It is a fact that most traders end up losing over the long term. In order to be part of the minority of traders who win long term, you must trade differently than the majority. That is just simple logic. Then the first step is to identify what the majority of traders do. The second step is to avoid doing those things. By reading books about traders (Market Wizards series is a good starting point), seeing what traders say on Twitter, Stock Twits, stock message boards, etc. you start to get a sense of what the majority do. What most traders do: 1. Bet too big. In equities, it is betting it all on one stock. In futures and options, its using too much leverage by buying or selling as much as you can. Even if you have good pattern recognition skills and accurate analysis of the long term macro situation, there is still a lot of uncertainty in this game. Good traders still lose a fair number of times. It is just part of the game, you can't be perfect in this business. If you bet too big, you can have a string of winners and then that one big loser will eliminate all your gains plus more. Or even blow you up and take you out of the game. In my early career, I had a habit of trading only one or two stocks at a time, and using full 2 to 1 margin. It led to some exciting times, lots of wins and losses, and I was lucky to have survived. I had a very effective strategy and it worked about 90% of the time, but the 10% of the time that it didn't, I lost huge on the trade and it would eliminate all the progress I made building up my account. This happened a number of times and I still didn't fully understand why I couldn't really breakthrough to the next level. It wasn't because I didn't have an understanding of the market or good pattern recognition skills. I was just constantly betting too big. And although that led to rapid growth in account size during the good times, I would inevitability trade a stock that would act like an outlier and end up losing anywhere from 50% to 90%. Remember, if you lose 90% of your money, you need to make 900% to get back to even. 900%! Try this math exercise: you bet 50% of your account on a 1 to 1 payout, with 60% chance of winning, 40% chance of losing. See where that account value goes over the long term. The effect is the opposite of compounding. 2. Try to make money everyday. I am lucky that I didn't have to work for too long before I was able to just trade for a living. I never developed that worker's mentality. Although in the short amount of time I did work, I quickly developed a dislike for having to wake up early in the morning to do something that I didn't want to do, just for money and my "career". So when I started trading for a living, I tried to make as much money as I could, so I could amass enough money to not have to find a job ever again. Unfortunately, that led me to trade too big, and go all in too often, because of my greed and overzealous desire to build up my account as fast as possible. But I never really chased prices, and would often let halfway decent opportunities go by because I didn't feel like I needed to make money every day. If a good opportunity was there, I would plunge in. And usually there was. But if not, I didn't do any trades. I watched TV, read a book, and tried not to stare at the trading monitors. I didn't make money that day, but I didn't care. I never treated trading like work, so I never expected to get paid based on the hours I put in. I was willing to wait for the next good trade. On the topic of daily trading, one of the dumbest things that a good trader can do is to quit for the day because he made his daily profit goal. Unless that trader has some psychological problems dealing with winners, he should try to make as much as possible when the going is good because most of the time, they aren't. Especially these days. As Stanley Druckenmiller says, "it takes courage to be a pig". More importantly though, a trader shouldn't force trades and trade bigger to try to make a "comeback" for the day and turn a losing day into a winning one, to make yourself feel better. I have made this mistake countless times and at the end of the day, when I stare at a huge loss on my trading screen, I think to myself, "What the hell am I doing?" Its the same feeling a gambler would get at the casino when he keeps hitting the ATM to try to comeback and recover his losses, only to end up with a huge loser when the night is over. Trading is a long term game, not a daily one. 3. Think short term. It is hard to come up with good trades, especially long term trades. If you turn a good long term trade into a good short term trade, that is a big mistake. Yes, it is a higher level mistake. For those who have traded for a while, and made some money at it, it is a common mistake. I have made it numerous times throughout my career. If only I had just stuck with the trade for another few days, another few weeks, another few months. Then I would have had a home run. Those who have bought dips in the SPX know what I am talking about. Same goes for those who bought dips in Treasuries this year. That is why it is so important to thoroughly analyze what the current long term opportunities are in the market and then when the market gives you a chance to get in at a good price, you need to ride it for as much as you can. You can only do this if you have a lot of conviction on your trade, and your short term view aligns with your long term view of the market. How do you develop conviction that is usually accurate and helpful rather than irrational confidence? Through studying, experience, and gut feel. Some of it can be taught and developed, but the gut feel is usually more innate. This conviction is something that I am constantly trying to improve, both in accuracy and breadth. Some markets and time periods are just easier than others. Right now, we are in a bit of a difficult time period, low volatility and very few good medium term opportunities. However, that should pave the way for some monster long term opportunities. There is a good long term opportunity developing, but it will only come to fruition once the price action and higher volatility confirms the topping phase of this US equity bull market. So I am trying to preserve capital for what I view as interesting trading opportunities in 2018.
A really great post that you put up for all trading apprentices. When you mentioned study, is it fundamental news or just price? Can you give some examples of medium term opportunities in the past? When you lost a huge % of your account, what did you do to recover ?
%% Great points. Even though ''it takes courage to be a pig'' is not my favorite quote, i still like it LOL. [ I like the way Mr Stanley D also admitted he blew his account UP doing the pig thing also.]I also like his work habits according to Jack Schwager SEPT stocks tend be down a bit,but 4th quarter stocks tend to be bullish Uptrend . NOT a prediction
Thank you for an excellent post. I will have to make sure I don't make the mistakes you mentioned. My question to you: Are you keeping your powder dry waiting for a down year in the near future? Regards,
Studying long term fundamentals, such as the secular trend of higher debt levels, low interest rates, competitive devaluations, looking at the weekly COT reports to see how speculators are positioned. Price is also important since that determines value and potential profit. Medium term opportunities in the past are usually when most are leaning too far to one side irrationally. This includes going long S&P and oil in early 2016, into the fear. Shorting the dollar after Fed hiked rates in December 2016, amidst the Trump trade optimism and dollar euphoria. I recovered by identifyng price points where I would find great value, and after entering at those levels, riding trends as long as possible, thinking long term and going for big gains, to price levels where I would be tempted to trade the other side. For example, getting long Treasuries in early March ahead of FOMC meeting.
I am keeping my powder dry to either short S&P or go long bonds in 2018. S&P is very overvalued now, but with volatility so low, I expect even higher prices by early 2018. However by summer or fall 2018, I think we will get a big equity correction and that should crush bond yields lower. A Trump appointed Fed chair will be quick to be dovish. Also, sustainable secular global GDP growth is weaker than what most traders and economists think. Without QE and asset price inflation, the global economy can get ugly quickly.
In actual fact you're better off not concerning yourself with what others are doing and focus on working it out yourself. There's a very high probability that any information delivered by someone that's not in the top 0.5-1% is misinformation. Even the information in Market Wizards is limited in what it will teach you about what you really need to know. That's probably a book I would read if I was interested in setting up a fund.
Mmmm....I try to make money everyday I trade. I am always thinking short-term. I do try to avoid #1 i.e. trading too big for my britches.