recognising possibilities of this sort. But remember, there’s no question of fault, or blame. What you are is just what you are, and it comes from your programming: but you have to find out what it is you are. To know that, you have to look at the facts not your impressions. Add up your profits and losses. Go over your trades, to see what you did and why. Consider how much homework you did. Consider whether you used stops as a” crutch”. How often did you capitulate to the crowd view? Or blame someone else? There are some more questions below.
If we are committed to winning, we probably know it. But if we aren’t, we have to work to find it out for ourselves. However, once we have found out that we are a loser, or a non-winner, so that we know for sure, then that is not only the first step we need to take but also the last. All the rest will follow automatically. Once you know you are a loser, you either give up trading or change. That’s the way it is.
Do you accept responsibility for your trading?
Recently a reader wrote to me to say that he would renew his subscription to Currency Bulletin, in order to try and win back some of the losses he had made following its advice in the previous year. He made the losses. The advice was OK and others made profits with its help. A newsletter is
just a tool that you can use to help you if like. If you blame a newsletter for your losses – or central bank intervention, or volatility, or a government or anything else – then you are not committed to winning. You can see that. And once you understand it deep down and know it for sure, you’ve learnt something priceless.
Is money what matters to you?
Here is the paradox. Money is by definition the measure of success in trading: yet money is not important to top traders, by and large. It’s just one of the many paradoxes in financial markets, though it would present no problem to the Zen archer*, who hits the centre of the target by just shooting at it, not by aiming.
The answer is that 1) trading is a game, which 2) is won by playing according to the rules of the game; and 3) if you do that you make money over time; but 4) it’s OK to lose money, that’s part of the process of winning.
According to Dr Tharp, the above credo is part of a “constellation of beliefs” which top traders share. They also believe they have “won the game before they start”: they can’t help winning if they play by the rules. If we’re worried about losing money, we have a problem with taking losses, and cutting losses is one of the rules of the game. If we’re worried about keeping the money we’ve made, we have a problem with letting profits run, which is another of the rules of the game. The rules of the game were spelt out in Chapters 7 and 8.
I think that if money matters greatly to us, it may help if we don’t keep tab of our equity – especially when we’re ahead. That may sound odd, but knowing your equity all the time encourages worry; and worry destroys judgement.
Are you concerned about being right?
“Of course” , you may say. “Obviously being right is essential to successful trading”. That seems to have been the view of the great Jesse Livermore, who was much possessed by being right. But being right so often didn’t bring him success in the end. You can imagine a successful trader claiming that he was usually wrong in his analysis but, somehow when it came to actually trading he managed to do OK.
The distinction is between being right and doing right. Livermore was aware that the two were not the same. “The thing”, he says “was to be right; to know it and to act accordingly.” It was his way of stressing the importance of confidence, perhaps. But he may have missed the danger that can come from overconfidence. Overconfidence is no more destructive to trading than
lack of confidence; but neither is helpful and both result from an intrusive ego. Here is Jesse Livermore again: “Also, don’t forget that I had gone broke (my italics) a little while before because I had seen this break too soon and started selling before it was time. Now when I had a big profit I wanted to cash in so that I could feel that I had been right.” That is in Chapter IX of Reminiscences. A few adventures follow and Chapter XIII begins thus: “There I was, once more broke (my italics), which was bad, and dead wrong in my trading, which was a sight worse.”
Interestingly, in games the notion of being right as opposed to doing right is more or less meaningless. So it is in trading. Being right is an ego trip.
Do you find losing intensely painful?
Asked innocently about the joy of winning and the pain of losing, Ed Seykota responded thus: “The joy of winning and the pain of losing are right up there with the pain of winning and the joy of losing. Also to consider are the joy and pain of not participating. The relative strengths of these feelings tend to increase with the distance of the trader from his commitment to being a trader .” (My italics).
The more committed you are –and there can be ebbs and flows in the degree of commitment of any trader –the less smitten you are by emotions attaching to individual losses and gains. You will know you are getting there when you view losses and gains with equanimity.
How do you perform under fire?
As we all know, the danger points in trading come when we’re under stress. The immediate source of stress is usually adverse price movement and the danger is that we capitulate to internal promptings (often from the Child or the Parent within us) which are irrational.
It would doubtless be a worthy objective to work to vanquish stress –as much in our lives as in our trading. But in trading, the more practical solution (in life too perhaps) is to take on a series of rules for action in all circumstances. This is not complicated: the only things we do in trading are to initiate positions and then close them. It’s a relatively simply matter to formulate rules for each proposition. For example, we only open positions “when all the pieces fit”: and we only close them when the pieces cease to fit or when our stop is hit whichever is first. OK, adhering to the rules is not as easy as formulating them. But we can get there, step by step, if we are committed to winning.
Also, there may be something physical we can do under fire. In moments of stress you’re apt to respond emotionally, on the lowest common level of
