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To be a successful trader, you must be willing to do what others won't ...
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To be a successful trader, you must be willing to do what others won't ...

  #1 (permalink)
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To be a successful trader, you must be willing to do what others won't ...

The more I trade, the more I appreciate that to be a successful trader, you must be willing to do those things that most people aren't willing to do. In the futures industry, there is a statistic that says that 90% of futures traders don't make money. It stands to reason, then, that the 10% of futures traders who do make money are doing something the other 90% aren't doing. But what is that?

While the trading promoters and system gurus want you to think that this "elite 10%" possess some kind of arcane knowledge about the markets, I don't think that's the case. Instead, I believe a big part of trading success comes from having the emotional strength and courage to do those things that most people won't do.

Let me give you a few anecdotes about what I mean. The first comes my own experience, the second comes from my observations of a very successful futures trader and the third comes from the TV game show “Jeopardy!” (yes, this last one involves a trader as well).

* * *

I trade mechanically; that is, I use a specific set of rules that tell me when to enter and exit the markets. You would think that trading mechanically would mean that I would not be affected by having to make discretionary decisions that relate to trading, right?

Well, yes, for the most part, but there are insidious ways in which I let discretion back into my trading (at least for a little while, until I corrected things).

Here are a couple of examples.

1) In the spring of 2014, I was working a breakout buy stop in the Japanese Yen futures, right before a big economic number came out in the USA. In the 30 seconds or so before the number came out, the Japanese Yen futures mysteriously rallied something like 70-80 ticks, getting me stopped in. As soon as the number came out, the market reversed course, and I experienced a quick and significant loss. The pain of this loss was especially acute, because it happened so quickly and for so seemingly an inconsequential reason. When this happened, I was livid.

So what did I do in response? I decided to reduce my trading size before big numbers but widen my stop. Good idea, right? I would be protecting myself from the pain of having that kind of "fake out" trade happening again.

Which I did ... but I ended up leaving a lot of money on the table, because although I did avoid the emotional pain of getting stopped out, I also had small size on when big moves happened in the currency markets. In essence, I "paid" for my emotional comfort with thousands of dollars of foregone profits.

2) Similarly, one day last year, I had a portfolio of trades on that were moving well in my favor only to see the major markets reverse course and put me flat (or a little down) by the end of the day. Again, this is one of the most painful things for a trader to see - a nice fat profit evaporate right before your eyes.

So what did I do in response? I instituted a new rule that said that if I had $X dollars in open profit, I would take half of my winnings off the table. This happened with surprising frequency, and while it felt good to take profits off the table (and avoid seeing them disappear should the market reverse), in retrospect, I ended up leaving thousands of dollars on the table in most instances, because the markets didn't care how much money I had made ... and kept moving in my favor, even though I had exited.

Again, I had "paid" for my emotional comfort with my missed profits.

These are but two examples, but I could share other instances when I made decisions with an eye of maintaining my “comfort” in trading which ended up costing me money. Had I been more disciplined and courageous, I would have nicer results to show for it.

* * *

Before becoming an independent trader, I worked for a bona-fide “Hedge Fund Market Wizard” who actively trades in the fixed income futures and foreign exchange markets. I had the opportunity to watch his trading closely for several years, and although his style of trading (technical + fundamental discretionary) doesn’t suit my temperament, I learned a lot of important lessons.

I realized that one of the key things that made him so successful is that when he gets a trade that’s working for him, he adds to his position. In fact, if he has a high conviction on the trade idea, and the market is confirming his view, he may quickly double or triple his size to catch the move. In essence, he is aggressively adding to winning trades when everything lines up for him.

Now, as behavioral economists have shown, most people don’t act this way. When they get a profit, most people are quick to take it off while they let losses run.

My old boss was the exact opposite: not only did he let profits run, he took more risk when the market was confirming his view. And when he wasn’t getting any positive feedback from the market, he would get out quickly.

For him, a key part of his success was his willingness to do what most other people won’t do – add to what’s winning and quickly cutting back what’s losing.

* * *

A third example, from the American TV game show “Jeopardy!”:

Recently, the currency trader (and former professional poker player) Alex Jacob had a six-day run on Jeopardy! where he demonstrated his strong mastery of trivia. I am very good at playing Jeopardy! (at home) but he smoked me. I would say that Alex Jacob is probably one of the top 5 players in the last 10 years.

However, besides his strong mastery of trivia, one thing that distinguished Alex was his aggressive style of play. Unlike most Jeopardy! players, who start answering questions from the beginning of each category, Alex would start towards the bottom, harder questions, searching for lucrative “Daily Double” questions, which allow you to bet any amount (up to double) your money. In this way, Alex Jacob eschewed the tendency for most players to work their way down, getting a feel for the question category, before trying the more difficult lower questions. To gain an edge, Alex would do what most other players wouldn’t do (and, in fact, ending up losing to someone who mimicked his style).

When Alex found the Daily Doubles, most of the time he would bet everything … even when he had a lot of profits already won. This is something rarely done in Jeopardy!, because most players are afraid of losing what they’ve already accumulated. However, because of his confidence in his skills, Alex often would win the Daily Doubles, widening his lead against other players. For several days, he couldn’t be beat by the time the game advanced to Final Jeopardy.

Although his command of trivia played a central role in his success, Alex Jacob won approximately $150,000 on Jeopardy! in six days because he had the courage and strength to do what other players wouldn’t do.

* * *

In my own trading, I know that I must have the courage to follow my system, no matter what happens, no matter what the markets do … even if the markets drag me through the mud, and I have a string of losing trades. I am confident that my system will make money in the long term, but for it to do so, I must be willing to accept the roller-coaster ride that is trading, and to stick to my guns, even when it’s painful to hold onto a trade or to put a new trade in. Most people can’t do that, and I still have some limited difficulty with it.

However, the more I trade, and the more I reflect on this idea, the more I realize that to be a successful trader is, by definition, to be different.

Last edited by furytrader; April 23rd, 2015 at 12:54 PM.
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  #3 (permalink)
Trading Apprentice
western NY
Trading Experience: Intermediate
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I agree with most of that for sure.

There is certainly an El Farol Bar problem with trading.
El Farol Bar problem - Wikipedia, the free encyclopedia

Practically the worst strategy for the El Farol Bar problem is to buy a book that everyone else buys that tells you when to go to the bar.

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