This month I had the very good fortune to be invited to have lunch with a gentleman who until recently was the head of a bank.  Before you go jumping to any conclusions I should first point out that the person concerned is (a) not Scottish and (b) his departure from the bank was nothing to do with failure!  Indeed other banks would not have got themselves into such a mess had they been headed by people of this calibre, which is why I want to share this interesting experience with you.

First of all a bit of background on the gentleman concerned.  I am obviously not going to name him so for simplicity let’s just refer to him as Tom.  Tom is a friend of a friend, someone who was in England recently and just decided it would fun to invite Tom and me to have lunch with him knowing that we both had quite a bit in common.  Tom you see originally qualified as an engineer.  As did I, for my sins.  On the face of it that is an unusual background for either the head of a bank or someone trading a fund.  However, it is just possible that an engineering background is actually the most perfect background that someone in this line of work could have.  But that’s another story for another day.

Over what turned out to be a 4 hour lunch Tom and I shared many insights and experiences.  The parallels were uncanny.  When Tom took the top position in the bank he inevitably become responsible for the banks trading activity, something that he knew very little about.  But he quickly realised that this division had the potential to be both a goldmine and a deathtrap.  His logical and highly disciplined mind also led him to conclude that we work in the present and that the future by definition cannot be known in advance.  This led to him imposing just one simple rule on the traders at the bank.  This is how he described his briefing of the managers of that division:

“I don’t claim to have the faintest idea of how you traders do the work that you do, nor for that matter do I have any intention of learning!  However I do know a thing or two about risk and probability.  If a customer rings you up and wants to sell Yen, for example, then by all means buy the Yen from the customer.  That is what we are here to do – to make markets, provide liquidity and to service our customers’ needs.  Then you decide what to do with the Yen.  You can flip them straight back out if you want.  You can hold them for a few minutes or even a few hours if your experience tells you that is the best thing to do.  You are free to do whatever you choose and you will be judged on your performance as any other profit centre.”

“However, by the time you leave the office at night every position will have been completely unwound.  This is my one and only rule.  If you ever go home carrying a position overnight, don’t bother coming in the next morning because your desk will already have been cleared!”

“Let me make this perfectly clear:  We provide a very important and valuable service to our customers, but we do not speculate.  If a customer believes that he or she knows what the future holds and wishes to bet on it, then we are more than happy to assist him or her in taking that gamble.  But as we certainly do not know what the future holds, we have no place putting our money on the line.”

Does that sound like a bit of a contrast to what we have been hearing about banks recently?

Every day I hear traders talking authoritatively about how the the high of the day is now in, or the low of the day in now in, or this market can run up to this price, or that market is going down to that price…etc.  Do you think any of these traders make money?  Its a pretty safe bet that these are the traders, or gamblers should I say, regularly feeding their apparently surplus cash into the markets.

Traders who make money couldn’t give two hoots about such things because they know such things are totally irrelevant to their work.  Traders who make consistent, regular, reliable returns do so by working in the present, with reality, with fact.  There is no place in their day for all of this hypothetical, speculative nonsense.

The truth is that the less analysis you do, the fewer indicators you use and the less you believe you know what will happen next week, tomorrow or even in 5 minutes time – the sooner you will become successful in the markets.

Success in the markets comes from learning how to react to what is actually happening and not from gambling on what you think should be happening in the future.  Tom realised that without even being a trader and he drew an absolute line between the present and the future.  In his case that line was drawn at the end of the working day, something that was easy for him to monitor and manage.  In my case with my work that line is drawn at the end of the current swing in the market, whether its a swing on a daily chart or a 1 minute chart.  Beyond the current swing I have no visibility, so I put that out of my mind.

If you are someone who is still worrying about what would, could or should happen next, take a step back for a moment.  Think seriously about where your effort would best be spent and where you should draw your own line between what is fact and what is not.  This might just be the change of focus that turns your career around.

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