The 3Ms – Secondary Reasons for Trader Failure

Earlier this month I made available a report to my subscribers called

“The Single Most Important Reason Keeping You Among the Losing 90%…..and It’s Not What You Think!”.

The reviews far exceeded my expectation. One review, in particular, prompted me to think…….

…….a splendid way to start the new series would be one on the 3Ms – the reasons most of us think of when asked why so many traders fail.

Here’s in part what he said in his review:

“The question I asked of myself is will I repeat the same patterns of the past so I appreciate your article.  First time it is bad luck and after a few times I can see the patterns and I have been questioning myself so your article is appreciated.”

That’s the key question, isn’t it? Why is it, despite all the improvements, in psychology, risk management and trading methods that over 90% of us still fail?

If I asked you the question, the top of mind answer you’d probably give would be Mind x Money x Method.  And, if I were asking you for secondary answers, you’d be 100% correct!

Mind x Money x Method = Trading Success

where

A) Mind means:

  • the consistent execution of our Money and Method rules, and
  • the willingness to engage in consistent and never-ending improvement (CANI)

B) Money means:

  • Risk management and

C) Method means:

  • A strategy that provides a positive expectancy

Notice the multiplication sign between each of the Ms. Because they are so linked, all 3Ms are needed for your success. And, notice too that the degree of our success is limited to the weakest link (the weakest “M”) in the chain.

But, what if I wasn’t asking for secondary answers? What if I was looking for the ‘single most important reason?’ That report we’ll look to make available in February. In the meantime, I’ll do a series on Mind, Money and Method. We’ll start the first of the series on Wednesday, January, 24.

So, see you here next Wednesday. I’ll be asking for reviews and comments are on par with those of “The Single Greatest Reason”,  I may turn the whole series into an e-book and provide it free to all who comment.

What do you think? Sound good?

 

Perception?

Which one do you see? An old woman, a young woman or both?

What about the Bitcoin’s prospects of continuing higher? Higher, lower or unchanged?

If you accept Teek’s thesis, Bitcoin is destined for USD 100K with ease.

And, tradingview believes we are seeing a continuation Head and Shoulders.

What do you think?

Up, down or rally around? This is not an academic question if you have bought Bitcoin or are thinking about it. It doesn’t matter that you may be thinking of buying one of its substitutes, be brave! Tell me, what do you think: ‘up, down or rally around?

Below is a chart for Bitcoin since inception. What do you think now?

What point am I making?

In an uncertain environment, we can’t control an outcome. All we can do is, give it our best guess, and control the risk. That’s why loss is part of the cost of doing business. You want to be a successful, trader? Then accept that you can’t win without losing – period, no ‘ifs’, no ‘buts’.

Where do I think Bitcoin will do? Sure next Tuesday, same time, same place. I’ll give you an answer then.

 

 

You’ve Made a Ton! Luck or Skill?

A

The worst thing that can happen to a newbie? Make tons of money when you first start trading. I fall into that camp. In my first foray day-trading the HK Gold Tael market, I made enough money to buy my wife a first-class fur coat!

“How easy is this?!”, I thought!

The experience convinced me to sell my legal practice and become a full-time trader. Easy? It took me all of seven years and bucket loads of dollars lost to become profitable finally.

And that’s the difference between trading and other professions – luck plays such an important role for success.

Think of it this way: let’s say you have been charged with murder. Would you hire someone with no training or experience to defend you? What would you say would be his chances to get you acquitted – somewhere between 0% and -100%? In short, no knowledge, no training means no chance of success.

Not so the trading game. You can be a total ignoramus, and for a while, appear to be God’s gift to the trading world. And, the ‘unfairness’ doesn’t stop there. You can be the most knowledgeable trader, you can do everything right on any one trade, and still lose money on that trade!

It’s this randomness and uncertainty that makes trading so hard.

So, how do we overcome the hurdle? Accept that on a trade-by-trade basis trading is random and uncertain. Our profitability, our edge, comes from the consistent execution of our trading and risk management rules.

S&P Trade

Thanks, Baz, Lee and Ryan for the comments! Appreciate…

The 60-minute chart above shows what I did. I exited the entire long position taken at 2667.3  because:

  1. Traditionally, the end of year sees an up close in the S&P because fund managers want to close their books with a strong showing. Instead, we saw a down day: a warning of a larger correction ahead?
  2. The Upthrust Change In Trend is a very reliable pattern. The minimum target for the move was 2678 to 2676. For me, if 2676 gave way, the next support zone was 2669.5 to 2656.3. Given the narrow ranges in the week, I thought it highly probable I’d see 2676 breached.
  3. Exiting the position meant I’d have a clear mind to see if the new year brought a rally. My mindset was I could always re-enter if I thought a rally was on the way.

I was prepared to buy on the close on Jan 29 (US time) if the S&P reversed and formed a rejection day, by closing near the highs.

By the way, if you click on the chart above, it will expand to a new window.

Thanks again for the participation!

 

The Power of the Unconscious

BarroMetrics Views: The Power of the Unconscious

As the curtain draws down on the BarroMetrics Blog, I wondered what I could leave you with that you would find worthwhile.

One fact stands out: somewhere between 75% to 92% of retail traders lose money. And despite the modern advances in technology, learning theory and psychology, that number has not changed. Those were the numbers when I started trading in the 60s, and little has changed.

So, what needs to happen to make a difference?

A spate of books I recently completed suggest that the remedy lies in two areas:

  • our commitment to self-awareness of our belief systems and
  • to the commitment to do whatever it takes to succeed i.e. to have the necessary grit. Surprisingly, it also includes the ability to quit. If you aren’t willing to do what is needed, you’re better off quitting.

The success formula is well known:

  1. Gather what is known about successful trading.
  2. Identify our current reality and our end game.
  3. Identify what is missing and what needs to be changed.
  4. Plan the actions to make the changes.
  5. Execute our plan.
  6. Review the actions – throw out what is not working and keep what is.
  7. Loop 3 to 6 until we attain our goal.

The process includes being aware of the beliefs that serve us and those that don’t. Once we’ve identified them, we accept the existence of our limiting beliefs, then reframe or substitute them for empowering ones.

The process is not an easy one. It takes self-honesty, work and dedication. Most traders would rather lose money than do what is necessary to change – hence the abysmal success stats for retail traders.

My hope: you are among the winning 8% to 25% winners, if not now, then tomorrow. All the best and thank you for reading my blog.

I have attached the books I referred to in paragraph 4. I’d recommend reading Insight.

Book List

 

Using MindMaps

BarrosMetrics Views: Using MindMaps

Nothing to do with trading or finance today. Occasionally, I come across an offer that I’ll pass on, simply because I consider it great value. Today is such a day.

But first: Happy July 4 to all my US readers!

Those who know me, know that I am passionate about improving my skills. Many moons ago, I adopted Mindmapping. I apply this skill to all areas of my life – reading, memory, planning, etc.

Last year I took a course called Mindmap to Kanban by Faizel Mohidin.

You’ve never heard of Kanban? At the time, neither had I. But, with Mindmap to Kanban, I learned and am now applying it daily. It’s has improved my personal effectiveness by 50% or more. If you want to learn more about personal Kanban go to:

http://www.personalkanban.com/pk/.

Figure 1 has an overview of the course contents.

Faizel has gone on to develop quite a few other programs. Another I took was his Learning Management Program. Again I found it useful and beneficial. Figure 2 for course contents.

So why am I telling you all this?

Faizel has a special offer open to Thursday – all his courses (USD 1282.00) for USD 279 (4.61:1 Reward: Risk!)

  • 6 Week MMK High Performance Coaching ($497 Value)
  • MMK High Performance System ($197 Value)
  • Learning Management Program ($197 Value)
  • Personal Business Model ($97 Value)
  • Worker’s Guide to Using Mind Maps ($97 Value)
  • Premium Webinars ($197 Value)

To view the offer, go to

http://usingmindmapsacademy.com/p/using-mind-maps-academy-lifetime-membership-special/

If you have questions, please write to Faizel at

fmohidin@usingmindmaps.com

Usual disclaimer: I am not an affiliate and don’t receive a commission if you sign up. I’m recommending the offer because I have taken two of the courses; I consider the $297 great value.

FIGURE 1  MindMap to Kanban

FIGURE 2 Learning Management

Why We Fail

BarroMetrics Views: Why We Fail

Ninety percent, perhaps more, of traders fail to produce a consistent profit.

Since I formed a goal to turn this dismal statistic around (well, at least to improve it), ‘why’ it should be so, has fascinated me.

Sure like any profession, law, medicine, architecture, etc., trading success requires an education; then we need to turn that education into a skill-set.

On the other hand, the knowledge required for trading competence is relatively small when compared to other professions. It’d be impossible to acquire the knowledge we need, for example, for law, in less than four years. Acquisition of trading knowledge, on the other hand, is possible within a 6-month window.

So what’s different for trading?

I think part of the problem lies in the nature of trading. More than any other profession, its results, on a trade-by-trade basis, are totally random.

This means ……….

You may not know anything about trading, but, you may still make money – if luck favours you. Indeed, you can make a lot of money if luck favours you, because luck may bestow herself on more than one trade; you may enjoy her blessings on a series of trades!

But, of course, luck eventually leaves. The newbie, misinterpreting luck for competence perseveres and, in the process, returns all the profits and more. I went down the road often enough in my early years to know its truth.

Another part of the problem lies in the educational environment.

Imagine an ad for a law degree that promises to turn you into a Perry Mason instantly. It’s unlikely that it would be very successful.

But ads promising instant success – instantly turning “a few dollars to mega dollars all because of System z” – abound.  I assume they abound because we buy them in enough quantities to encourage continuation of the tripe. Now add to that the fact blurbs, promising hard work in return for success, seem to be less successful in attracting students. The effect of the education is we have newbies trading a method which even if strictly followed, has no chance of making money over a large sample size.

The final problem lies with a lack of appreciation that to succeed traders need to be adequately capitalised. In a sense, this is an issue of knowledge: what capital ought we start with to give us the best chance of success?

Nowadays in my part of the world, the matter is not such a great hurdle.

Capitalization is a function of our trading stats and the volatility of the instrument or asset class we are trading. Since we don’t have the necessary stats when we first start, we make do with ‘volatility’.

One of the better formulas available is the Turtle’s formula:

($ value of % Capital to risk)/($ Value of the 14-period Average True Range).

The formula does not quite eliminate the need for personal stats because the % of Capital to risk is dependent on our results. Still, based on experience, a risk of 1% to 2% per trade would be sound.

With that info in hand, let’s see what capital we’d need to trade one contract in the e-mini:

  • ATR:                                           19
  • Point value:                         $ 250.00
  • 2% risk:                             $ 2375.00
  • Capital required:             $475,00.00 (!!)

I wonder how many trading the e-mini have that sort of capital?

I said ‘adequate capital’ is not such an issue in this part of the world. The reason is we don’t have to trade futures, we can trade CFDs. And, the regulatory environment is such that traders receive as much protection (if not more) as futures traders in the US and UK.

Essentially, what CFDs do is allow traders to trade smaller size.

A survey of CFD brokers shows contract sizes ranging from $1.00 per point to $5.00 per point. At 1.00 per point, we’d need USD 950.00 per contract, at $5.00, we’d need USD 4,500.00 per contract. The amounts are within the purview of the newbie.

(The Turtles Formula would not be the only factor limiting position size, we’d also have to consider the margin dictated by the regulators and the brokerage house).

More tomorrow……..

 

 

 

 

Do You Have What It Takes?

BarroMetrics Views: Do You Have What It Takes?

 

Pleasure Pain Gracia Scale

Angela Duckworth calls it GRIT. She argues that grit is more important than talent. Sure, talent gives us a leg up, but in the end, we succeed or fail by learning to do the right thing at the right time.

While I don’t disagree with her, I believe there is a pre-cursor to grit. And what is this precursor: motivation! This is especially true for traders.

Let’s examine this idea a little deeper in the next couple of blogs. I’ll be assuming that our trading plan has a positive expectancy if only we execute with some consistency,

In Pleasure and Pain, I introduced Gracia’s Pleasure-Pain Scale: the idea that we act only when an action’s (Pleasure of Action + Pain of Inaction) > (Pleasure of Inaction + Pain of Action).

The question I was asked is how to increase Pleasure of Action etc., and decrease the Pleasure of Inaction, etc.

There are a couple of ways.

The first is to make our ‘why’ (why we undertake an action) as strong as possible. I cover this subject in some detail in Live the Life of Your Dreams.  The second is to make the Pleasure of Action immediate and thrust the Pain of Action further into the future.

As humans, we are wired to opt for the immediate rewards ahead of future ones. Thus, when our flight, fight or freeze is triggered, we gravitate to taking any action to ease the discomfort. It is painful and uncomfortable to sit with a trade that is going against us. At that time, it is also painful to analyse the incoming market information and ask: ‘Early exit? Or should we wait for our stop to be hit?’ So, we act to ease the pain and discomfort rather than make a decision on our best guess based on the developing market the information.

I call these ‘impulse decisions’ and more often than not they result in our deepest fears. You know, don’t you, that behind our decision-making process is the fear that whatever we do will lead to a loss (pain):

  1. If we don’t exit early, the market stops us out for a full loss.
  2. If we exit early, the market does not hit our stop and reverses to a profitable conclusion – except we longer have a position!

So, what can we do to keep our commitment and motivation going? I’ll consider this question tomorrow.