Don't Miss
Home » Articles » Beware of Trading Quotes

Beware of Trading Quotes

Retail traders love quotes. Boiling something down to a single sentence makes it appear as a universal truth. A physical law that cannot be broken. It’s a great way to reduce critical thinking. After all, if George Soros said something, it surely must be true. The guy is a billionaire and couldn’t possibly be wrong.

Quotes are useless. Pay no attention to them. – Andreas Clenow

What you need to realize is that quotes are almost always out of context and oversimplified. There are also many quotes I see used as universal truth in the retail space are from people with dubious backgrounds or who clearly have an agenda. Often people who make a living selling trading systems, mentoring, coaching, trading signals, newsletters and such but lack any real, verifiable experience. Even when intelligent, successful people speak they might have an agenda. If a billionaire who owns a commodity firm says that gold is the only real asset in the world and that it’ll double in the next year, he clearly has a reason to say so. Same as how someone who owns a discretionary global macro hedge fund might talk about how dangerous the stock market is. Or someone who’s a partner of a systematic hedge fund firm trying to convince you that systematic strategies are superior. Oh wait, scratch that last one.

All I've got in this world is my word and my balls. And I don't break 'em for nobody!

All I’ve got in this world is my word and my balls. And I don’t break ’em for nobody!

But let’s assume for a moment that the person behind the quote is a highly experienced trader, has the best intentions and that he is correctly quoted.

Even then, the quote is probably not very meaningful. You’d need to fully understand the context and what was really intended with the quote. Most of the time, people don’t really expect that a throw-away sentence will hang around for decades and be repeated in trading books and on websites.

Sometimes I say silly things without intending it to be quoted in future trading lore. – Andreas Clenow

Many popular trading quotes are generalizations. They are formulated as absolute truth and appear to be a summary of a person’s life philosophy. That was likely not how they were meant. Take something as simple as “Always trend with the trend.” The only people who would agree with that are those selling trend following trading systems. Trading with the trend can often be a good idea, but saying that you should always do that and never reevaluate your approach is unprofessional.

Generalizing is fun. It makes for more powerful and memorable statements. I do it on purpose from time to time but I try to explain the context and make the assumption that my readers are smart enough to do some thinking of their own. What you really can’t do is to cling to absolute statements as if they represented some higher truth. For almost every one of these kinds of statements from some famous trader, you can find some other famous trader who said the opposite.

The key to making money in stocks is not to get scared out of them. – Peter Lynch

Sure, that worked for him. Nothing wrong with that. But what about when someone like Marty Schwarz then says this?

The best advice I can give the ordinary guy to become a better trader is to learn to take losses. – Marty Schwarz

The two statements seem contradictory in nature. Which one is right?

Both of them, and none of them. It all depends on the context. Life is not simple enough to be boiled down to a punchy quote. If you’re looking for easy answers, go work in the back office.

I’ve never met a rich technician. – Jim Rogers

Jim’s quote above might not go down too well with the many rich people out there who identify as market technicians. He’s obviously trying to make a point and he probably doesn’t mean that there are no rich technicians in world. We all know that there’s an abundance of useless and rather silly methods in TA and that most people practicing TA are delusional. That can be said of many other areas too of course and there’s still useful ideas in the field and successful people using them.

Movie quotes however are always applicable.

Movie quotes however are always applicable.

The elements of good trading are: 1. Cutting losses, 2. Cutting losses, and 3. Cutting losses. If you can follow these three rules, you may have a chance. – Ed Seykota

Ed has done well for himself, so clearly he can’t be wrong. Right?

After buying a farm, would a rational owner start selling off pieces of it whenever a neighboring property was sold at a lower price? Or would you sell your house to whatever bidder was available at 9:31 on some morning merely because at 9:30 a similar house sold for less than it would have brought on the previous day? – Warren Buffett

Warren clearly takes issue with stop losses. He flatly don’t use them. Not only that, he’s repeatedly pointed out how irrational he thinks the whole notion is. Warren has more money than Ed. Does that make him more right?

Also beware of any quote or mantra that rhymes or generally sounds cool. They tend to be perpetuated more than others.

There is no holy grail. – All Too Many People, All Too Often

Pointing out that there’s no holy grail usually precedes a solicitation of some sort. There’s no holy grail, but I’ve got something close enough for you. Although on the topic of holy grails, it should be said that quoting Monte Python on the subject is never wrong, in any context.

The trend is your friend until it bends. – Who Knows.

Sure, but that’s about as useful in practice as

How much wood would a woodchuck chuck if a woodchuck would chuck wood? – Guybrush Threepwood

Real World Trading

In the real world, there are many trading and investment styles and many variations of them. There are plenty of analytical tools and many ways to use them. It’s a good idea to read a lot about how others have approached the markets. Studying research reports and books can yield valuable insight and help you design your own strategies.

What you need to be clear about is that there are no universal truths here. An out of context one-liner from some wealthy guy isn’t very likely to help you.

Trading isn’t simple enough to be boiled down to a punchy quote. – Andreas Clenow

 

Now Available!

“Buy my new book” – Andreas Clenow

 

 

11 comments

  1. Big fan of your blog. Always a good read. The contradiction in quotes seems to arise due to the 2 different approaches used to make money i.e yield and capital appreciation. I try to compare them here:
    http://saurabh-shah.blogspot.com/2015/05/bang-for-buck-part-1.html

    Yield guys like Warren Buffett sell when yields decline (i.e prices rise). Capital Appreciation guys sell when prices decline owing to their stop losses.

    • Yes, that’s part of it, and I agree with what you’re saying, but still not the whole story. Since writing Following the Trend, I’ve gotten to know many of the really major CTA managers personally. I’ve had some very interesting discussions with some of the very best and most famous of them. No, I won’t mention the names. These were private conversations.

      What strikes me is how different views they have. I know one guy who has a multi billion dollar shop who says that he finds stop losses the most stupid thing in the world. Then there’s another guy who also has a billion dollar firm located only miles away from the first guy who says that it would be suicidal to trade without a stoploss. These guys are both extremely successful in the same niche of the industry since several decades. And they have extremely different views on such a basic premise.

      There are plenty of these examples around. That’s why the proper answer to any complex question is, It depends. Should you use a stop loss? It depends. Should you trade with the trend? It depends. Should you use technical or fundamental factors? It depends…

    • How do you manage risk if you don’t use stop losses ? How do you decide when the position you put on is wrong ?

    • Stop losses is just one of many ways to manage trades. Nothing wrong with it, but it’s not a universal solution.

      As an example, look at a simple 12 months momentum model. Be long if price is higher than a year ago, else short. No stops. Correctly applied, it shows great results. There are many ways to close trades, stops are just one of them.

  2. Interesting & entertaining article…

    Guybrush from Monkey Island? What a great source of wisdom!! (But you could have picked a better quote…)

    The reasonably intelligent American talk show host (an oxymoron) Dick Cavett said “all clichés are true, otherwise they wouldn’t be clichés”

    • – “You fight like a dairy farmer!”
      – “How appropriate! You fight like a cow!”

      And of course, even after all these years, the rubber tree gag still gets me…

    • haaaaaa…

    • OK, I can’t help myself… don’t have a copy of the software and I can’t remember the rubber tree gag… I’ll be thinking about this for days if you don’t enlighten me…

    • Heh… Sure, why not.

      So, for the benefit of those unlucky enough, or young enough, to have missed out on the cultural wonder that is Monkey Island, let me start by explaining that we’re talking about an adventure game for computers from the early 90’s. Part of the setup here is that it’s the type of game where you can’t ‘die’. There’s no game over. You just continue until you solve the problem.

      But… Here you are, high up on a cliff on a tropical island, and when you walk too far to the edge, suddenly your character falls off it. While you’re still forgetting to close your mouth from the surprise, there’s a big GAME OVER sign coming up to cover the screen.

      A couple of seconds pass. Just enough time for you to mouth the word ‘dafuq..?’.

      Then your character, the mighty pirate Guybrush Threepwood, comes flying the hell up again. He flies up over the edge, landing right back where he started.

      Knowing that you, the actual player, might be a little confused over this, Guybrush breaks the fourth wall and turns to the ‘camera’. Looking right at you, he shrugs and utters the words

      – “I landed on a rubber tree…”

      With the Game Over sign gone, the game continues as if nothing ever happened.

  3. OUTSTANDING POST! I’ve read a couple dozen books on trading and probably tried a dozen trading styles, but the thing that I’m learning is that trading is a very personal venture.

    Schwager’s wizard books are invaluable. I’ve had to read three of them to get the point that you can only win in the markets if you, to steal a sports cliche, play your game.

    The other thing I’ve learned is that I don’t trade different markets the same way. I and a trend trader, but setups and scans are different from Forex to Equities (haven’t traded futures yet).

    STOCKS ON THE MOVE is next on the list to read. Already read FOLLOWING THE TREND, and the odd thing is that I use it more in my equity trading rather than Forex, which sound kinda backwards, but it works for me.

  4. Good article.

    The illusion that these trading quotes so often provide is that the wisdom from them will surely bring trading success.

    All these trading quotes are contradictory with each other because market as a whole is price discovery mechanism that takes into account nature and intent of so many different participants belonging to different time frames right from HFTs, scalpers to positional traders.