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Why investing is like playing tennis

Posted by Dan on February 27, 2019

One of the first things a coach tells you when you pick up tennis lessons is to keep your eye on the ball at all times, and not to get distracted by outside noises. If you become good enough and make it to play tournaments your coach will start telling you not to watch the score too much. Play the point and still keep your eye on the ball while blending out distractions. And there will be plenty of distractions. The opponent may be receiving illegal coaching from the sidelines. A ball may be called out incorrectly. Spectators may be shouting things while you hit the ball. Or a phone may ring. Even the wind may cause you to miss an easy point… There will never be a shortage of factors that can cause you to lose focus: you stop watching the ball as much as you should and you start finding all kind of outside excuses for your bad results.

Investing is very similar. Instead of keeping your eye on the ball at all times you must keep your eye on “price” at all times and blend out all other noises. Is the stock you are trading going up or down? Of course you will watch price within the chosen timeframe you are trading. A daytrader will watch what price is doing intraday. A swing trader will keep an eye on day to day price movements. A longer term investor may only consider the weekly or even monthly moves.

And there will be plenty of outside noises that can keep you from doing that. You may think the Fed or Trump is doing illegal coaching from the sidelines. In the media you will be hearing all kind of spectators shouting their opinions on what and how you should trade. News items may be like the sudden phone call or burst of wind that causes you to panic out of your position, making you miss out on some good profits. E.g. president Xi has farted so stocks should go down. Or a commentator on CNBC is warning for a crash. Or the national debt is up again… I have been seeing that kind of news for over 30 trading years and it has never helped me to trade better. Whenever I let that kind of factors influence my trading decisions it has cost me money. If you can blend all those factors out and keep your eye on the ball/price you will give yourself the chance to play near the best you can. That’s why some people with average talent and average systems can do quite well, because they have become good at blending out distractions.

At some point a tennis player will also learn to anticipate the opponent’s shots, but only that much. If you anticipate too much or too early you will become too vulnerable to being wrong-footed.
In the same way an investor can try to anticipate what the market (=other traders) may do next. But if he anticipates too much that can become a distraction in its own right. Anticipation starts with observation. If the opponent tennis player is far outside the left of the court then you may be able to hit in the open court on the right for an easy point. But he may expect you to hit in the right side of the court, so he could be running in that direction already when you hit the shot. That could actually make hitting into the left side where he is coming from the easier way to get the point. This is the game of anticipation and how it can backfire.
In the market you may observe that a lot of traders are bullish (right) or bearish (left), but that doesn’t mean you will get to easy gains by hitting to the other side. So you can anticipate a little, but keep the eye on the price because it’s important to confirm if you anticipated rightly. You will need to react quickly if price tells you that your anticipation was wrong.

A good tennis player also needs a game plan if he is to beat equal (or even stronger) opponents. In trading that means you use some kind of method. A game plan/method should be chosen with your own personal strengths in mind. Of course, your game plan can evolve over time, as you get better and more experienced.

Bottom line: blend out market noise. Watch the price. Anticipate a little, but be ready to reverse course as soon as price tells you your anticipation was wrong. And stick to your method.

Good luck.

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