Estimates are that 75-95% of all traders lose all their trading capital in the first year, and only about 5-10% of those that get into trading are able to stay profitable on a consistent basis after 5 years. This is not encouraging. However, since the majority of people tend to be overconfident, most believe that they are not going to be among the casualties.
What is behind this overconfidence?
Some of the most highly educated professionals such as doctors, lawyers and engineers who are used to being first in their class–the best of breed in whatever they do– fail miserably as traders and investors. The reason is that the process of trading and investing is completely different from activities and ways of thinking that bring success outside of the markets. Trading is a counterintuitive to what we are taught growing up. As we grow and develop, we acquire levels of control. We learn to control our bodies, movements, environments, who we chose as friends, lovers and mates, our educational goals, where and how we live. We get cozy and comfortable in our little worlds where we make the rules, and live out our lives in accord with them. Yes, there is a lot going on in the world, but it really doesn’t mean all that much unless it affects us directly. When external challenges face us in our personal lives, we take control, problem solve, and get done what needs to be done.
In the markets things are quite different. There is no way to control the market forces. Markets are larger than life, yet they are life. Millions of people from every part of the world are there making decisions that affect you in either a positive or a negative fashion. Millions of nameless and faceless people are trying to take your money before you take theirs. There is no situation in the life of most people that compares with this. That is why successful trading and investing requires one to adopt an entirely new brain-set.
The majority of people are simply not neurologically flexible enough adapt to this new environment. They insist on adapting the markets to their own worldview, and they fail—sometimes miserably so.
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Small losses almost always become larger and larger losses, leading to every manner of emotional distress as you are holding and hoping, or in complete denial that the position could possibly turn against you. Holding and hoping leads to larger losses and more emotional carnage until you are a financial and neuropsychiatric basket case and you just want out at any cost. Desperation, anxiety or depression set in and remind you of every time in your life you were told that you were not good enough, that you would never amount to anything or that you didn’t deserve to win or be successful. You are now in a state where both financial and psychological capital are depleted–all because you didn’t take a small loss.
How do you preserve your financial and psychological capital? You learn to embrace risk by using rigorous risk management techniques. The most important of these are position sizing, stops and money management. You take small losses. You take small losses! You let winning positions run and take profits and trail stops as they are running. Please memorize this until it is burned into the connections in your brain: The single biggest reason for failure as a trader or investor is the inability to take small losses and letting them grow into larger losses.
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Estimates are that 75-95% of all traders lose all their trading capital in the first year, and only about 5-10% of those that get into trading are able to stay profitable on a consistent basis after 5 years. This is not encouraging. However, since the majority of people tend to be overconfident, most believe that they are not going to be among the casualties.Which type of trader?
Which type of trader?
Please which one of the following belong to you?
there are many type of traders, an awareness of the varieties allows you to avoid the pitfalls.
THE DISCIPLINED TRADER.
This is the ideal type of trader, you take your profits and loses with ease, you focus on your system and follow it with discipline.Trading is usually a relax activity,you appreciate that a loss does not make you a looser.
THE DOUBTER.
you find it difficult to execute at signals, you doubt your won abilities.You need to develop confidence.Perhaps you should paper trade.
BLAMER
All losses are someones else ‘s fault, you blame bad fills, your broker for picking the phone up to slowly , our system for not being perfect, you need to regain your objectivity and self-responsibility.
VICTIM
You blame yourself, you feel the market is out to get you, you start becoming superstitious in your trading.
OPTIMIST.
You start thinking it’s only money , ill make it back later. you think all losses will bounce back to profits, or that you will start trading properly tomorrow.
GAMBLER.
You are in for the trill, Money is a side issue. Risk and reward analysis hardly figure in your trade, You want to be a player, want the buzz and excitement.
TIMID.
You enter a trade, but panic at the sight of a profit and take it far to soon, Fear rules your trading.
Fear & Greed
Most of us make the same mistake with our money over and over again: We buy high out of greed and sell low out of fear, despite knowing on an intellectual level that it is a very bad idea.
Think about this pattern for a minute. At the top of the market we can’t buy fast enough. About three years later at the bottom, we can’t sell fast enough. And we repeat that over and over until we’re broke. No wonder most people are unsatisfied with their investing experience.
No one is sure how this will turn out. But with interest rates again near record lows (meaning bond prices are near record highs), you could end up losing money in that bond fund you bought for the purpose of making sure you don’t lose money.
It makes far more sense to ignore what the crowd is doing and base your investment decisions on what you need to reach your goals, then stick with the plan despite the fear or greed you may feel. To do otherwise would be following a pattern that has proven to be extraordinarily painful.
Trading Vs. Professional Gambling
Marcel Link in his excellent High Probability Trading is not the first to equate the skills of the professional gambler with the skills needed to succeed as a trader but he does it very convincingly:
[The professional gamblers] don’t take unnecessary risks or gambles. They know when the odds are in their favor and will bet more when the odds get better. If the odds aren’t there, they won’t risk nearly as much, if anything. They know how to protect their winnings, and they know how to call it a day when Lady Luck is blowing on some other guy’s dice. Having this discipline lets them come back to the table the next day. […] (more…)
The Anatomy of a Trend: 10 Guidelines
- A trend begins with capital flowing into an asset based on a perceived increase in the future value of the asset.
- Trends are identified by higher highs and higher lows for several days in a row or the reverse lower highs and lower lows.
- Moving averages can also identify trends based on a moving average sloping up or sloping down visibly.
- A moving average can also act as support or resistance for a stock as it trends in one direction and bounces off a key moving average.
- Trends tend to persist because the owners of the asset have no reason to sell and tend to just let their position ride causing the trend to continue.
- Supply and demand causes trends when you have a lot of dollars chasing a limited asset.
- In stocks, up trends are caused by mutual fund managers building large positions in their favorite stocks.
- Down trends in stocks are caused when institutions start to unload a stock or investors cash in their mutual fund shares during bear markets and managers have to raise cash by selling their holdings.
- Capital is always looking for great returns so they chase stocks with the biggest earnings expectations planning on the stock price following.
- Trends tend to persist until acted on by an opposing force. Sometimes this is as simple as running out of buyers or sellers of the asset.
The money is in the big trends, look for them, find them, and ride them until they end.
“The trend is your friend until the end when it bends” -Ed Seykota
What enables a trader to exit every trade the same way, with confidence?
- Preparation: If you put yourself in the best possible position and you lose money at least you spent that money wisely. Good things happen to those that are prepared because 90% of people do not know how to do it or are unwilling.
- Purpose: Acting with purpose. You prepared, you knew the risks, you executed the way you wanted to execute. In cold blooded evaluation you would do it the same with the information you had at the time.
- Protection: Losing the invisible money is how I have seen many people blow up. Invisible money is not locking in profits or losing more than your plan allowed. If you lose what you intended to risk you own the trade, if you lose more the trade owns you.
Your goal as a trader is to always reduce the time it takes to analyze, react, and recover. The best traders do this effortlessly after much thought, experiment, and practice. I lacked confidence because I thought about the wrong things or not at all and I was doing random things all of which made it too costly, emotionally and financially, to practice.
Don't focus on the money
By focusing on the money, you get hooked on the trade that you have placed in. Therefore, you are less likely to be in the zone and really noticing what is happening in the market.
You need to detach yourself from the result of your trade. This does not mean that you don’t care. Of course you do, and that is why you have placed your trade. It means that you are not married to your position. You are free to be in the zone and really notice what is happening versus what you hope and wish to happen.
Why do you think most traders fail?
- Poor selection criteria; usually based on personal opinion, theory or tips and bad advice
They don’t stick to and commit to an approach; style drift
Don’t cut losses (#1 mistake made by virtually all investors)
Don’t know the truth about their trading – they fail to conduct in-depth post analysis
Treat trading as a hobby and not a business
- Want too much too fast; learning a skill takes time
There’s a lot of important meat in those few lines of text. We all recognize that it’s not easy to cut losses, but I firmly believe that this results in more grief for traders than anything else. What causes a trader to suffer a big hit? I believe that it’s the unwilligness to accept that a trade is not working, and that it’s not likely to get any better if held longer. Under those conditions, losses mount. The only way to prevent that big loss is to cut it off at its knees – and the time to do that occurs when it’s a much smaller loss.The difficulty with that is sacrificing the possibility that the trade would turn profitable. My advice: Get over it. Many trades will be unprofitable. That’s a fact of life for a trader.
I understand that on a rare occasion a gap opening may do irreparable damage, and not provide an opportunity to take the small loss. However, that’s also a preventable occurrence. If the damage is too great, then the position was too large. It really is as simple as that.
How many of us look at trades after the position is closed? How many dissect the entire trade in an attempt to find out what was done correctly and what mistakes were made? Very few.
A mistake is not a trade that loses money. A mistake is making a decision that was clearly incorrect at the time, but the trader was unable to see that. Another mistake is avoiding a trading plan and not doing postmortems on your trades. It all takes so much time. However, if you take trading seriously, and do not consider it to be a hobby, there’s work to be done.
Mistakes are part of the game. Making the same mistake repeatedly is not. At least it’s not part of any successful trader’s game.
Three Tips to Better Handle Losses
It is very unlikely that a medication is going to help you feel better about a trading loss. There is no simple fix to the emotional problem of losses. No one likes to lose money, and a loss can be very painful. But, being able to take losses is also a part of the trader’s job description. One of our tasks as traders is to take losses as a routine function of the trading role.
To help make losses more of a routine event rather than an event that throws us into emotional turmoil, here are three key tips to help you better handle losses:
1. Have a trading edge. Define your setups well and be sure they have an edge. By an edge I mean that these setups have a certain probability of winning over a large number of trades. In other words, based on your experience or historical testing, your trade setup should possess a positive expectancy that over, say, 100 trades some percentage (e.g., 67%) will be winners and produce a sufficient profit over loss to make the trade worthwhile. If you don’t have a trading edge, you are likely trading random patterns and you are likely to have many, many losses. (more…)
Trading Rules :
- We accumulate trading information – buying books, going to seminars and researching.
- We begin to trade with our ‘new’ knowledge.
- We consistently ‘donate’ and then realize we may need more knowledge or information.
- We accumulate more information.
- We switch the commodities we are currently following.
[private] (more…)