Psychology

Why Can?t Johnny and Jane Make Money in the Markets?

There are literally thousands of traders out there who have brains, motivation, money (but not for long), big computers, trading software, newsletters, trading magazines, courses and more, but who can?t make money. I call them ?Johnny and Jane?, because they?re typical and engage in losing behaviors common to so many traders. The sad but true fact is that in spite of all the advances we have made, too many traders still fail. But why? Why is it that ?Johnny and Jane Can?t Make Money in the Markets? consistently or successfully? Here are some of my thoughts. I hope they help you in your trading plan. Hopefully you won?t end up like Johnny and Jane or if you?re already a Johnny or a Jane (or both) my thoughts will help you improve your results.

1. The average trader gets too much information

In my talks with traders I have discovered that the typical trader uses the following information sources almost daily or even many times daily: two or three newsletters, two or three newsletter hotlines, brokerage house on line reports and recommendations, CNBC, free on line reports (usually 2 or 3), computerized trading systems, timing indicators (at least three to five of them), a variety of charts, and postings in various trading chatrooms. If you DO NOT use the majority of these ?informational sources? then I congratulate you. The simple truth is that the vast majority of these informational sources have no value. All too often they reflect the opinions of other traders and analysts who usually have very little experience or who are merely touting their own points of view. You only need a few sources of information. In fact, if you trade based on mechanical trading systems, then you need NO OTHER source of information. One of the reasons that ?Johnny or Jane can?t trade? is that they have TOO MUCH INFORMATION. When it comes to trading information, less is often more. Don?t make the mistakes that so many others make. DECREASE the amount of information you get. REMEMBER that most of the information you get is totally useless. In fact, it?s worse than useless. It can actually help you lose money!

2. Johnny and Jane are victims of common thinking

Common thinking in the markets will get you common results. In fact, common thinking in any aspect of life will get you common results.Common results in the markets are losses. If you want uncommon results then train yourself to become an uncommon, unconventional thinker and trader. Be a contrarian. Question the psychology of the herd. Don?t listen to what most traders are listening to and don?t do what most traders are doing. The logic is VERY SIMPLE. If what most people are doing leads to the common result of losses then what most people do is DEAD WRONG!

3. Over analyzing trades

Most things in the markets are simple. Most moves do not happen by accident. The markets give us very clear clues in advance of moves. I would estimate that about 20% to 40% of market behavior is random. Accordingly, many of the signals or conclusions that you reach from analyzing markets will be incorrect. Some traders believe that the more tools they have in their analytical arsenal, the better will be their trading decisions. This is not correct. The time you spend in analyzing a trade does not improve the odds of success beyond a certain point. If you think that you will do better if you spend more time analyzing your trades then you are wrong. Stop wasting your time and stop fooling yourself.

4. Johnny and Jane love small stop losses

The myth of the small stop loss is another reason for Johnny?s losses. The good news about small stops is that you won?t lose too much money every time you get stopped out. The bad news is that you WILL likely get stopped out almost every time. Johnny and Jane don?t understand that the size of the stop loss must be related to the volatility of the underlying market. A stop loss of $800 may be reasonable for the cocoa market, but it?s not at all reasonable for the full S&P contract.

5. Stop losses should be a function of your trading system and not your pocketbook

By this I mean that the markets have NO RESPECT for what you can afford to lose on a trade.Using a dollar risk stop loss based on how much risk you want to take makes a lot less sense than a stop loss based on market volatility and trading methodology. Think about it!.

6. Be careful what you believe

I?m sure that I?ll ruffle many feathers by what I?m about to say. I could easily alienate some of you, but I?ll take my chances. Over the years I?ve seen all manner and types of market theories. They have ranged from the arcane to the absurd, from the magical to the mythical, and the astrological to the biblical. I?ve seen smooth talking operators sell the most outlandish trading systems to gullible traders. Some of these operators could sell the rust off nails. I?ve seen wave theories, angle theories, magical number systems, lunar phase systems, astrology systems, systems based on hidden meanings in the bible, systems based on secret codes taken from the tomb of a deceased trader, systems based on special geometric ratios, special charts, incantations, the I Ching, and more. I?ve seen systems based on biorhythms, wave counts, and even more esoteric phenomena. I have not seen a single shred of evidence that any of these work better than chance. Still, however, trades have a need to believe. Indeed, they have a need to feel that there is logic to the markets. While I believe that there is indeed logic to the markets, this logic is neither mythical or mystical. It is not metaphysical. Rather it is purely physical.

7. Diversification of trading methods, markets and time frame is the best overall approach

Johnny and Jane believe that if you specialize in one market you will achieve consistently profitable performance. I disagree. While such an approach may work well for a floor trader, it is NOT recommended for most traders. I believe that you need to diversify across three levels in order to minimize draw down, increase total profits and perform consistently. The three levels are as follows:

  1. A diversified group of markets. By this I mean trade at least one market from each sector. For example, one of the meats, one of the grains, one of the metals, one of the interest rate futures, one of the stock index markets, one or two (unrelated) currencies, etc.
  2. Diversify trading methods. By this I mean that you should trade one trend following method, one support / resistance method, one breakout method, one seasonal method, etc. You can trade one market from each approach and thereby you will have satisfied both of the two-diversification methods. And..
  3. Diversify across different time frames. Trade one method that is short term or even day trade, one method that it intermediate term and one method that is longer term. My Grand Super System (GSS) does exactly this and has shown a remarkably consistent equity curve. This is one of the most important things I can tell you. It ranks among the top two to three things I can share with you. It speaks to the fact that things are sometimes not as simple as they seem.

Diversification is a broad concept. It does not mean simply that you need to trade a group of different markets. As you can see, there?s much more to it!

8. Avoid fads

It never ceases to amaze me how traders allow themselves to fall into fads, fashion, fallacies, and other follies. I?ve seen fads come and go. I?ve seen the rise and fall of the 4, 9, and 18 day moving average system. I?ve seen candlestick charting rise and fall in popularity. I witnessed first hand the Chicago Board of Trade sponsorship of the Market Profile theory. I saw the Market Profile theory fervently taken to heart by floor brokers and many professional traders only to see it decline to virtual obscurity a few years later. I saw the growth, birth and reincarnation of point and figure charting. I witnessed the rise and fall and rebirth of day trading. I remember when traders watched the Federal Reserve money supply figures as if they were the Holy Grail of interest rate futures trading. And I saw the US 30 year Treasury bond market reach a peak monthly trading volume of over 11 million contracts a month in late 1997 to a current volume of under 100,000 contracts a month. Fads come and go in the markets just as they do in real life. I still have a Nehru jacket. I?m saving it for the next reincarnation. My wife says I?m wrong. She told me to throw it out. I saved my bell bottom jeans from the 1970?s. I was right (but I had to lose a few pounds to get into them).

9. Timing indicators come and go but patterns persist

By patterns, I mean PRICE patterns and time based patterns such as cycles and seasonals. I?ve seen so many indicators rise and fall in their performance, but I have seen patterns continue to perform. Since markets are ruled ultimately by supply and demand and mediated by emotions, the combination creates stable and repetitive patterns in prices. There are literally thousands of pattern combinations that use the open, high, low and close of each daily or weekly price. These are among my favorite and consistent indicators along with cycles and seasonals.

10. Play your own game

You don?t need me or anyone else to play this game successfully. Once you have learned it go off and be on your own. Believe in the power of your own observations. Come back to me now and then to see if you can learn anything new from me since I continue to grow and evolve as a trader. Avoid becoming dependent on anyone. Take the tools you have found to be effective for YOUR STYLE of trading, develop them and play your own game. There are a number of ?market gurus? out there. Some have valuable things to teach you while others have worthless trash to offer. Learn the good – reject the bad and then go off on your own path. This will serve you well in the future. And once you have developed your own game, keep your trading results, success and failures to yourself. Be humble and you will avoid becoming a target. Don?t be a Johnny or a Jane.

Jake (Jacob) Bernstein is President of MBH Commodity Advisors Inc. and Bernstein Investments Inc.  Born in Europe in 1946, Bernstein moved to Canada and then to the United States. He is publisher of Bernstein on Stocks, The Letter of Long Term Trends, Short Term Stock Trader's Hotline,  MBH Weekly Commodity Trading Letter,  Monthly Key Date Trader, and Short Term T-Bond Hotline.  His newsletters and advisory services are read internationally by traders, investors, brokers, financial institutions and money managers.   His Internet presence includes:   Jake Bernstein on Futures (http://www.trade-futures.com) and  his stock market advisory 2Chimps.com  (http://www.2chimps.com), www.Seasonaltrader.com, and www.Patterns4Profit.com.   Bernstein’s areas of expertise include stock and commodity trend analysis, long term trend and price forecasting, seasonal price patterns, cyclical economic analysis and timing, trading system and timing indicator development, computerized stock and futures trading, trader and investor psychology, short term and day-trading, economic forecasting, and historical price pattern analysis.  Bernstein has been a featured speaker at investment conferences and trading seminars the world over.  He has held over 500 of his own seminars since the 1970’s, and is considered a leading educator, market analyst and researcher in the field of stocks and futures. Clients to his advisory and consulting services include some of the world’s largest banks and brokerage firms as well as professional traders and money managers.  He has developed and popularized a number of innovative market indicators and concepts.Many of the long term social , political and economic forecasts Bernstein has published in the last two decades have come to pass.  These include the interest rate top of the early 1980’s; the deflation of the 1980’s and early 1990’s; the Japanese economic Peak; the explosion in genetic engineering technology; the Interest Rate lows of the mid to late 1990’s; the Gulf War; and many more.  Among his more than 30 + published books are the following:The Investor’s Quotient (Wiley and Sons)The Investor’s Quotient 2nd Edition(Wiley and Sons) - Also in ChineseBeyond the Investor’s Quotient (Wiley and Sons)How the Futures Markets Work (New York Inst of finance)The Compleat-Day Trader (McGraw-Hill) Also in ChineseThe Compleat Day-Trader II (McGraw-Hill)Strategic Futures Trading (Dearborn Publishing)The New Prosperity (New York Inst. Of Finance)How to Analyze and Forecast Long Term TrendsCycles of Profit (Harper-Collins)Short Term Trading in Futures (Dow-Irwin)Investing in Metals (Wiley and Sons)Seasonality (Wiley and Sons)Seasonal Trader’s Bible (MBH Publishing)Timing Signals (Probus)Why Traders Lose  How Traders Win (Probus)Facts on Futures (Probus)Market Masters (Probus) - Also in GermanBeat the Millennium Crash (New York Inst of Finance)How to Trade the International Futures Markets (New York Inst of Finance)Momentum Stock Selection (Mc-Graw Hill)The Compleat Guide to Day Trading Stocks (McGraw-Hill)Stock Market Strategies that Work (with Elliott Bernstein) - McGraw-HillHow to Trade the Single Stock Futures Market (Sep 2002) - DearbornNo Bull Investing (Mar 2003) - Dearborn5 Winning Stock Market Strategies (Mar 2005) - Entrepreneur PressThe Investors First Aid Kit  (2005) TBAArticles by Bernstein have appeared in Futures Magazine, Money Maker, Stocks and Commodities, Barron’s Financial Weekly, FarmFutures, and other leading financial publications.  He is a guest commentator on business radio, Internet, and television in Chicago and Los Angeles.  He has appeared on numerous radio and television business shows, including Financial News Network, Jag.FN, Web.fn, CNBC, CNN (London), WBBM Radio Chicago and Wall Street Week, and numerous other radio and television shows.  He has been a keynote speaker, workshop leader, or organizer of numerous investment and trading conferences throughout the world.

Jake (Jacob) Bernstein is President of MBH Commodity Advisors Inc. and Bernstein Investments Inc.  Born in Europe in 1946, Bernstein moved to Canada ...

Rhody Trader

Senior member
2,620 264
In this article, highly regarded author Jake Bernstein offers up some of his insight as to what leads traders in to trouble and how they can avoid going down the wrong road.
 

JumpOff

1
702 14
The only thing that didn't make sense to me was his statement about "Diversification of trading methods, markets and time frame is the best overall approach." His description of how to do this will probably overwhelm Jane and Johhny. I know it overwhelmed JO!
 

timsk

Legendary member
7,059 1,861
JumpOff said:
I know it overwhelmed JO!
Timsk too!
It's also contrary to the advice that most other trader experts / gurus usually dispense, which is to get to know, think, live and breathe one market in one timeframe before attempting to introduce another. Although the logic behind Jake's view is very sound, to achieve this level of diversification strikes me as being a task as monumental as climbing Everest on a sunny Sunday afternoon. There again, he also advises a contrarian approach and not doing what everyone else is doing . . .
Tim.
 

nine

Senior member
2,038 506
An opportunity to be contrarian:

JB says that Johnny and Jane are victims of common thinking. Bull. You can do some very simple and old and common things in the markets and make money, plenty of it. You just have to execute well and control your behaviour well. IMO, many people are victims of the contrarianism that he advocates and as a result tend to take countertrend trades, scale in, follow hunches and do other contrarian things that lose money (being contrarians to the current trend).

Many other bits are good (common) sense.

The diversification section seems like an attempt to sell his GSS system. Oh great. Just what the beginner needs - a JB system.

"Come back to me now and then to see if you can learn anything new from me since I continue to grow and evolve as a trader." OK so here we have it. Yes this is just another Jake Bernstein sales pitch. Or is it only that I have an overactive spam detector? LOL. Your choice. ;)
 

chump

Senior member
2,212 274
good article and his views on diversity presuppose you have some size to trade in which case it's good advice.
 

FetteredChinos

Veteren member
3,897 40
well written article, with a decent sense of humour..

"Fads come and go in the markets just as they do in real life. I still have a Nehru jacket"

I particularly liked that quote,

Jane
 

barjon

Legendary member
10,313 1,567
poor old johnny and jane - i'd better explore that deed poll business

one the most succesful guys i know has traded a single equity instrument (and only that) in all its different guises over the last 30 years - but then he's called fred.

good trading

jon
 

chump

Senior member
2,212 274
"I still have a Nehru jacket"

"I particularly liked that quote,"

I didn't ..I've only just bought one :cry:
 

Mr. Charts

Legendary member
7,364 1,181
Hello Jake - I'm sure you will be reading this comment thread.
An excellent article which carries the wisdom of time and understanding from the perspective of a very experienced trader.
It's only the third article in K Lab I've ever given 10 out of 10 for.
Well worth reading a second time to pick up on everything missed out on first time around.
I particularly liked para 3 and later, those vital words, "be humble..."
As for a "decent sense of humour", I saw Jake Bernstein speak at a seminar I spoke at myself last year and he was very funny, dry and ironic and always on the ball.
Richard
 

JumpOff

1
702 14
chump said:
good article and his views on diversity presuppose you have some size to trade in which case it's good advice.
It also presupposes you got at least one instrument figured out and are ready and able to hold two or more of them in your brain at one time. Just thinking about that makes me want to find a cool muddy spot so I can go lie down. LOL
JO
 

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