Todd,
Here is an article that has been posted on SI before. I would suggest that you develop and hone a trading system and keep refining it over the years. Carefully examine every loss and try to determine if that loss was avoidable or a natural consequence of your trading approach. Either is OK as long as you understand what is happening and you know the aggregate effect of all of your trades will be positive. Try to learn from every trade and hone your skill. Your own personal trading system is a part of your makeup and you need to strive to continually get better and better. Losses are not shameful, merely a part of the learning process.
Successful traders will hit for singles and doubles to run up the score (thier net worth). Spectacular wins will be followed by spectacular losses. A great trader:
Member 657121
posted that his last huge win was in 1979; yet he consistently makes money on balance. So here is the article.
Aiming for the Right Target in Trading
By
Walter T. Downs
When trading goes right, it can be a great feeling. When
trading goes
wrong it can be a nightmare. Fortunes are made in a matter of
weeks and lost in a matter of minutes. This pattern repeats
itself as each new
generation of traders hit the market. They hurl themselves out
of the
night like insane insects against some sort of karmic bug-light;
all
thought and all existence extinguished in one final cosmic
"zzzzzzt".
Obviously, for a trader to be successful he must acknowledge
this
pattern and then break it. This can be accomplished by asking
the right questions and finding the correct answers by rational
observation and logical conclusion.
This article will attempt to address one question:
"What is the difference between a winning trader and a losing
trader?"
What follows are eleven observations and conclusions that I
use in my own trading to help keep me on the right track. You
can put these ideas into table form, and use them as a template
to determine the probability of a trader being successfull.
OBSERVATION # 1
The greatest number of losing traders is found in the
short-term and
intraday ranks. This has less to do with the time frame and
more to do with the fact that many of these traders lack proper
preparation and a well thought-out game plan. By trading in
the time frame most unforgiving of even minute error and most
vulnerable to floor manipulation and general costs of trading,
losses due to lack of knowledge and lack of preparedness are
exponential. These traders are often undercapitalized as well.
Winning traders often trade in mid-term to long-term time
frames. Often they carry greater initial levels of equity as well.
CONCLUSION:
Trading in mid-term and long-term time frames offers greater
probability
of success from a statistical point of view. The same can be said
for
level of capitalization. The greater the initial equity, the
greater the
probability of survival.
OBSERVATION # 2
Losing traders often use complex systems or methodologies or
rely
entirely on outside recommendations from gurus or black
boxes. Winning traders often use very simple techniques.
Invariably they use either a highly modified version of an
existing technique or else they have invented their own.
CONCLUSION:
This seems to fit in with the mistaken belief that "complex" is
synonymous with "better". Such is not necessarily the case.
Logically
one could argue that simplistic market approaches tend to be
more
practical and less prone to false interpretation. In truth, even
the
terms "simple" or "complex" have no relevance. All that really
matters
is what makes money and what doesn't. From the observations,
we might
also conclude that maintaining a major stake in the trading
process via our own thoughts and analyses is important to
being successful as a trader. This may also explain why a
trader who possesses no other
qualities than patience and persistence often outperforms those
with
advanced education, superior intellect or even true genius.
OBSERVATION # 3
Losing traders often rely heavily on computer-generated
systems and
indicators. They do not take the time to study the
mathematical
construction of such tools nor do they consider variable usage
other
than the most popular interpretation. Winning traders often
take
advantage of the use of computers because of their speed in
analyzing
large amounts of data and many markets. However, they also
tend to be
accomplished chartists who are quite happy to sit down with a
paper
chart, a pencil, protractor and calculator. Very often you will
find
that they have taken the time to learn the actual
mathematical
construction of averages and oscillators and can construct them
manually if need be. They have taken the time to understand
the mechanics of market machinery right down to the last nut
and bolt.
CONCLUSION:
If you want to be successful at anything, you need to have a
strong
understanding of the tools involved. Using a hammer to drive a
nut in to a threaded hole might work, but it isn't pretty or
practical.
OBSERVATION # 4
Losing traders spend a great deal of time forecasting where the
market will be tomorrow. Winning traders spend most of their
time thinking about how traders will react to what the market
is doing now, and they plan their strategy accordingly.
CONCLUSION:
Success of a trade is much more likely to occur if a trader can
predict
what type of crowd reaction a particular market event will
incur. Being
able to respond to irrational buying or selling with a rational
and well
thought out plan of attack will always increase your
probability of
success. It can also be concluded that being a successful trader
is
easier than being a successful analyst since analysts must in
effect
forecast ultimate outcome and project ultimate profit. If one
were to
ask a successful trader where he thought a particular market
was going to be tomorrow, the most likely response would be a
shrug of the shoulders and a simple comment that he would
follow the market wherever it wanted to go. By the time we
have reached the end of our observations and conclusions, what
may have seemed like a rather inane response may be
reconsidered as a very prescient view of the market.
OBSERVATION # 5
Losing traders focus on winning trades and high percentages of
winners.
Winning traders focus on losing trades, solid returns and good
risk to
reward ratios.
CONCLUSION:
The observation implies that it is much more important to
focus on
overall risk versus overall profit, rather than "wins" or "losses".
The
successful trader focuses on possible money gained versus
possible money lost, and cares little about the mental highs
and lows associated with being "right" or "wrong".
OBSERVATION # 6
Losing traders often fail to acknowledge and control their
emotive
processes during a trade. Winning traders acknowledge their
emotions and then examine the market. If the state of the
market has not changed, the emotion is ignored. If the state of
the market has changed, the emotion has relevance and the
trade is exited.
CONCLUSION:
If a trader enters or exits a trade based purely on emotion then
his
market approach is neither practical nor rational. Strangely,
much
damage can also be done if the trader ignores his emotions. In
extreme
cases this can cause physical illness due to psychological stress.
In
addition, valuable subconscious trading skills that the trader
possesses
but has no conscious awareness of may be lost. It is best to
acknowledge
each emotion as it is experienced and to view the market at
these points
to see if the original reasons we took the trade are still present.
Further proof that this conclusion may have validity can be
seen in even
highly systematic traders exiting a trade for no apparent
reason, and
pegging a profitable move almost to the tick. Commonly, this is
referred
to as being "lucky" or being "in the zone".
OBSERVATION # 7
Losing traders care a great deal about being right. They love
the
adrenaline and endorphin rushes that trading can produce.
They must be
in touch with the markets almost twenty-four hours a day. A
friend of
mine once joked that a new trader won't enter a room unless
there is a
quote machine in it. Winning traders recognize the emotions
but do not
let it become a governing factor in the trading process. They
may go
days without looking at a quote screen. To them, trading is a
business.
They don't care about being right. They focus on what makes
money and
what doesn't. They enjoy the intellectual challenge of finding
the best
odds in the game. If those odds aren't present they don't play.
CONLUSION:
It is important to stay in synch with the markets, but it is also
important to have a life outside of trading. It is a rare
individual who
can do anything to excess without suffering some form of
psychological
or physical degradation. Successful traders keep active enough
to stay
sharp but also realize that it is a business not an addiction.
OBSERVATION # 8
When a losing trader has a bad trade he goes out and buys a
new book or
system, and then he starts over again from scratch. When
winning traders
have a bad trade they spend time figuring out what happened
and then
they adjust their current methodology to account for this
possibility
next time. They do not switch to new systems or methodologies
lightly,
and only do so when the market has made it very clear that the
old
approach is no longer valid. In fact, the best traders often use
methodologies that are endemic to basic market structure and
will
therefore always be a part of the markets they trade. Thus the
possibility of the market changing form to the extent that the
approach
becomes useless, is very small.
CONCLUSION:
The most successful traders have a methodology or system that
they use
in a very consistent manner. Often, this revolves around one or
two
techniques and market approaches that have proven profitable
for them in
the past. Even a bad plan that is used consistently will fair
better
than jumping from system to system. This observation implies
that
stylistic foundations of a trader's market approach must be in
place
before consistent profitability can occur.
OBSERVATION # 9
Losing traders focus on "big-name" traders who made a killing,
and they
try to emulate the trader's technique. Winning traders monitor
new
techniques that come on the trading scene, but remain
unaffected unless
some part of that technique is valuable to them within the
framework of
their current market approach. They often spend much more
time looking
at how the market seeks and destroys other traders or how
traders
destroy themselves. They then trade with the market or
against other
traders as these situations arise.
CONCLUSION:
Once again, we can note that the individuality of a trader and
his
comfort level and knowledge regarding his system are far more
important
than the latest doodad or
Market guru.
OBSERVATION #10
Losing traders often fail to include many factors in the overall
trading
process that affects the probabilities of overall profit. Winning
traders understand that winning in the markets means "cash
flow". More
cash must come in than goes out, and anything that effects this
should
be considered. Thus a winning trader is just as thrilled with a
new way
to reduce his data-feed costs or commissions as he is with a new
trading
system.
CONCLUSION:
ANYTHING that affects bottom line profitability should be
considered as
a viable area of study to improve performance.
OBSERVATION #11
Losing traders often take themselves quite seriously and
seldom find
humor in market analysis or the trading environment.
Successful traders
are often the funniest and most imaginative people you will
ever meet.
They take joy in trading and are the first to laugh or relate a
funny
story. They take trading seriously, but they are always the
first to
laugh at themselves.
CONCLUSION:
Its no wonder that one of the first things psychiatrists test for
when
treating a patient is whether or not the patient has any sense
of humor
about his affliction. The more serious the tone of the
individual, the
more likely that insanity has set in.
SUMMARY OF CONCLUSIONS AND OBSERVATIONS
Both winning and losing traders consider trading a game.
However,
winning traders take the game not as a diversion but as a
vocation which
they practice with an intensity and dedication that rivals the
work
ethic of a professional athlete. Since the athletic metaphor
seems
appropriate, I will sum up on that note.
If trading were a game like basketball perhaps novice traders
would
realize more readily that what appears as effortless ease of the
professional trader in sinking three-point shots is in fact the
product
of endless hours spent shooting hoops in deserted back yards
and empty
playgrounds.
As in sports, the governing factors are internal and external.
We deal
with the market and ourselves. Both are like weapons and they
can be
used proactively or destructively. Each and every trade should
be taken
with professional care and planning
In order to bring these observations home in an even more
compelling
form, lets add an element of ultimate risk to life and limb and
say that
our "sport" is more like target practice with a handgun. While
it is
certainly important to hit the target, it is more important to
make sure
the gun isn't pointed directly at ourselves when we pull the
trigger.
Minute differences in how we take aim in the markets can
have amazing
impact on the final outcome. The difference is clear: One
method is
accurate target practice. The other is Russian Roulette.
Copyright@1999 Walter T. Downs All Rights Reserved.
Distribution is
allowed with
due credit to the author. cistrader.com |
