BarroMetrics Views: 3 Essential Qualities for Success
I was reading a blog my Michael Hyatt about three qualities effective leaders have (What Ike’s Secret D-Day Letter…). And, I thought,
‘Yep, that’s also true for traders’!
Eisenhower wrote a secret letter ahead of the Normandy invasion – in case the invasion failed. In it he takes full responsibility for the ‘failure’: ‘The troops, the air, and the Navy did all that Bravery and devotion to duty could do. If any blame or fault attaches to the attempt it is mine alone.’
From that letter, traders can integrate three critical lessons:
- He practised ‘extreme ownership’. This phrase recently has come into vogue (just Google it and you’ll see what I mean). But, it has been around for aeons. Dad taught it to us, and I’m a septuagenarian!
Dad called ‘accountability’ – take total responsibility for actions within your control. As traders, we decide when to enter and when to exit. Trade-by-trade, matters will occur beyond our control; but, in the long run, we will be profitable if:
- our plan has an edge,
- we execute consistently and
- we practise appropriate position sizing
2. He addressed the downside: Eisenhower succeeded not by ignoring the challenges he was facing but by meeting them head-on.
Mechanical traders do this by understanding the stats of their system:
- the expectancy return,
- the average dollar win & loss,
- the theoretical consecutive loss probability,
- the average ROI, etc.
Discretionary rule-based traders face the challenge this way: by understanding, not only the structures they are trading, but also the principles underlying the structures. For example, in the Wyckoff model, we are taught the ‘buying climax’. The trader needs to know not only the pattern but also the conditions giving rise to the pattern.
3. He used contingent thinking: expect the best, prepare for the worst. I use the ‘if-then’ approach. I adapted this from the goal-achievement material (see How to use if-then planning to achieve any goal). When coaching, I find getting traders to integrate this thinking one of the most difficult skills to teach. The question I seek to answer:
‘What do you have to see to tell you that your (trading) scenario is wrong?
And then use the ‘if-then’ formula to generate action if that scenario comes about. The answer often allows me to exit early, ahead of the stop-loss being hit.
If you think about it, you’ll see that the initial stop loss is a form of an ‘if-then’ statement. For the discretionary trader, exiting before a stop loss gets hit is a big plus – if done for the right reasons.
The problem is the student-trader is afraid to look into the question. Why? Because after asking that question, he encounters the fear: ‘what happens if I exit early and miss a humongous profit!??’
He doesn’t seem to ask: ‘how much will I save by exiting early rather than being stopped out?’
And he fails to look into the stats, to see if early exit costs or saves him money.
My question for you: how many of the three qualities does your trading exhibit?