No need for speed: why Top Gun traders can crash and burn

Some of you may know that I’m a contributor to Bullbearings.co.uk. I recently write a piece that managed to weave the themes of 80’s movies (in particular Top Gun) my previous work, financial markets and the trading industry into one piece.  You can take a look at the piece on the Bullbearings website or read the script below:

With the upcoming re-release of the 80’s classic ‘Top Gun’ in 3D I thought this would be a suitable theme with which to talk about trading – as the need for speed is something many private traders feel. I examine where this idea came from, the wisdom of this urge and how to respond…

There will be few reading this that will not be aware of the highest grossing movie of 1986. Not surprisingly many teenage boys and girls across the world (myself included) grew up watching this movie and wanting a piece of the action. As a young air force air defender I was fortunate enough to attend the European version of Top Gun (it was in a cold, wet, winter-time Belgian forest – not really the same as San Diego California, though the Belgian beer was much better).

In fact my strangest recollection of viewing this movie was back in the mid-90s while dressed in a bed-sheet at a toga party in Cyprus with the RAF’s 111 Fighter Squadron. It was quite surreal to watch a gang of two dozen or so fighter pilots stood around in similar toga attire, ignoring the girls while all providing a critical review of the movie. There was a lot of sucking of teeth and shaking of heads at Hollywood’s interpretation of their day jobs.

In our movie our intrepid heroes ‘Maverick’ and ‘Goose’ claim they “feel a need…a need for speed” (which incidentally is the right way to employ an underpowered jet like the F-14A Tomcat. Such ‘zoom and boom’ tactics are precisely the right ones for using the strengths of their jet as you shouldn’t get into a turning dog fight with smaller more powerful and manoeuvrable adversaries – but I appreciate that would have made for a bland movie. You see you’re learning stuff here. Anyway, I digress). At its most base elements Top Gun the movie is adrenalin-fuelled, edge-of-the-seat stuff.

Top Gun trading

When it comes to trading in the modern environment I sometimes see, hear and feel similar sentiment from private traders: they feel a need for speed! They too are engaged in adrenalin-fuelled edge-of-the-seat stuff. Having been fed on a diet of 24hr news, constant connectivity and 24/5 markets (for those trading FX) they fall gullible to the impressive advertising and marketing efforts of organisations with a commercial agenda urging them to trade quicker, faster markets with more frequency.

As a rule, the financial technology companies, the brokers and the educational firms are all encouraging our wannabe Maverick & Gooses traders to trade faster markets on shorter timeframes with increased frequency. Why? Because they have an agenda and it’s in their commercial interests for you to trade more!

Firstly – there is always a cost to trading, in fact there can be several. The indirect costs soon build up by the time our traders have bought big fancy six screen computers and professional charting packages and expensive indicator/signal services, the books, the seminars, the whole shebang. Trading rebates for technology and educational firms are not as handsome as they once were but they are still valid lines of revenue for these organisations.

Whilst the direct cost of trading in terms of commissions has declined impressively there is still either a cost in commissions or in the broker spreads. All these business costs add-up and provide a substantial hurdle to profitability for any aspiring business owner. I often wonder how many people actually make a note of these expenses and make account for them in their business plan?

The need for training

Secondly trading at very short time frames (I’m considering anything below 30-minute charts as short time frames for the purpose of this article) takes immense amount of skill, dedication and mental fortitude to perform at a consistent level. When Malcolm Gladwell talks about it generally requiring 10,000 hours of deliberate practice to become a master in any field this is exactly what I’m talking about.

If we refer back to Top Gun our heroes spent probably three to five years going through a very thorough, disciplined and testing training program before they were allowed anywhere near flying an F-14 Tomcat. The military are exceptionally good at training their aircrew to be able to operate complex, expensive, dangerous fast jets right to their very limits in demanding physical and mental environments. They know the risks and they manage them well. Anyone who lacks the necessary skill, dedication and motivation is weeded out pretty quickly.

How many traders can truly say that they have experienced a similar rigorous training regime in their efforts to become a trader? For some it will be an e-book they picked up off the internet. Or maybe they splashed out on an expensive weekend course that promised to teach them the secrets of generating untold wealth for only 10-20 minutes work a day!

Either way most human beings are not able to operate in the environments of short-time frame markets through their present paradigm of operating. They’ve simply not been trained to operate in such a demanding environment.

The speed at which things happen means that the likelihood of the untested and poorly trained trader making mistakes increases exponentially. 

Trainee fighter pilots take years before they’re allowed to fly fast jets at ultra-low levels ‘down in the weeds’ like you see in Top Gun. Similarly new traders should take time getting a feel for trading longer time frames before they try operating ‘down in the weeds’ of short term intra-day trading.

Re-set your sights

There is a generally accepted statistic to describe the fortunes of the great masses entering the trading arena through spread-betting. It’s known as the ‘Triple 90’: 90% of traders lose 90% of their money within the first 90 days of opening their account.

Pretty sobering stuff really. So, if you’re a new trader, why not do yourself a favour and make it your target to simply be one of the ten per cent of people who do survive their first 90 days?

How would I suggest you do that? Well do the opposite of what the marketing and advertising messages are telling you would probably be a good start. As the messages tell you about tighter spreads and faster execution for short-term intraday trading perhaps you should just look for a broker that offers solid fixed spreads with cheap overnight fees for swing/longer-term position trades. Instead of buying trading robots/signals services/specialist indicators, why not just learn to read price action on daily charts and understand such simple yet important principles as horizontal areas of support and resistance.

Instead of trying to trade news announcements by over-analysing what effect the news may have on the market why not just stand aside and watch how the market reacts to the news. As traders it ain’t the news it’s the market’s reaction that we are interested in.

Furthermore whilst it’s important to educate yourself it’s more important to be focussing on the right things. Spending your day watching 24×7 news channels and scouring websites and bulletin boards is unlikely to truly help you. Spend some time either watching how the market reacts at certain levels, spending time in a trading simulator like Bullbearings or your broker’s (they have their uses and all fighter pilots spend a lot of time in their version, flight simulators) or spend your time debriefing your last trades and determining what learning points you can garner from the experience.

So take your time, slow down and take it easy. Trading should not be an edge-of-the-seat activity but a rather slow procession of consistent application of your tactics and solid risk management.

Finally for any other fans of the movie I’m going to go and watch the re-release in 3-D splendour at the Imax – but my advice is not to be there when I’m watching it as you’ll have to endure sitting through a constant head shaking, tut-tutting and critical commentary by myself. Hollywood made a great movie, but it leaves a lot to be desired in the eyes of a professional air defender!

Until next time, check six, and always remember there are no points for second place.