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Why most traders fail, in 1 minute of an interview
The question is not whether a person can outperform a strategy (of course they can), the question is whether fear-induced actions, which are defined as errors, benefit one's long term equity curve. And the answer is categorically no.
tos won't let me use something I need in my code...
I didn't think whether fear-induced actions/errors benefiting one's equity curve was even in question lol
Of course that will have a negative impact, however one has to have an edge in the first place. I doubt most traders are trading with one and if they are then we can talk about execution/fear induced errors however the foundation and where all of this starts is the edge itself. I've found that when you have a statistically backed edge it's pretty easy to follow. When you're not really sure you're probably going to f it up.
Maybe it's a what comes first the chicken or the egg sort of deal? I don't know. I understand your point.
Firstly, I would be interested in further understanding what you mean by the above statement.
Secondly, at some point, most traders will realize that they wont be "right" on every trade, and that trading is a game of probabilities.
My point is that even when the trader has gotten their mind right about trading probabilities, they still struggle to come up with a plan that actually produces positive results over a series. So from my point of view this is the main reason traders fail, a point you quite fairly disagree with.
At best they manage to just break even and decide the juice isn't worth the squeeze. At worst, their edge has negative expectancy and they would be better off flipping a coin. In this case, hesitation and fear actually saves the trader from further damage. Raise your hand if you ever decided, "today I am going to execute my plan to the letter", only to end the day with huge losses.
To my point, most traders never get the opportunity to experience trading a good plan poorly!
And no, I don't believe that a robust, tradable edge is that easy to come by. If it is, the jokes on me. Contrary to popular opinion, I believe most well adjusted traders are quite capable of executing a plan they really BELIEVE, and does produce consistent results, and if the consistent results are indeed produced, there is no reason they wouldn't continue.
I any case, I enjoy these types of discussions because it makes me think more deeply about what I am trying to do.
Without interrupting the good discussion, I needed to add couple of little things since I was reading one interesting book just now and it was talking about this as well.
Personally speaking everyone should read it, but I leave that to you.
Its called "Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street"
Its not that high fantoosh but good to read.
PS: I'm not author, my horrible English should make that evident.
Okay, now on personal front.
"Edge" is basically knowing/having something that is not there with the crowd, it can be anything, in most common form it is whats dominant (Almost too much) in market and called "information". Now there are bunch of illegal and legal ways to that but without getting into it, as a retailer I swear I've tried lot of things and the only reasonable "Edge" I could imagine there that could be "accessible to me" is "stacking probability" in my favor.
I can't really control the market, I'm a mere blip on markets radar, I can only hope that I'm blipping in right side.
Stacking probability is again combination of developing working system that "you have back-tested" and accommodates for "your psychology", I've had great system failing on me because I was not able to manage it with my psychological buildup and I've had average system working pretty good for me because I had the suitable psychological build for that. The reason "you" word is important there because only you can discover yourself.
Its a very complicated subject and I'm sure some people can do phd in it, but in simpler mortal terms I can go out on limb and say it is "you" that decides if the system really has edge or not. Both statistically and psychologically.
Now, one can always gain experience and condition themselves, but it takes time, most retailers give up before that and don't have resources to keep grinding till that knife has edge sharp enough to do the job.
Sorry if I did not phrase this well. I meant that in life, there's a pretty strong correlation between doing things well/correctly, and a favorable outcome. Proper execution of an edge can produce several losers in a row, with a temporary disconnect between good execution and results.
I think you give folks too much credit in what they eventually realize. Yes, they know every trade won't be right. But when it's not, that doesn't stop them from self-destructive behavior, attributing the loss to everything external to them, and the like. I'm not sure how you can even get your mind right about probabilities, if you haven't demonstrated to yourself through some level of success, that it "works." "Getting your mind right" is not the issue. It's internalizing that at your very core, and executing in such a way that demonstrates that it has become part of your DNA.
Hand raised -- but I think any plan which allows huge losses in a day was not particularly good from a risk perspective. A day's, week's, or even month's, worth of trades going wrong does not invalidate an edge.
For discretionary trading, I think you've hit the nail on the head IMO.
My edges are:
* reading shifts in order flow
* understanding day structure and value, and lower risk entries that arise from that
* understanding positioning, pain points, and liquidity
* thinking like the winners in the market, that is, the algos
* my experience, and with it patterns that are common (not really just price patterns, but behavioral patterns)
That's really it. I'm not always aligned, and I lose when I'm not. When I'm aligned, the results are usually good. Despite often being in tune with the market, if I am unable to execute due to fear of losing, for example, then none of the above matters.
Excellent point about having an average system that works well because of it meshing well with your own psychology. I feel like after several years of struggle, this is where I’ve landed. As an early discretionary retail trader I always tried to hit home runs or optimize a grand plan but I didn’t have the makeup/experience/wisdom to cut losers appropriately, or hold winners to my target when they were working. Then pepper in the occasional revenge trade and I had about the results you would expect.
Then I had a moment of clarity and started fine tuning a very basic boring order flow/price action pattern with a small edge and it has made all the difference. The way I trade now is unexciting, boring, and makes very little use of all of my monitors. But it works for me because I don’t have to fight against myself anymore. Are there better systems out there with better returns? I guarantee it. But I don’t trust myself to trade them profitably. I’m comfortable with what I do now because it has clearly defined risk and reward in my mind, not just on my platform. And if my stop is hit, I know I am not in tune, and need to step back and reassess. All that being said, many years of studying and struggle we’re absolutely necessary to frame what I do now in the context of the market. For every trade opportunity I see there are probably 10 decisions about it that are made on an “unconscious competence level” before taking it.
At the end of the day - to make it in this business, you have to become a professional at losing. Everyone comes into the game focused on winning, which is the absolute opposite of what they should be focused on. Winning is easy - managing your risk whether that be done by mediating/practicing mindfulness, having a defined “stop trading for the day” criteria, or a mechanical & systematic trading plan: it is completely against human nature to do what needs to be done to pull money out of the markets month in, month out. The Golden State Warriors did not win 3 championships in the last decade purely because of Steph Curry’s jumpshot, they needed Draymond Green who is the best defender in the NBA. Sure, not as flashy and more hated than Steph Curry but arguably just as, if not MORE important to their success was the ability to play DEFENSE just as good as they can score - The market will take back a lot of what you’ve made, and I can’t stress how underrated the topic of playing defense actually is in the financial markets. Your job as a trader is to manage risk - that is it. Profitable trades will come by default - they do not mean anything...
A small losing trade is much more impressive to me these days than someone predicting the market correctly & placing so much emphasis on doing so
Great point. Learning to take a small loss, or series of small losses, stay composed, and keep trading my plan was one of the hardest things I ever achieved in trading. If you can’t do that, nothing else matters.
