BE A LOVER, NOT A FIGHTER

Presented at a Chicago Mercantile Exchange Traders Seminar,
Chicago, Illinois,
March 20, 1969.

This age-old credo was learned the hard way—it usually is. It came to me as a revelation after years of fighting the market. Unfortunately, it is a rule we traders often forget. Rest assured, the market will remind us.

Be a Lover, Not a Fighter. The motto is prominently displayed on a plaque in my office. The thought behind the words is as old as trading itself. It represents a credo which every good trader knows and abides—forgetting it can prove fatal. There are many ways to say it. In stock trading when you violate this doctrine, it is known as "fighting the tape."

Fighting a market is a professional trader's greatest enemy. It prejudices his reasoning process, it warps his logic, it clouds his mind, it disrupts his market "feel," it destroys his ability to participate in other market opportunities, it becomes debilitating, and ultimately it can take all his money. All professionals get caught in this nightmare from time-to-time. The winners remedy it as soon as they detect it.

Ask any stock or futures trader what it means to fight a market and he will know exactly what you mean. He may not always find the right words with which to give a satisfactory definition, he may not always be able to explain how he can determine when it happens or why, but he knows precisely what it is and he knows most emphatically that it is a road to disaster.

When you fight the market, you rationalize your position is correct even when the market screams that it is not, when all the facts contradict your opinion, when your instincts tell you to get out. On rare occasions, such stubborn trading can turn in your favor. When that happens, it is a dooms-day event. You will apply the same procedure the next time, and the next time you will go broke. Clearly, there are some exceptions to this rule—as there are with every rule.  Some traders have been very successful fighting the market.  But, for each exception, thousands more fail.

How do you know when you are fighting the market. There are no specific rules—and each trader has his own dictate or guidepost to serve as an early warning system. Some intuitively know when it is time to get out and before it becomes a fight; others get out of their positions as soon as a losing position causes them a sleepless night; still others never go home with a losing position. Whatever the system, whatever the rule, one must have it in the arsenal of futures' trading weapons.

The rule does not require that a futures trader discard an opinion or liquidate a position after his first loss or even after a series of losses.  Quite the contrary. No professional can expect every market play to show a profit.  Nor is an immediate losing position the sign of an wrong position. Indeed, conviction about a position in the market is an important ingredient to success. Conviction is especially important when you are not immediately proven correct. However, every professional trader knows the difference between conviction and obsession. The difference is critical. In every market play of consequence, there is a point at which that difference divides winners from losers. Losers fight a market, winners do not.

Somewhere between an immediate losing position and eventual wrong position lies an imaginary line which, when crossed, turns a losing position into fighting the market. Experience will help in establishing the necessary guidepost. But until a trader develops this early warning sense, he should ask himself the following questions whenever he has a losing position:

Would I take the same position today at this new price level if I did not have a previous position in the market? If the answer is no, you should not maintain your present position. Is the loss one that I am afraid, or cannot afford, to take?  If the answer is yes, you are in the market for the wrong reasons—you are in the market not because you think you are right, but because the loss will be too much for your emotional equilibrium or finances to bear. Am I still in the position because I hope to make back the money I lost?  Hoping and wishing is not a reason to maintain a losing position. Has the position twisted my reasoning and calculations?  Do the figures still logically add up to what I originally expected or am I rationalizing? Am I so prejudiced by my position that I refuse to discuss or hear a contrary opinion? And, if I hear one, can I still logically refute it? Do I have a point at which time I will take my loss and get out? Is a further loss on this position worth the potential profit?

An honest appraisal of the answers to these questions can help the trader determine whether he has crossed that crucial line. Once it has been crossed, the trader will be lost in a quagmire of hope and desperation. He will no longer be rational with respect to the position; he will never honestly know his rationale for remaining with the position—whether he truly believes in it, or whether he is simply "married" to it. The ultimate test will come on the day the trader liquidates his position.  Inevitably, this will be near or at the end of that particular market move.

Sometimes, the results are catastrophic—not only because of the money lost and the inability to capitalize on the market play when it finally arrives, but because often market fighters liquidate their positions at the very bottom (or top) of a market and then reverse their market opinion in a fit of desperation. They then go for a bundle in the other direction.  Such are the unfortunate fates of the fighters.

How much better and more fun it is to be a lover. A trader who is a lover is a trend player—the trend is his friend. He seeks out the trend of the market and romances it.  He loves the market whether it is bull or bear; he follows wherever it leads. If it's in an uptrend, he's bullish or he leaves it alone; if it's in a downtrend, he's bearish or he stays out.  He does not try to pick reversals or outsmart the world, he merely wants to follow the market's direction. When a lover increases his position, his original position is profitable and the market shows continued promise.  Clearly, lovers also have losing positions, but they never allow it to become a fight with the market. Unlike the fighter, the lover never closes his eyes with righteous indignation, I will be right. Unlike the fighter, the lover seldom blames a loss on the market. He may be wrong, but never the market.

It is rare for a lover to catch the bottom of a market, nor will he get out at the top.  At the bottom, he is most likely still short; at the top, he is still long.  As soon as he suspects the market is changing direction, he gets out--even if this means reinstating the same position at a less advantageous price or missing a further move. Often lovers liquidate positions long before the market reaches its ultimate level. To take a little out of the middle is a lovers delight. While lovers do not earn as much as they could have, year after year they go home with a profit. Maybe the real difference between lovers and fighters is that lovers never want to be right, they just want to make money. In the long run, only the lovers do.

Reprinted by permission. Excerpted from Melamed on the Markets, by Leo Melamed. John Wiley & Sons, 1993

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