Nick McDonald: Two Traders and a Fisherman

As it happens Miley Cyrus is not the only one who enjoys a day on the water with Savoy Charters. Less than one hour after she left the boat, Z minus-lister Nick McDonald boarded for quite a different experience via 24 hours of chasing big, hungry snapper.

What happens when two traders who LOVE to fish spend 24 hours in close quarters with a skipper whose life is dedicated to fishing? We obviously talk a lot of fishing, throw in some inevitable trading conversation and we end up with a surprising number of trading and fishing analogies.

I love analogies as a means of teaching people to trade so here are just a few of my favourites between trading and fishing. Thanks to Kyle (skipper and fisherman) and Scott (owner, trader and fisherman) for inviting me for a fish and providing the inspiration for today’s column.

The tide does just three things – incoming, outgoing or slack

Just like the markets only do three things – uptrend, downtrend or no trend.

The similarities are striking. Many fishermen prefer to trade just one of these three tides and they swear by it. Others, can quite comfortably fish all three tides. Many have different strategies, including different locations, gear and bait, depending on the type of tide they are fishing.

When trading, we get to choose whether we trade the uptrend, the downtrend or non-trending markets. No one forces a trader who likes uptrends to trade a downtrend, just like no one forces a fisherman who prefers to fish the incoming tide, to trade the outgoing. We get to choose, and the best fisherman and traders both do this very well, choosing their specialty carefully and making sure the timing is right to perform at their best.

I asked Kyle for his preference of tide: “it does not matter to me,” he said. He catches fish on all three and it is not one of his key ingredients. For me in trading, I too trade all three however I do have a preference for a trend – up or down trend, it does not matter.

Risk management – deciding when to fish

Another element of choosing when to fish, comes down to conditions and ultimately risk. While on the water on Friday, the morning started with a lot of boats chasing the same workups as we were fishing. Later that afternoon, I commented to the skipper that we had the workups to ourselves. He pointed out to me that conditions had worsened, the wind had picked up and for this reason most small boats had gone home. We were on a bigger boat and the risk factor had never risen to the point that we had to consider returning to shore.

A good skipper watches weather carefully since the safety of the passengers and themselves lies in their experienced hands. Amateur boaties can often get themselves into trouble when they underestimate the conditions. In trading, since the risk is just losing money, as compared to losing life, new traders do not pay market conditions as much attention as they should. The best traders pick their conditions carefully … just because a trader likes to trade a certain trend, does not mean they will not be checking news releases, spreads, margins, gap history and volatility factors among other things when assessing the risk of a certain trade.

We do not have to fish every incoming tide, nor do we have to trade every uptrend… we can wait until the conditions align and always put safety first, be it our money or our life that is on the line.

Waiting for the conditions to align

Thursday night we put some bait out on the water for a night fish. Before doing this however, our skipper Kyle told us there was not much chance of catching anything. The conditions were “just not right” for a night fish. Full of enthusiasm I put a bait out anyway and fished a few hours, yet true enough, we caught nothing.

Next morning we set about chasing workups and that starts with one of a few vital ingredients – dolphins and gannets. We found the dolphins first, hundreds of them… but they all seemed to be playing and not feeding. We followed the dolphins around and soon after we found the gannets, yet still not feeding. The skip told us it was still a bit early, not all the ingredients were quite ready but it would “kick off soon”. Soon after a bonus ingredient came along, a large whale that seemed to be about most of the day thereafter. These ingredients – dolphins, whales and gannets – are all fantastic ingredients for the style of fishing ‘workups’ that we were doing. There were more ingredients too, Kyle told us even before we found the birds and dolphins that today was going to be “a great day fishing” – he could estimate this, just like he could estimate the night before was not good.

Around 10am I heard Kyle muttering to himself “come on sun” and I asked him what he meant. He explained that all the “ingredients” were there, we just needed the sun to break through the cloud cover so the gannets could see the bait fish and start working. True enough, about 11am the sun peeked through the clouds and for the next few hours the fishing went berserk.

Now if I went fishing myself with no experienced skipper, I could easily say “I fish workups” just like a trader can say “I trade breakouts”. However, just because we plan to execute that concept, does not mean we have a complete strategy. A strategy is multiple ingredients, not just one factor or one concept. In trading, I prefer to trade a trend, however that is just one ingredient and I have many more. I teach trading in this exact way with eight to 25 different ingredients which must be present for each and every trade I consider. One ingredient or one concept is not called trading, it is called gambling.

“Fishing the incoming” or “chasing workups” alone is not a fishing strategy, it is a concept… there are multiple other ingredients required to get it right more often than not.

True to form, I have run out of room and still have more analogies to share so sometime in the future, watch out for Two Traders and a Fisherman part 2!