3 Essential Qualities for Success

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:

  1. 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?

 

The Trading Mind 2

BarroMetrics Views: The Trading Mind 2

When I last left off, we had just completed a consideration of the Reptilian Brain (Unconscious Mind).

We saw that it’s the oldest of the three brains and controls out biological functions and instinctive reactions. It’s designed to keep us safe, and it does this by looking to control outcomes. The problem is it was designed for a bygone era. Many of its solutions are out of place when it comes to trading. For example:

One of the hallmarks of trading is an uncertain outcome on a trade-by-trade basis. Seeking to control this outcome is doomed to failure.

Turning now to the Limbic System (Subconscious Mind)….

Its functions are well set out in the diagram above. I’ve also attached the image as a pdf file.

The unconscious and subconscious brains seek only the best for us. But, in their attempts to ensure our survival and to adopt the ‘right’ course, they prove to be a barrier to trading success. Our main adversaries are:

  • The desire to be right,
  • To stay with our within our comfort zone, and
  • The flight, fight or freeze response

Traditionally, in looking to defeat our nemeses, we have sought to control and reframe the impulses. In my experience, this approach has met with a distinct lack of success. Our most modern brain, the Neocortex (Conscious Mind), can’t control the other two, nor does it want to if it could. It needs to partner them for optimal results.

ACT (acceptance and commitment therapy) offers this option. I have written extensively about ACT in this blog.  (For past ACT articles, in my blog, do a search for ‘ACT’ and ‘Acceptance and Commitment Therapy’). 

Like anything else, the ACT processes need awareness and dedication until we integrate them. Once the processes become ingrained, they become part of us. Even better, we’ll see the results reflected in our trading bottom line.

Theory-of-the-Mind-Revised

The Theory of Mind (through the courtesy of Gemma Stone)

Essential Thinking and Success 4

BarroMetrics View: Essential Thinking and Success 4

Only two more elements to go, folks!

So far we have covered:

The penultimate element: entry

The function of entry is to buy us some time and space: after entry, the instrument moves favourably for some profit for some time. If it does this, it allows the room we need to manage our trade so as to ensure the worst result is breakeven.

Take Figure 1. There is a world of difference between an entry at 123.99 (green arrow) and one at 124.91 (red arrow). The latter gives us no time and space to manage a breakeven trade within the timeframe we are trading. Since I am trading a 5-day swing, I’ve found that the 60-minutes is the lowest timeframe I can expect follow-through to the end of day. Shifting down to lower timeframes exposes the trade an unacceptably high risk of whipsaw.

Finally, we have instrument selection. This element is especially important in FX. Over a large sample size, selecting the instruments to trade that result in profit is important. For example in Figure 2, the trader entered both pairs on May 12. The EURUSD is showing a profit of 302 pips, the EURJPY a profit of 40 pips.

So there you have it. What I view as the essential elements for success. In the piece, I wrote in order of importance. Let’s summarise in chronological order of a trade:

  1. Instrument selection.
  2. Entry
  3. Initial stop
  4. Position sizing
  5. Subsequent Trade Management
  6. Consistent execution.

Figure 1 EURJPY 60-min

FIGURE 2 EURUSD cf EURJPY (Daily)

Essential Thinking and Success 3

BarroMetrics Views: Essential Thinking and Success 3

Today I want to look at ‘Subsequent’ Trade Management i.e. how do we manage trades once they have started to become profitable.

The strategy has to be different for individual traders – the approach depends on our trading stats and personality.

My philosophy is best expressed by Trader Vic in Principles of Professional Speculation. In order of importance:

  1. Preservation of Capital
  2. Consistent Profitability
  3. Pursuit of Superior Returns.

As a result. I employ different trade management strategies when in Ebb Stage (than when I’m in Flow). When in Ebb, I take profits more quickly, and I am less patient when prices go against me.

For example, on Monday. May 15 I bought the GBPUSD at 1.2907. After rallying to 1.29560, it retreated to 1.28908. I exited the position at 1.28997. It’s now trading at 1.29618.

Any regrets at the early exit?

Nope: the only way I’d have captured the current move would have been to hang in. And, my stats show doing that in Ebb Stage, would produce a drawdown of between 15% to 21%.

Executing the current strategy keeps my losses tiny – I’m effectively flat until I have a winning month or two. But when I do have a winning run, my profits don’t have to chase losses. Applying this approach, I had my second best year in 2016.

Essential Thinking and Success 2

BarroMetrics Views: Essential Thinking and Success 2

Carrying on where we left off in yesterday’s blog.

Most retail traders ignore the next Essential – and it’s easy to understand why. When losses are viewed as unacceptable pain and profits as desired pleasure, trade management is seen as something to be ignored. Here’s the quandary trader’s face:

If I exit a position, and then it goes my way, I’ll feel bad. If I take a profit and the trade continues making money, I’ll feel bad. 

If I don’t exit a position, and I lose even more money, I’ll feel bad. If I don’t take a profit and the trade then reverses, I’ll have left money on the table, and I’ll feel bad. 

It’s damned if I do, and damned if I don’t.

To act on this Essential, we need to accept that losses are inevitable. I always dislike to lose money, but I accept the loss as a necessary consequence of doing business. With that acceptance, we can turn to a trade management strategy that best suits our personality and available time.

For me, I prefer to take small losses (with the risk of missing the occasional big profit). And, since I am a full-time trader, I can manage exits on an intra-day basis.

The result of the strategy is: most of my money is made in a month or two. The rest of the time my results tread water. The strategy calls for exiting on two levels:

  • a ‘soft’ stop – a situational exit. For example, if the trade fails to do ‘x’, I’ll exit immediately, and
  • a ‘hard’ stop – a price stop, placed in the market. If the price is reached, I am automatically out.

Figure 1 shows a swing strategy I employ:

  • This is a momentum trade. I buy on stop on the expectation that by day’s end, I’ll be in profit.
  • My ‘soft’ stop: by day’s end, the trade must not be in loss.
  • I took two trades both at the same price 123.97. The first I exited because, at day’s end, the EURJPY had failed to follow-through. I took the trade again the next day.

An alternative strategy is the Buffett type approach: we exit when the reasons for the trade are no longer valid. I know of some traders who are very successful using this method. But, it’s not for me. I’ve seen too many wipeouts to be comfortable with it

More tomorrow…….

FIGURE 1 60-min EURJPY

 

The more things change, the more they stay the same

BarroMetrics Views: The more things change, the more they stay the same

Flashback: When I first started trading some 45 years ago, a very popular seminar was doing the rounds. The promoter promised ‘no loss trading’. His strategy called for ‘hedging’ a loss. By that I mean, you would take the side of the open position and hold it as an open position.

For example, I sell the AUDUSD at 0.7380. The pair moves up, and at 0.7410, I buy. Effectively that’s a loss of 30 pips. Instead of taking the loss, I hold open positions of short at 0.7380 and longs at 0.7410.

At some point, I lift the ‘hedge’ for one leg (usually the one in profit) and look for the other to retrace to breakeven. In Figure 1, the hedge is created in the ‘recover zone’: we have bought at the buy level and sold at the sell level. The market moves to the Profit Target, and we lift the buy leg. When the market moves to at least the recover zone, we lift the sell leg, thus allowing the trade to reduce the loss or to even breakeven on the trade.

I’ve done countless stupid things when trading, but accepting the ‘hedge’ insanity is not one of them. The fact is when you have a ‘buy’ and a ‘sell’, you have a closed postion, period. Moreover, when you ‘lift’ a leg, you are, at that point, instituting a fresh trade. To think otherwise is to engage in a self-deception of massive proportions! For example, when you lift the buy leg in the example above, you are in fact going short at the new sell price.

Flash forward: The insanity continues.The

The other day I found that MT4 does not permit part exits of open positions, unless you use a market order – which means we need to be sitting in front of the computer to exit part of our position.

BUT MT4 does allow hedging!

Now if there were a demand for partial exits, I’d expect MT4 to provide it. The fact that it does not, but does allow for hedging, tells me much about the way retail trading is being conducted. No wonder over 90% are losing – they refuse to accept that losses are an integral of trading. As traders, our only choice is to limit losses; we cannot eliminate them.

FIGURE 1 Hedge Strategy

Why We Fail 3 – Putting It All Together 2

BarrosMetrics Views:  Why We Fail 3 – Putting It All Together 2

So, we’ve identified the traits we need. The key takeaway from the “Why We Fail 3 – Putting It All Together” is to behave in a manner consistent with the traits.

The next step is a two-fold process:

  1. Formulate a vision of what success means to us. Break the vision down into its component steps and identify what is needed to attain those steps.
  2. Survey our current reality to discover the gap between what is needed and what we have.
  3. Implement a plan of action to fill the gaps.

In implementing the plan of action, we use the skill-sets required to bring our vision into reality. This necessarily includes taking the nature of trading into account – in particular knowing that our focus has to be on the process rather than the outcome of any single trade. The outcome needs to measured over a large sample size else we mistake luck for competence.

Trading success is not easy. We can do all the ‘right’ things and still suffer drawdown periods.. On the flip side, it’s the most rewarding profession in the world. Success or failure is totally within our control, and it’s the only profession where the majority of the competitors are actively contributing to our profits. For me, it’s worth whatever effort it takes to be a success.

 

Why We Fail 3 – Putting It All Together

BarroMetrics Views: Why We Fail – Putting It All Together

In Why We Fail and Why We Fail 2, I outlined why trading creates, more than any other profession, failures and the qualities as well as the skill sets we need to become successful. Here, I’ll draw the strands together to create a model for success.

We start with the need for the commitment to do whatever it takes, add the willingness to move outside our comfort zone, and finally, have the integrity and self-honesty needed. Included in the three is the resilience to bounce back from the inevitable drawdown periods.

Too many start trading without appreciating that without these qualities no amount of knowledge will allow them to succeed. This was recently brought home when I again met John at my recent gig in Singapore.

John had attended one of my courses. His story was a familiar one: trading off his mobile, he bought when the 5-minute chart was up and sold when it was done. In the process, he lost over $100,000. For a while, after completing the course, John would attend all the free presentations I give in Singapore. I used to think that it was his way of supporting me for the extra guidance I had extended.

Perhaps…

I say ‘perhaps’ because it so happened that I also met a mutual acquaintance at the recent Singapore event. It turns out John had long abandoned the lessons of the seminar and had returned to his old way of trading and to his old way of losing tons of money.

He reminds me of another trader I met at an event held (many, many moons ago) by a broker for his most active clients. The gentlemen had been in serious drawdown mode since opening the account (high six figures). In our after event festivities we had this conversation:

“Do you think you can help me make money?” he asked

“What do you think needs changing?” I replied.

“Nothing. I just need my trading to become profitable.”

So I asked: “Let’s see if I have this right.

  • You don’t want to change what you are doing.
  • What you are doing is leading to losses. And
  • You’d like me to change the outcome of your ‘doing’ so it becomes profitable?”

Incredible isn’t it? Yet that’s how many unprofitable seem to think. They are unwilling to move outside their comfort zone and make the changes that may lead to a different result. And, the commitment to keep making the changes they need to make until they achieve success. In the process, they will need to invest time, effort and money. In the process, they kid themselves that they are doing what they need to do to succeed.

The same points are made in Mike Bellafiore‘s “One Good Trade“. Mike’s SMB is one of the premier prop trading houses in the US. He also runs SMBU, a training program for budding intra-day prop traders. I do have an alterior motive for mentioning Mike’s book. I was reading it last night and on page 97, he recommends ten blog sites from which newbie traders can find value. This site was among them.

More tomorrow

 

 

 

Why We Fail 2

BarroMetrics Views: Why We Fail 2

  • and how to succeed!

Without a doubt, failure is a precursor to success. I don’t know anyone who has not failed first before succeeding. But, that does not mean we’ll succeed just because we fail. If that were true, then the success rate would be over 90% rather than the reverse.

To make failure a part of the success process we need to learn from our failures. And this learning or lack of it is the key ingredient that separates the 90% (unprofitable) from the 10% (profitable).

So, what do we need to have to be willing to learn?

Well, there are three values that are critical:

  • The commitment to do whatever it takes – time, effort and money. This value necessarily encompasses
  • The willingness to move outside our comfort zone.
  • Integrity and honesty with ourselves. By integrity, I mean keeping the promises we make with ourselves; by honesty, I mean not consciously faking reality.

We’d also need some skill sets:

Tomorrow I’ll put it all together

 

Journaling

BarroMetrics Views: Journaling

Baz was kind enough to provide a link to a free video utility, ‘Loom‘. Baz’s suggestion is it would be a useful tool for journaling. My view, it should be, but most retail traders wouldn’t use it. I think for three reasons:

  1. Journaling that acts as a learning tool is usually time-consuming, especially if the initial recording media is a video.
  2. Even if kept, most retail traders, don’t revisit to extract the info needed to improve.
  3. Even if they revisit and extract, often they don’t know what to extract.

The main function of keeping a psych and an equity journal: to have a database from which to extract lessons for future improvement. In a word, by keeping the journals, we know what to avoid and what to keep doing. In this way, we raise our skill level from ‘competent’ to ‘mastery’.

There are two steps in the process. First we ‘enter’ the data, second, we extract the lessons.

The ‘entry’ can take any form. We can write and take snapshots; we can video and extract the info, or we can use a combination of the two. What is important is we have the info, firstly to identify the qualitative factors (psych entries) that hinder our success and those that assist it; and secondly, to identify the objective factors (equity entries) that do the same thing.

With psych entries, we are looking at items such as the conditions under which we are likely to be disciplined and the conditions under which we won’t be e.g. following consecutive wins or losses.

With equity entries, we are looking for stats: Maximum Adverse Excursion, Average $ Win and Average $ Loss, Win and Loss Rate, etc.

Once have the info, you need to learn from the entries. For example, what has been the effect on my equity curve of ill-disciplined trading? It’s best that this info is displayed visually. Research shows visual lessons from trading journals have the best impact.

One of the main reasons I recommend Edgewonk is because it does all this seamlessly and mainly automatically. For a one-time payment of USD 169.00, it’s one of the best value tools around.