Talking turkey

We are willing to bet that you have not forgotten the story of the hare and the tortoise even though you heard it when you were still a toddler sitting on your mother's knee. And we are sure you remember its moral too: slow and steady wins the race. That is the power of using stories to convey a message.

We are going to use the same technique to tell you some truths about the market. In effect, we will be trying to recap what we have learnt so far, so that every time you are faced with a tricky situation while trading, you can draw inspiration from this tale.

 

Story time, folks!

This is a story that will illustrate the concepts of profit-taking much better than all the features we can write on it. A story that was told to us when we were babes in the market and stayed in our memory indelibly.

There was this hunter who used to make a slow but steady income hunting wild turkeys. He used go down to the nearby forest, string out this net from the lower branches of trees and sprinkle some birdseed under it. More often than not, a turkey used to come for the birdseed and then graduate to becoming someone's dinner. He had a steady (and ready) market in the form of the local bird-man. And a relationship that was strictly of the cash-and-carry kind. A steady return.

Although the income couldn't support a golf-every-evening-and-drinks-followed-by-dinner-and-cigars kind of lifestyle, he was quite comfortable, if a bit lazy. But who doesn't have an eye for the big league?

One day, while our hero was waiting with his net spread out, not one but three turkeys walked in. And just as our hunter was having visions of an unexpected (but very welcome) two-day holiday, three more walked in. And what do you know, before our man of the moment could say Rio de Janeiro, three more walked under the net while two stepped out. Enter Greed.

he hunter, already seeing visions of an extended 10-day holiday on the beach, decided that he would drop the net as soon as the two that had walked out came back in. Meanwhile, one more stepped out. He decided to wait for that one to come back too. Turkeys, after all, are stupid birds. Enter Indecision.

While he was waiting, the three explorers returned but five others ambled out. His vision of the beach started clouding. He decided that when three of the five came back in, he would drop the net and go home with 7 birds and a week off.

To cut a long story short, he kept waiting as the birds trotted in and out, until there was only one bird under his net. With his visions of the beach and bevies of Hawaiian beauties shattered, he finally decided to quit while he was ahead. He dropped the net on that one bird. And went home, the same as every day, as if the windfall that could have been his never happened. Back to steady returns.

Tut, tut. Now who would you say was the turkey?

Think about it. What could be a trade to bring in windfalls is often botched up simply because you are unable to decide when to take profits.

 

Exiting a position is tougher than entering one

In the first and second parts of this series, we argued that exiting a position is more difficult than taking one. The basis for this was that, till such time that you haven't entered a position, you could play by your own rules. But once you are in a trade, you are at the mercy of the market and have to play it by the market's rules. You are forced to take a decision on that position.

We then went on to say that it is because you are forced to take that decision that you find yourself under pressure from a series of conflicting emotions - ranging from fear to greed to over-confidence to doubt and fear again. And so, more often than not, you end up taking a sub-optimal decision.

 

Employ strategy, not emotions to guide selling decisions

What we have tried to introduce here is the element of strategy. If Saddam Hussein, the Iraqi dictator, were a stock trader, he would call a lack of strategy the mother of all reasons people lose money in the markets.

In the next feature in the 'How to make money and have fun doing it" series, we introduce the most important element of trading strategy. Stop losses. And in the course of doing so, we will be delving deep into various techniques of obliterating these emotions from the trading process later.