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Hi,
This email is intended to make you a little more self-aware as a
trader.
It could do the opposite and delay your self-awareness if any emotional
reaction is severe. This is up to you.
It might contain uncomfortable information for some.
This might generate a feeling of 'I do not understand' - this can be a
result of the ego attempting to reject the information.
In the face of something not understood, we often tend to react with
rejection and hostility - again the ego speaking.
And if others do the same - we feel vindicated and do not take the
learning opportunity.
Beware of you inner tendencies to avoid inner change.
Successful traders and unsuccessful traders alike, leave strong clues as
to their success at both making and keeping profits.
Most of us want to be successful, so it pays us to notice those aspects
of ourselves which are stopping us being successful at trading.
We will look at the clues left by the unsuccessful traders.
It is based on a large sample of traders, both clients and
others who have revealed both their level of trading success and
preferred discussion topics.
Traders who are not making profits or are making profits but give back
their profits (often in a spectacular fashion) usually give the following
strong clues about their status:
- they
talk about individual trades actual or proposed,
- they
assume everyone trades the same way namely trend-following,
- they
are happy with low reward to risk ratios,
- they
say they enjoy emotional highs and lows,
- they
want others to do the same,
- they
want to hear about others failures,
- they
talk about flexing of stop or exit parameters.
It will be helpful perhaps to see why each of these things might be
true.
Individual Trades
----------------------
Imagine you have hundreds or thousands of trades behind you, of which
many are profitable and many are not, but overall you make money and keep
some of it.
Your confidence is probability based, and your trader behaviour has not
got too much in the way of you making profits, or keeping your
profits.
In this context, the profitability of one particular trade is of little
interest - it is just one in a long chain of trades, which will help
fulfil the known probabilities of winning and
losing. Your current open trade or planned trade
is just one in hundreds or thousands - of no special value or
interest.
You do not care whether it is profitable or not - you just trade it and
then on to the next, for each trade adds, on average to your account
value and knowledge base. Successful trading is
simultaneously boring and interesting.
So you do not talk about individual trades if you are successful, except
as an example or illustration of a concept.
Trend-following
--------------------
I am aware of three exceptions, but most newbie traders seem to go for a
trend-following style. This includes momentum plays and
similar.
This is normal and natural, because it is a crowd style and we are crowd
animals.
Because much of the written trader material, and most other traders, by
number, also use a trend-following style, this makes the newbie
comfortable. And after a while the
newbie does not even consider there are other trading styles such as
spreads or market making or volatility breakout or insurance strategies
etc.
Most successful traders appear to have become successful because they are
open enough to try new things, fail, learn, improve,
adapt... Many use position sizing techniques across two
trading systems.
So they at least have read about, tried or currently use other trading
styles and methods.
So even if they have gravitated back to trend-following, they do not
assume that trend-following is the only trading style.
Reward to risk Ratios
----------------------------
One of the single most common attributes of successful traders, in my
experience, it that they are constantly trying to improve their reward to
risk ratios.
Most such traders have discarded trading systems that newbies would 'die
for'. Because if you find an approach that gives you a
17 to 1 reward to risk ratio, you are going to discard one that only
gives you 15 to 1.
Imagine your reward to risk ratio is low, say 4 to 1 or worse.
A long run of losses happens to any trader, but with such low reward to
risk ratios, it can easily overwhelm recent profits and dishearten the
trader. This is less of a problem with a trading system
with a better reward to risk ratio.
Also we are human. We make errors, so do our brokers
etc.. If you have an inherently highly profitable system, a
few errors still leave us with profits. If your reward
to risk ratio is low, the same error rate will have a disproportionate
impact on profits. Errors can even eliminate your profits -
more ego and emotional problems often result.
So traders with low reward to risk ratios (common for trend-following
systems) have a harder struggle to make and keep profits.
Emotional Highs and Lows
-----------------------------------
Emotional highs and lows are often associated with one or more
of:
- big
profits and big losses,
- runs
of winners and runs of losers,
- low
confidence in following the system (lack of self-trust).
- taking
high risks (in context).
So if you enjoy emotional highs and lows you are unlikely to be
profitable and get to keep most of your profits.
By definition you are at least partly addicted to adrenaline.
Addicts do not normally make as good judgements as those who are not so
addicted. Trading, even mechanical trading, requires
judgement at least in the design of the mechanical system.
And addicts are not renowned for their discipline.
Want Others to do the Same
-------------------------------------
If others are:
- talking
about individual trades,
- assume
everyone trades the same way namely trend-following,
- happy
with low reward to risk ratios,
- say
they enjoy emotional highs and lows,
then everything is OK - I am part of the crowd - all is
well. I have no need to break out of the
mould.
Successful traders want others to be successful and not losing.
Want to Hear about others Failures
----------------------------------------------
If you have problems, it can be comfortable to know you are not
alone. Others share your difficulties, you are not stupid or
inadequate.
If you are making and keeping your profits there is no need for such
comfort in others difficulties.
Flexing of Stop or Exit Parameters
--------------------------------------------
This characteristic is a little more subtle.
A successful trader will have conquered a myriad of trader behaviours
that had previously sabotaged their trading.
One of these is the taking of traders tips.
Now I might have a similar trading system to you - a trend-following one
- but my system parameters may be different.
My parameters work for me because:
- they
are part of a whole,
- they
are right for my account size and trade size,
- they
are right for my basis or timing of entry,
- they
are right for my time horizon,
- they
are right for my stage of development as a trader,
- they
are right for my market,
- they
are right for my acceptable risk of ruin,
- they
fit my personality,
- ...
They will not work for you in the same way - because you are
different.
If the trader has realised this, and so understands about tips, he/she
will not share stop and exit etc. parameters, because to the other
traders they are just tips.
So a trader can be successful and share parameters, but it does tend to
indicate either lack of profitability or lack of full development of
effective trader behaviours. This suggests that a
catastrophic failure may be waiting in the wings.
So just because we share the concepts of stops and entries and exits is
no reason to share parameters.
-----------
There are also clues given away by successful traders, but that is
another story.
May your potential be realised, Ric.
www.traderscalm.com
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