Saturday, January 17, 2009

The Weekend Trader - The Svithjod Rock

High up in the North in the land called Svithjod, there stands a rock. It is 100 miles high and 100 miles wide. Once every thousand years a little bird comes to the rock to sharpen its beak. When the rock has thus been worn away, then a single day of eternity will have gone by. -- Hendrik Willem Van Loon

I first came across this quote when I was young, and it had a profound impact on me then. And like many of life's principles, it also forms part of the underlying foundation for my perspective on trading.

Ever get upset or overly excited about the results of a single trade execution? First re-read the above quote (chest-beating advisory service horse race callers included), and then consider the following:

If I took my 2008 trading volume of 637,766 contracts and adjusted it downward by 10% for conservative purposes, that would total about 574,000 contracts per year. If I then divided that by an average trading size of 40 contracts (probably in the ballpark, keeping mind I'm sometimes far heavier), and then divided the result by two to try to capture a complete buy-sell sequence, that would result in over 7,000 trade sequences annually, or about 30 per day.

We'll also assume there are 230 trading days in the year (there are actually about 250 U.S. trading days excluding holidays, and we'll take off another 20 days for vacation and other commitments), and that one has a 20 year trading career. The career span of course assumes a successful trader with longevity, and so the 20 year figure may be ultra-conservative.

So, the following stats are relevant when I close my first trade on Monday:

The trade will reflect 0.014% of a trading year and 0.0007% of a trading career. Double the career span to 40 years, and the trade will reflect 0.00036% of all trades made. Then, factor in the ongoing mental decisions that are made over the course of the trade sequence (sizing, holding time, scaling in and out), and one could argue the % truly approaches zero.

Trade far less frequently? No problem, simply adjust all of the numbers downward. The % results would be similar.

Now it's of course true that the financial impact of a single trade or day can have a large impact on one's bottom line, as it's often those home run or disastrous single results that can drive the bottom line hard one way or the other. And this might be especially true for swing traders needing to ride profitable trends, traders executing inappropriate strategies, or momentary brain cramps. Yet, the point obviously is that a single trade decision or sequence often means so very little in the scheme of things.

The countdown clock to the left is simply one way of my keeping the Svithjod rock in perspective over the course of the year's "single trade".

It's my way of stepping out of the moment ... in trading and in life.

Look for additional posts over the weekend as I look at making a few blog enhancements to benefit all.


Steve said...


One thing (a typo I think).

You said: If I took my 2008 trading volume of 637,766 contracts and adjusted it downward by 10% for conservative purposes, that would total about 574,000 contracts per day.

I think you meant 574,000 per year, yes?

Don Miller said...

Steve -

Oops. Yea, I'm not that heavy ... fixed.

Thanks :-).


E said...

"No one trade will ever make me or break me" is my motto.

It could, of course, and that is the point of stop losses.

Barings Bank,"The education of a speculator (Vic N.)", Lehman et al, and lately even Hubert Senters are great examples of the need for discipline.

Learning from our mistakes is essential to success; learning from the mistakes and experiences of others is pure genius.

Taking each day, and each trade, step by stepis all that is required.

"Sully" has demonstrated the essence of being prepared, reacting with poise under pressure, competency, and flawless execution of a contingency plan.

He would make one heckuva trader.

Life is full of paradox; I embrace Don's philosophy of perspective of a meaningless single trade. Yet, 155 passengers and crew are indebted to Sully as this "one trade" was the outlier that had significance.

Related good reads for those so inclined are Sway, Outliers, and The Black Swan.

Thanks Don for provocative posts to keep us thinking.