Why do 95% of traders basically wipe out their accounts in the first year? What does it take to be a master trader, to profit on a consistent basis and not burn out in the process?
From 1897 to 1900, 200,000 people started to the Klondike and only 30,000 reached it (1 in 6). Not more than 400 found any gold (1 in 500) and of those only a few managed to keep it (possibly 1 in 5000). It is said that if all the gold that was found (some 4 millions dollars) was divided among everyone that first started the search, each would receive $20.00!
This is not about gold, but the analogies to trading are all too real and familiar.
I am blessed to be surrounded by traders at every level of skill, from Unconsciously Incompetent to Unconsciously Competent.
A couple of days ago, I asked a 25-year veteran of options trading, a guy who has not had one single losing year the past twenty-five years (let's call him Danny) if he had a trading plan. He did not hesitate to reply: No I don't. I am unconscious.
What he means is that after 25 years of options trading he is Unconsciously Competent. Unconscious Competence is the penultimate stage of in the five levels of trading competence. Even with all this experience and reaching a high level of trading mastery, Danny continues to perform, day after day with remarkable success, always pushing himself to higher and higher levels of mastery. It is not enough to be a multimillionaire. It is not about the money. It is about the continual challenge of dealing with everything that comes to him a way that is as natural as breathing. If stock gets "put" to him or called away, he knows immediately what to do and he does it without thinking. He does not panic or have an attack of high blood pressure or emotional outburst. He just does what he has to do. Because of the rapidity with which he trades, he cannot express well or teach another person exactly what he is doing, and if you review the article on Competence: So You Think You Can Trade, you will see why Danny, with all of his experience and profitability, has not reached the ultimate level of trading mastery
Lately, however, I notice that something is going on with Danny. He seems to have reached a point where he needs more and more challenge. I suspect that this has happened before, but I have not known him long enough to make that judgment. Danny's brain is begging for novelty and new tasks. It has done that before because the only way that anyone can go for 25 years without one losing year is to lay down new brain pathways, i.e. to develop novel ways in the brain can see charts and make decisions. The nature of the markets is to run in ever changing cycles, and the brain must be entrained for these changes in order for a trader or investor to continue to be profitable year after year. There is, in fact, evidence that the more one becomes attached to a particular strategy, the more limited one is by that strategy.
Why are some funds or managers "hot" for a few years and then fall behind? Why do traders do well for a while, and then have a succession of losing months or years? All other things being equal, i.e., it is because their strategy is no longer working due to the fact that the character of the markets has changed. In order to keep with the ever-changing cycles, new brain pathways must be laid down which enable continuous counterintuitive thought and action in order to generate consistent profits. Be it a change in position sizing, less leverage, decreased frequency of trading or any number of stabilizing and equilibrating factors, the trader must become aware that something is different. Once this awareness takes hold, then it's back to the charting board or the drawing board to retrain the trading brain to accommodate to this particular change in the personality of the markets. Traders and investors are well served to ask themselves: What is my brain doing to cause me to make these hideous choices and lose money? How are my thoughts, beliefs and preconceived ideas about what is going on ruining my trading? What can I do to make sure that I am not neuronally undermined? In other words, how can I train and retrain my brain for consistent profits?
What about you? How are you doing?
If you are like most people who write to me, you are still struggling to find your place in the markets. You are on the learning curve and are paying your dues.
How long does it take? This is the question most frequently asked. The answer is: in my experience, it takes 10 years and 10-20,000 hours of practice before the average person gains enough expertise to succeed consistently in the trading shark tank. The casino is getting more treacherous these days because the sharks are becoming more and more cunning. Complex algorithms, neural nets and many types of computer assisted trading are in vogue. Yes, you say, but human beings program all these computers so there is always going to be human error. Yes and No. Why No? There are new hedge funds cropping up which put millions of market algorithms into computers and "allow the computer to sort out which work and which don't!" Please don't ask me how this is done, since I do not know. I only know that the waters are becoming more and more murky for the "little guy or gal" (I am one of them!) and the sharks are getting hungrier.
Deception in the markets is rampant and anyone who tells you that you deal with market conditions the way you deal with real life success is not being honest. Yes- there is a real correlation between the way you conduct your life and the way you trade, but this has to do with state of mind. Peace of mind and the learned ability to respond, rather than react when you see something, which is unfamiliar or threatening
(like a huge market move against your position).
Success in "real life" has little if anything to do with success in the markets. This is why so many highly educated and highly trained individuals fail as traders. Trading is a profession unlike any other since losing is winning. Think about that for a minute. Losing is winning.
How can I say something like that? What does that mean? How successful would you be as an attorney if you came home a couple of nights a week and announced to your wife that you lost another case today, and that you had lost three of your five cases this month? What about a medical doctor? How successful would you be if you had to deal with losing three patients in five surgeries? You see, real life standards by which success is measured are not applicable in the markets. Do you understand that? Do you see why so many people with enormous success and great careers simply fail miserably as traders?
To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride. Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes... George Soros
The most successful traders know how to take small losses and manage risk. It is impossible to trade without taking losses. Impossible. You are a success when you learn to manage risk through position sizing and limiting losses. In life, we do exactly the opposite. It is somehow virtuous or noble to hold onto losing people, places and things. We get "stuck" in the commonplace and everyday such that we don't want to "hurt" other people or we don't want to make a change, since change is perceived by the ego as death. Things are just fine the way they are.
Do you know what it means when you say you are F I N E? Well, the first word cannot be written, but it rhymes with Mucked Up. The I = Insecure; the N = neurotic; and the E = Emotionally Unstable. Now, how many of you are F I N E? How is your life working for you when you keep doing the same thing over and over again with the same people over and over again and expecting different results?
Do that in the markets, and the sharks will devour you. They are waiting for you. Markets are not nice. They are mean and cruel and that is the way it is. You are trading your beliefs against the beliefs of millions of people all over the world. How many degrees of strategic thinking do you need to use in order to determine what the other person is going to do? Call in John Nash to tell you about iterated dominance and every other aspect of game theory because that is what you are dealing with in the realm of strategic thinking.
Think about how powerful and dangerous a game you are choosing to play, especially because you don't know who is taking your money and you don't know where the money you are getting is coming from. Is there any situation in your "extra-market" life that compares with this? If so, please drop me a line and let me know.
This is war and you chose to enter it. So, if you do, come prepared for the battle of your life. This is the biggest battlefield on the planet. Welcome to the great game of trading!
Any player unaware of the fool in the market probably is the fool in the market... Warren Buffett
You have to live the life you're given
And never close your eyes!
You hold on and stare into the skies
And burn against the cold
For any moment you might find the gold!..
