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Hi Walt,
Just a note of thanks for helping to clarify and reinforce what has been,
until now, an amorphous mass of hazy core beliefs about the game of trading.
Every time I try to explain the paradoxes involved with trading to someone
new to all of it, I find more paradoxes hidden within the explanations!
These days I find myself more interested in the lessons I learn about myself
than in the prospect of a quick killing in whatever market attracts my
attention (not that I'm against the idea, mind you). Perfecting my
approach/abilities/self as a trader is the most rewarding part of this
game - losses are simply tuition payments toward the lessons I require to
advance toward that perfection. Probably the final paradox is that
perfection is unattainable, but the journey is the point.
Thanks again,
Dennis Conn
dconn@xxxxxxxxx
-----Original Message-----
From: Walt Downs <knight@xxxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Saturday, January 23, 1999 14:56
Subject: Trading GEN: The "Downs Doctrine" 11 part matrix for a Trader's
probability of Success
>Hi all,
>
>Regarding some of the recent posts on right and
>left brain thinking, some may find this of interest. :)
>
>Here's an article which sites
>eleven observations and conclusions. It is designed to be
>used as a matrix, and often seems to do a good job in predicting
>probability of a trader's success.
>
>Walt Downs
>CIS Trading Cos.
>
>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@xxxx Walter T. Downs All Rights Reserved. Distribution is
>allowed with
>due credit to the author. http://cistrader.com
>
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