cap our losses.
Let’s use the ancestral model as framework and do as our ancestors would have done.
If the trading is good then trade; trade until the trading day is done or as long as there are favorable conditions.
On the flip side if the opportunities are slim then give yourself permission to go home, relax, recuperate, laugh, love, have some fun, and prepare for the next hunt.
PS – If you enjoyed this evolutionary perspective then I would highly recommend checking out Dr. Daniel Lieberman’s book, The Story of the Human Body. It’s a fascinating read and you’ll find it as #8 on my Top Recommended Books list.