All trading can be broken down into these two things:
1) Being right often enough
2) Not losing too much when you're wrong
I focused entirely on #1 for the past 12 years, and, whether in automated or discretionary trading, I've taken care of that part. I have an edge, I have many edges. I know how to spot highly probable trades. I even would go as far as saying that, on your first day looking at stock chart, everyone knows what's most likely to happen next. So, most of us can tell where the probability is, intuitively, from the first day.
The problem is that most of us never get done with doing #2 properly or don't even get started. Trading seems so easy, like a regular videogame, and yet it is a wonder why so few people can manage to do it. The main reason is that with money you don't get to practice like you can practice with videogames. One thing is to learn to juggle with balls, and another thing is to learn with knives. Most people (including me until now) do not give paper trading a chance and therefore learning to trade for them is like learning to juggle with knives. Each time you make a mistake you're going to get cut, and so you either get mad and that keeps you from learning, or you simply quit after getting hurt once too many.
Paper trading and back-testing are great tools in understanding when odds are in your favor. Backtesting for automated trading, and paper trading for discretionary trading.
Once you use these tools for practicing your trading, you can finally understand #1, that is when odds are in your favor. Once that happens, you become confident of your edge. You know that you are "good". Good enough to win. Then you only need to ensure that you don't lose everything when you are wrong, which is #2, and which implicates using a stoploss.
Using a stoploss is hard when you do not know you have an edge, because you can't let a trade go, you can't let that loss happen, because you are not confident that there will be other trades that will be winners. You're not confident in your ability to pick a majority of winners. That's why you first of all need to acquire an edge, but also to be aware that you have an edge. However, the two things maybe have to happen simultaneously because you won't know you have an edge until you're overall profitable, and you are not overall profitable until you use a stoploss.
Maybe that is why it is so hard to become profitable: because we keep on confusing #1 with #2 and keep on changing the dosage of the ingredients. Many of us are already good at picking what's most probable, but are not good at understanding that, since they have that ability, they can let losses happen, and don't have to hang on to their trades forever (in my case, this includes not doubling up on losers, because of how obsessive I get about not taking that one loss). This is why using a stoploss seems a simple concept but it is the hardest thing to accept, until you're positive that, with that given stoploss and bracket order, you have the ability to pick a majority of winners.
What I think is that if we did not have to enforce the stoploss by ourselves but were forced to use it, things would be much easier. The problem is that with trading we are totally free to do whatever we want.
I believe that if I gave that 0.2% bracket order (I spoke about it in earlier posts) to any teenager, who didn't know anything about trading, and told them "this is your weapon, now shoot your predictions on this chart", they would become profitable within a few hours. But money is on the line, it doesn't look like a game, and if you don't paper trade you don't get enough practice. As a consequence... you don't learn to trade in a few hours but in a few decades.
Think of this, of how a teenager would be taught and how he could see a chart on his first few days.
I'd give him the 9 futures I trade, and I'd give him two timeframes to use for all charts (he'd have to view all symbols in both timeframes):
1) 4 hours of 1 minute candles
2) 1 month of 1 hour candles
That's all. Then I'd tell him: here's your bracket order, now make your predictions, only when you feel you have a chance of course, in predicting that it will go 0.2% up rather than down or viceversa.
He'd notice that some things happen at a certain time of the day, he'd learn about the news released at 14.30 CET... it would be pretty easy. After a few days, he'd be able to make his predictions with an accuracy good enough to make money.
But none of this happens, or maybe it happens and I don't know about it. Well, anyway, by definition there's more than 50% of losing trades in the market, because of commissions. We can't expect to teach everyone to make money consistently.
I want to see at least if I can explain it to myself, because if that miracle happens, then anyone can learn from me. I am the most stubborn student there is, and I am being my own professor, since I cannot stand any professors.
When that will happen, I will get a few of my younger cousins, provide them with paper trading accounts, and take care of #2 for them ("not losing too much when you're wrong"): I will force the 0.2% bracket order upon them. They will have to learn to be profitable
within that bracket order. That way, I will save them 12 years of efforts and self-deception. Yes, because once #2 is taken care of, you will develop your edge, your ability to pick the next probable 0.2% move, in just a few days.
This is awesome.
I hope I'll live to do this. Then I'll see which cousin does better, and try to learn something from them. But first of all, before I do that, I'll be my own cousin. I'll be the beginner being taught that approach. Why didn't I think of this before? I'll tell you why: It took me 8 years just to open an account with IB. When I did it, the commissions in Italy for the same instruments were about ten times as high. Trading with the right tools and broker makes a huge difference. If you don't know this, you aren't even able to do anything. By telling them trade with this broker and with this bracket order you're practically saving them a whole lot of time. This is all knowledge I had to acquire somehow. That's why there's unprofitable and unprofitable. I am unprofitable with a lot of knowledge now, and I was unprofitable with less knowledge 12 years ago. One could say: if you are still so bad now, what kind of crappy trader were you 12 years ago? I'd say I still had a good attitude, because I started off immediately by looking at charts, without even knowing it was called technical analysis (I learned years later). Think about all those people who waste their time with cnbc and fundamental analysis. Those guys will never get it right in their lifetime, because they let other people guide their thinking and because are in looking in the wrong direction. I have a friend like that: he just does fundamental analysis. He has some good money management, though, so he didn't blow out his account 30 times like I did. But he'll never understand how the markets work. He basically has 3 companies and only goes LONG on them based on information about the companies, such as Apple.
One more thing. A quote from Douglas book (page 81 of 143), regarding the fact that if you know you have an edge, you won't hang on to losing trades:
...Because they don't have to know what's going to happen next, they don't place any special significance,
emotional or otherwise, on each individual hand, spin of the wheel, or roll of the dice. In other words,
they're not encumbered by unrealistic expectations about what is going to happen, nor are their egos
involved in a way that makes them have to be right. As a result, it's easier to stay focused on keeping
the odds in their favor and executing flawlessly, which in turn makes them less susceptible to making
costly mistakes.
They stay relaxed because they are committed and willing to let the probabilities (their edges) play
themselves out, all the while knowing that if their edges are good enough and the sample sizes are big
enough, they will come out net winners. The best traders use the same thinking strategy as the casino
and professional gambler. Not only does it work to their benefit, but the underlying dynamics
supporting the need for such a strategy are exactly the same in trading as they are in gambling.
