Winners and Losers
|August 6th, 2012, 07:45 PM||#1 (permalink)|
Futures Experience: Intermediate
Favorite Futures: stocks
Posts: 21 since Jul 2012
Thanks: 2 given, 19 received
Winners and Losers
90% of traders lose. Its a well known fact. This may alter slightly to 89% or 91% but over the very long term this statistic is very much cast in stone. So what is the reason for this huge imbalance of distribution in trading profits? Below is a list of factors which contribute to the imbalance.
If you feel uncomfortable when reading this, then you are likely seeing some examples here which might remind you of yourself.
You can draw comfort from the fact that this page will only be read by winners who might be requiring a little food for thought or having a bad spell, I hope that after reading this you will identify some of your negatives and find ways to turn them into positives. The losing traders will not be bothered even to cast even a glance at it.
Psychological approach to losses:
A paradox exists in winning and losing, and here it is. Losers do not lose enough. What does this mean? Well think on it for a moment before reading on...
Image a hapless man at a disco with his mates. He spots a cute girl he likes and makes a naive approach to ask for a dance or join him for a drink etc. She refuses and the hapless man typically becomes contrite and will not talk to any other girls through the rest of the evening. It is likely that he has had too much beer and has not made any effort to collate his history of success v failure with ladies so his approach may have been poor. Then instead imagine a more successful man, who approached the same girl, got rebuffed and then shrugged his shoulders and continued to approach more women until one responded to his charms. He remained calm and kept trying until he got what he wanted from the disco evening. This second man has the ability to see through disappointments due to his belief in himself and his knowledge of statistics. He knows that if he keeps trying sooner or later one cute lady will be certain to say yes to him. Comparing this scenario with trading seems illogical, but it is in fact very similar. The trader who loses and the Romeo who loses have this same connecting factor. They are not prepared to lose enough. A winning trader will take his losses because as a winning trader he knows that losing is a normal part of winning. A losing trader will not be so able to take his loss and will continue to keep a losing trade until it destroys both his confidence and his account balance. The losing trader wants to be a success, so he incorrectly believes that by making a small losing trade (and cutting a loss) that this renders him as a loser. Its a very common scenario, you can observe it every single day in every day life and in conversations with people. Keep your eyes and ears open and you will see what I mean.
Input of time spent on research:
A quality of losing traders is often lack of effort in the form of research and testing. They will typically read a few books and articles and then engage in day trading some highly popular busy market such as EUR/USD or the SP500 Emini futures. After losing most of their equity on their account they give up. A winning trader may repeat the same process but instead he - she will realise that something is wrong in their method or application of that method. They will pick themselves up from the floor and try something else ( taking on board the previous mistake as "part of their valuable education" ) The loser would cast blame on the market they traded and or the books they read or the system they purchased. This would give them a perfect opportunity to whinge and whine to their friends about what a rip off the book was or how crooked the market is. He will engage in his drama, and losers are generally full of dramas. They rarely see that their own personality is a reason for their constant flow of failures.
Attention to detail:
Finding edges is a vital part of trading. In this sense an edge is defined as a competitive advantage over others or some statistical scenario that leads to a greater probability of success. An attribute of a winning trader is that they will pay close attention to the little details as each one will likely improve his chances of overall long term winning.
Lets look at a little example:
Mr Loser and Mr Winner both correctly observe that Jubilee platinum has moved up a large percentage on a massive volume session of 19 million shares traded.
Both observe that this is a significant event and that this has changed the prior downtrend to a clear up trend.
Both observe that this is a failure to break the previous major low of 7p in March 2009.
Both observe that the general market trend is bullish at the same time.
Both have decided to buy Jubilee platinum today
So five details are seen by the winner and the loser, but that is typically the full extent of the losers analysis, and by comparison the winner will look deeper...
Mr Winner searches Google news to find out what is going on, he finds out that it was tipped over the weekend by a well respected newspaper tipster.
Mr Winner has experienced this kind of event before and has lost. So he knows to expect high volatility on the way up and uses a wider stop.
Mr Winner checks his account balance and computes his exposure and checks his risk per trade optimum percentage.
So just by using a little information to gain knowledge and find more edges, Mr Winner has created an advantage over Mr Loser. This raises his chances of making a winning trade. In the outcome of this example you can be sure Mr Loser has got excited and rushed in to buy this stock before Mr Winner has completed his analysis, he may have got a slightly better entry price than Mr Winner in the process, but he will have not given any consideration to his exit price stop or how much he will risk on this trade.
Mr Winner computes his stop needs to be 5.25 points in distance and therefore once dividing his risk per trade optimum by 5.25 he has a well researched exit level and deal size sorted out before he presses the button to make his purchase. Mr Loser had become over excited and acted on impulse after his first five observations were made and as a result he bought many more shares than his risk profile allowed, realising his error after he sees the price falling he computes that he will lose too much money if his stop loss gets hit, so he proceeds to make it tighter to reduce risk. This action will of course reduce his risk, but it will increase his chance of losing simply because his stop loss is now way too tight. Mr Loser is careless and is guilty of acting out the following well known proverb "Invest in haste, repent at leisure"
Mr Winner knows he has made his checks correctly and can focus on the correct process of looking for more trades to put on. Which leads us on to the next heading in a fluid way...
Look forward and not back:
Most of you will have heard this well known adage. Many opportunities are missed while we are thinking over our past mistakes. Our losing trader above will make a large loss on his rushed trade, and even if the winning trader loses on it also, he will lose only 1 or 2% of his capital which he is used to doing frequently as he understands it is part of the job. The losing trader will not find it so easy to deal with his loss as it is going to be bigger because he failed to think about the risks before he rushed into the trade.
The winner may also be upset by his losses, but instead of becoming self absorbed in them he becomes self aware and observes his own faults as he goes through his career. He learns to accept being upset as part of the game and will continue to trade even if he is having a large string of losses. He does this because he knows that his method produces an occasional string of losses and accepts it. He has taught himself to think backwards. This expression is contradicting the heading "look forward and not back" because it is referring to risk v reward situations. Read on...
This one is simple to explain. Instead of thinking how much you can make if you buy Jubilee Platinum today, it is much more practical to ask yourself how much you can lose if you buy it today. This was one of the main differences between the foolish loser rushing in without thinking about risk, compared to the calm approach of the winning trader who computed his stops and risks before trading.
Greed and stupidity:
It has long been an observation of mine that there is a high correlation between greed and stupidity. The people I have known in my life who end up being victims of scams were always those who were both greedy and stupid. The wiser people who look at all the sides of a scam and try to figure out how it worked and thus avoid falling for it. A non-winner would just say it was a scam without trying to figure it out.
Being greedy in itself is not a bad thing as the movie Wall street teaches us "Greed is good", but when it is connected to stupidity and carelessness the results can be catastrophic. Greed is best when it is tempered with a cautious attitude to think it through and figure it all out before doing something in life. If you have ever been approached by someone trying to scam you and you are of the wise type, you will frequently notice that the scammer is of very low intelligence.
Simply because he is stupid he assumes you will be too. Needless to say a winning trader is not going to have stupidity as his counter for greed, and this quality is often one of the facets of a losing trader, who falls for the bells and buttons and shiny flashy screens presented by some worthless day trading system advertised online.
He will do some rushed and poor research and then rush out to buy the latest Hilbert transform system or a Fisher transform day trading model guaranteed to make millions in minutes.
Obsession and fascination v casual interest:
Being obsessed and or fascinated with trading methods and systems is usually an attribute of winners. I have observed this phenomenon many times in correspondence with both types of traders and on the other side of the curve is the casual loser who begins trading just for a hope of making money. He does not take such a keen interest in the processes that go on all around the methods and psychologies involved in it. The winning trader will typically develop a winning method in a year or so, and spend a lot of his "spare time" in trying to improve his methods.
He will see himself as a fatal limitation or barrier to making more profits and will work relentlessly on himself and his emotional responses to improve himself. This section is best ended with a wise quote from Ed Seykota.
In a conversation with another winning trader, Ed was told of an intention to help the losing trader become a winning trader by teaching him some important aspects he was missing. Ed Seykota's response was rather shocking, but after some thought is astoundingly accurate and correct.
A losing trader is not going to wish to transform himself, that is the sort of thing that only winning traders do.
Ponder this statement for a moment and you will see it is very true.
The arrogant man v the modest man:
In my correspondence with many traders from all over the world, I have observed that losing traders all seem to want something for nothing. They ask for free trial versions of my products, request huge unrealistic discounts and or try to fool me that they ordered something a long time ago and want the latest version or a prior version that they had never even ordered in the first place. They will ask for the best settings for trading their favourite market and want the whole lot dumped on their lap on a silver platter. Typically they will only trade one market and in comparison a winning trader will study hundreds or thousands of markets before choosing which of those to trade.
How do I know they are losers? Simply by observing their performances in my Trading IQ game combined with requests for my free products without earning them by scoring the required score in the game. On the other hand a winning trader will read the rules and then try to win his free indicator by getting the required score. The next point is very valid. The winner may not score high enough to win a prize, but the winner will return every week until he learns how to win enough points to get his prize. Conversely the hapless arrogant losing trader tries once only, fails and then never returns to try again.
The man who rushes v the man who takes his time:
Have you ever noticed some people are always in a rush? Even in a phone conversation they are in a hurry to spit out so many words without being sure that the listener is understanding their point. Losers are always in a rush to lose. The winner on the other hand will be taking his time, doing his research speaking slowly and clearly. When he trades he will apply all his checks before putting his trades on, or will have made certain his checks are factored into his automated systems before letting them rip on the markets. If you have ever watched Theo Pathitis on Dragons den, who is clearly an exceptional winning human being. You will notice how much time he seems to take when making his questions and statements. He is so far removed from carelessness that the whole world seems to stop when he speaks. He provides a good example of a winner who thinks before he acts. Winners never rush to lose.
The average man v The hard working man:
The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. He cant even be bothered to pick up the money he finds laying on the ground.