I am posting early for Friday because I’ll be in Vietnam tonight and want to be sure I complete Friday’s blog without mishap.
I wrote this article in 1999 – it’s an oldie and a goodie. Here it is with a few minor amendments.
Mark Douglas’ success model is one of the better ones that I’ve come across. Mark believes there are three independent lessons a trader needs to learn:
- He must learn to think in probabilities (a trader develops a trading plan with an edge coupled with an effective money management approach. He learns to view each trade as part of an overall result rather than as a life and death issue).
- He must learn to execute the trading plan relatively flawlessly – an issue of psychology.
- He must learn to accept the money the market gives you – an issue of psychology, usually self-esteem.
“Independent lessons” mean this: just because a trader has a winning trading plan does not mean that he can execute it nor does it mean that he can accept the rewards of his efforts without self sabotage; similarly, just because he can execute his plan does not mean his plan has an edge etc.
In this blog, I’ll look at what I believe is the unstated pre-requisite for successful trading. This element I call “perception and acceptance of reality”.
In his first book, “Unlimited Power”, Tony Robbins describes the “Ultimate Success Formula”:
- define your goals
- take action
- observe the results
- change your behaviour if your action is not giving you what you want.The element for success is implied in this formula.
It is more plainly stated by Hyrum Smith as his 7th law in “The 10 natural Laws of Successful Time and Life Management”:
“You satisfy needs when your beliefs are in line with reality.”
Most of the trading failures I have met have demonstrated an unbelievable capacity for either failing to perceive reality or if they do see it, failing to act on it. This fault is demonstrated in many ways.
One of the most common is to have unrealistic expectations of the return trading can bring (given that their stated goal is to be a long term market player) – this usually takes the form:
“I want to become a professional; you know give up my job and earn 100% pa, maybe 200% pa. Yeah, I’ve done a little trading and I haven’t made any money but I have faith in my ability to get it (ie 100% return pa. etc)”.
Give me a break! If the trader was a weekend tennis player, he wouldn’t expect to beat Pete Sampras; yet with a proven record of trading losses, he expects to make a consistent 100% or more without a high risk of ruin!
Another form this ailment takes is simply to deny reality. Robert Krausz used to tell a fabulous story about a trader who came to him for assistance because “his wife was stealing” his contract notes. Under hypnosis the trader told him he was hiding the notes because he couldn’t stand to see the losses!
Think about your trading and/or your current state as a trader – any “non reality” there? I am most vulnerable whenever my slump results approach my no-go zone of a loss of 20% or more.
How about the novice trader, what’s the best way for him to avoid this trap?
We’re attracted to the markets because we fall for the hype that it’s a quick and easy way to make money. The reality is there is no magic formula out there to make those huge profits; instead there are principles that need to be understood, accepted and applied if we are to succeed.
The principles can be succinctly stated:
- “Ultimately, trading requires behavioural change and that requires us to step outside our comfort zones by developing an insight on what we need to succeed and then acting to change.
- Mere insight into the problem is not enough – you actually have to do something towards it.
- A great definition of insanity is “to do the same thing over and over again and expect different results. If after a time, your actions are not leading to the desired result, change your actions.”
Too many traders approach success with a ‘wish‘ (yes please, but don’t ask me to work at it) and not a ‘want‘ (I’ll do whatever it takes). And, if they do effect change, they look for instant success. But, this change will not come quickly and will be the product of consistent work.
I have seen the effects of acting outside these principles in my “mentoring” work.
Over a year ago I met Amos. He wanted to become a professional etc, etc. He had been in the markets for over 10 years and had probably been to every course ever taught in trading. I asked him to develop a written trading plan. With some help, novice traders usually take about 3 – 6 months. It’s been over 18 months and Amos still hasn’t got a plan.
Burke came to me in the last week. He has a great feel for the market and has experienced success. However, he is aware that he needs to change as part of that success has been attained by refusing to take losses. So far it has worked but he knows it’s only a question of time. Nevertheless, he is afraid to implement changes – mainly because it will mean operating outside his comfort zone. Unless he changes, he will join the 80 to 90% of trading losers.
And so it goes….
That is one side of the coin. The other is the great success stories of traders who put in many hours of constructive work to learn Mark Douglas’ lessons. Like:
- Colin who was ready to give up trading when I first met him in Brisbane. Three years later, Colin’s success is a model to those striving for success.
- And like Doug, who is now running his own hedge fund.
Each trades differently and use different tools. Each has achieved success on his own terms by working ‘smart and hard’.
To summarise: success comes with commitment and consistent action. Both these are products of what I call “perception and acceptance of reality”.