Here is something a little different today: a guest blog from David Blair, the Crosshairs Trader, who like all of us wears many hats. He is a trader, blogger, and educator who spends a lot of time thinking about elite performance and how to get there in trading, and shares some rich insights with the community. This particular blog post is one of those rich insights.
We all want to succeed. Our success is measured by how we manage (and make) money. However, the reality is few will succeed in the trading business. Why? With all the trading platform technology and educational services at our fingertips, not to mention a library of 1000s of books on the subject of trading, why do so many still find trading success mysterious on the one hand and elusive on the other? Why do a few reach a high level of consistency while the rest flounder at best and quit at worst? It is certainly not for want of success. The traders I have worked with all have the desire to succeed and the passion to study the markets. They are willing to put in the time and effort to make trading work. Yet, so few succeed. Why? Is there a common denominator that the successful have that the unsuccessful do not? I believe there is.
The common denominator of all successful traders is not to be found in their choice of technology or in their educational background but in the quality of their decision making. In other words, as Mark Douglas has said, successful traders simply “think differently” than others; therefore, the quality of their decisions take on a different nature.
Before we proceed to the characteristics of the successful let’s separate the two general types of decisions traders make. On the one hand, there are the static decisions. These are the constants such as indicators, timeframes, chart patterns, type of price chart, etc. commonly referred to as the “tools of the trade”. Each trader, after much trail and error, eventually gravitates toward a set of tools that remain constant, rarely making dramatic changes. On the other hand, there are the active decisions. These are the day to day decisions made under the conditions of uncertainty inherent in the markets. While it can be said that the static decisions are the tools, the active decisions refer to how the tools are used. It is here that the successful separate themselves from the rest.
Most new traders believe the secret to success is in possessing the right tools, as if a magic indicator or candlestick pattern can consistently predict price action. This belief could not be further from the truth and, if not quickly changed, will likely become the source of much frustration, anxiety, and anger leading to the trader’s ultimate demise. Instead of wasting energy on the elusive search for tools as a source of predicting the collective thoughts and decisions of all other market participants, the successful traders focus on how to use the tools to manage the mindset required when facing uncertainty. Successful traders do so in the following ways.
The successful allow the pain associated with losing to strengthen their ability to accept the inevitable while others seek to deny it.
No trading system will ever produce 100% winners. This is a fact. Knowing this does not make it any less painful when a losing trade has to be closed. However, recognizing that losing is part of the game produces the acceptance that any trade, especially the current one, can be a loser. The successful plan and prepare for it with technical stops. This is the tool that clearly defines the trader’s definition of a losing trade. The trader then takes the static “stop” and qualifies it by taking “action” when called upon to do so. Preparing for loss is a mental decision. It is a decision to accept the ever present possibility of losing trading capital. It is a quality that few possess but a requirement when making trading decisions. Others seek to avoid the pain associated with losing by refusing to plan for a loss or, if planned, for refusing to take appropriate action when required to do so. They avoid the pain by denying the obvious. Denial is “it is not a loss until the trade is closed” mentality; the “it will come back” hope. It is a plan that looks good on paper but rarely implemented when in the heat of battle.
The successful embrace market uncertainty while others seek to avoid it.
Embracing uncertainty means more than accepting it. A trader may accept that a trade can be a winner, a loser, or a breakeven proposition but that does not mean the trader will embrace the eventual outcome. Embracing uncertainty means recognizing it as a benefit, not a liability. My best trades have often been the ones I had the least confidence in, while the ones I was most certain about turned out to be the losers that most frustrated me. In the markets, uncertainty is what produces great fortunes but lest the trader forget, uncertainty can also produce great losses. Embracing uncertainty requires us to be humbled by the former and respectful of the latter. While we all seek the perfect trade we would do well to remember that the perfect trade is a theory until history proves it as fact. Making quality decisions requires us to embrace both the theory and the fact.
The successful focus on losing well while others focus on saving face.
Losing well. What does that mean? In the markets it means that the sum is much more important than the parts. A successful trader’s equity curve can trend higher even with a majority of losing trades. Beginning traders fail to realize that winning in the markets is not about the percentage of winners versus losers but about how much is made with the winners versus how much is lost with the losers. For too many it is about quantity (%) and not quality ($). For far too many it is about how to look like a winner by winning a majority of the time (i.e., saving face) when success in the markets is not about looking good but about survival. Unfortunately, those hawking trading systems with ads boasting 90% winners take advantage of the gullible and ego driven individuals who have been induced into believing that the market is some kind of at home ATM machine. Losing well is the best way to save face.
The successful make process driven decisions based on delayed satisfaction while others make decisions based on instant gratification.
We feel better about ourselves when we see positive results from our actions. We most often want to experience the pleasure associated with positive results sooner than later, oftentimes settling for less than the most favorable results. Instant gratification is often used to label pleasures gained by impulsive behaviors: we want a winner now, not tomorrow. Walter Mischel is well known for his marshmallow experiment where he tested the gratification patterns of four year olds, finding that those children who chose to wait for two marshmallows later instead of one now were much more likely to succeed later in life. In other words, delayed satisfaction more often than not produces greater rewards than instant gratification.
Successful traders make quality decisions based on the long term satisfaction of an ever rising (and improving) equity curve, making the decision to “trade small if at all” under certain market conditions or when confidence in their edge is less than satisfactory. Waiting is difficult but can be advantageous in the markets. However, with opportunities for gain flashing across our screens in the form of price fluctuations we are tempted to jump in, not wanting to miss any chance to satisfy our longing for instant gratification. Unsuccessful traders suffer from various forms of instant gratification such as taking a trade off too quickly (with a small gain) before a profit target is met (for a larger gain); when attempting to make up for recent losses by searching for a new edge to trade now instead of waiting for his trading edge to develop later; or when taking on multiple trades outside her risk parameters (i.e., overtrading) in order to find something, anything, to work now while waiting on the other trades that have yet to meet positive expectations.
Successful traders understanding and accept that instant gratification can and will adversely affect their bottom line. Therefore, they are careful not to let their guard down. They fight the urge to win small now instead of holding on to the possibility to win big later. Ultimately, it boils down to the ego’s desire to feel good now versus the possibility to feel better later. It is about instant gratification versus delayed (and longer term) satisfaction.
Although anyone can succeed at this business few will. But lest we forget: trading success is elusive not because few are qualified to achieve it but because few are willing to make the difficult decisions required to obtain it.