Lessons from the Pros


Trader Lessons from the World Cup

Over the last month, the biggest sporting event on the globe has been taking place in Brazil, that is the world cup.  As many of you know, Soccer is a huge sport throughout the world (other than the United States) but it is growing in popularity here in The US.  The World cup is where the top players in the world get to represent their nations and vie for the top honor of being World Champions.

This week the remaining 4 out of the initial 32 teams played for the chance to compete for the Championship. These final rounds are what they call the knock-out phase because there has to be a winner, and the loser goes home.  There are many lessons a trader can learn from these extremely competitive matches, and one match in particular really showed what can happen when a team shows up  unprepared to compete. This is similar to a new trader that comes into a market not understanding who he is competing against, and not understanding how the markets really work. The match I’m referring to is the one that was between Germany and Brazil. In case you didn’t hear, Germany routed Brazil 7-1 in a historical defeat of a world Soccer powerhouse.

The first lesson a trader can learn from this epic loss  is to keep one’s composure when you go through a  losing streak (which apparently the Brazilian players didn’t subscribe to). When Germany scored the second goal, the Brazilian  players become “shell shocked” and stopped reacting. What followed was a barrage of goals in a short period of time which then devolved into an unraveling of a team rarely seen in a World cup.  Some of their star players began “chasing” the game. This means that defensive players went out of place, and in their misguided efforts left wide open spaces for the German players to score easy goals.

For you traders, think about the last time you had a losing streak.  Did you keep your composure? Or did you go into “tilt’ Mode, which in poker simply means you became emotional, and thus could no longer be logical. The natural tendency for many traders when they dig a hole for themselves is to start chasing trades in an effort to make up their losses. As we know from experience, this quite often only serves to exacerbate the losses, similar to what happened to the Brazilians.  True champions keep their composure, make adjustments and stay the course towards achieving their objective.

The best way to combat these emotions is simply to create a rule that will limit the number of trades and consecutive losses on any given trading day. I’m sure the Brazilian players and fans wished the game could have been stopped after the fifth goal was scored, but unfortunately they had to play on until they were finally put out of their misery at the end of the 90 minutes of  regulation time.

The second and most important lesson is that the German team came well prepared, had a strong strategy to compete against all the stars on the Brazilian team, and executed flawlessly. They were ruthless when they perceived weakness, capitalizing on every mistake. And that this is why they have been referred to as the “German Machine” throughout the tournament. On the other hand, the Brazilians came ill-prepared, had a poor strategy,  didn’t adjust, and became emotional, and we know now the consequences were devastating.

Similarly, a trader should avoid the mistakes  that the Brazilians exhibited in this match and strive to have the ability to trade like a machine.  Like  the German soccer team, a trader must be well prepared at the beginning of every trading day. This comes from paying attention to detail, mastering a strategy and focusing on execution. Also, know who you are trading against. If you understand, and can identify the human emotions of fear and greed on a price chart you can make these emotions work for you instead of against you.  Putting  all this together is what will produce world class traders.

At the time of this writing (Wednesday July 9), the World Cup champion has not been decided yet, but just like in trading, Germany is a high probability, low risk trade, though I’m sure Argentinean fans would disagree. But if I were a betting man, this is where my wager would go.

Until next time, I hope everyone has a championship trading week.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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