The Difference?

BarroMetrics Views: The Difference?

What is the difference that makes the difference? Why is it that some, the few, become successful traders, while others, the majority, failed to make the grade?

I was having this discussion with a long time friend and trader, let’s call him Tom. Tom is the best trader I know. I met him in the middle 70s when he was working for an Australian bank. He then migrated to the United States where he was hired by a hedge fund. He subsequently formed a hedge fund of his own.

Anyway, back to the discussion I was having with him.

Tom’s view: the difference lies in the response to large unexpected losses. I should mention that we predicated our sample size to be persons of equal technical knowledge and skill.

My view: the difference is the ability to be comfortable with the discomfort caused by uncertainty. In a sense, there is no difference between the two views. Let’s have a look at what I mean.

Tom believes that the unsuccessful trader, when encountering an unexpectedly large loss, will do one of two things:

  • He will start chasing his losses – by increasing size and/or the frequency of his trades; or
  • He will stop trading.

The successful trader, on the other hand, will hunker down: he’ll reduce size, or he may take a rest, or he may select only those setups with the highest probability of success etc. In other words, he will circle the wagons and focus on regaining his equilibrium.

If you think about it, this behaviour stems from the unsuccessful trader’s inability to handle the uncertain result of his next trades: if the unsuccessful trader knew that his next few trades would be successful, then he would just continue to implement his plan. It is the uncertainty of the results that causes him to chases losses.

It’s not that successful traders don’t make mistakes, they do; it’s not that successful traders don’t have an out-of-size loss, they do; it’s not that successful traders don’t encounter bad luck, they do. But, what they don’t do is lose their equilibrium.

Their strategy, as I outlined above, is to:

  • Take a short break 
  • Decrease rather than increase size
  • Do whatever is needed to maintain a successful state of mind 

The unsuccessful trader losses it – either blows the account or retires from trading.

9 thoughts on “The Difference?”

  1. Tom’s view: the difference lies in the response to large unexpected losses

    1. A series of small losses can amount to large losses

    2. The keyword is: “unexpected”?!

    3. Successful trader “expect” the trade could be a loss and he “plan for the losses” with detailed plan – Plan A?

    4. Successful trader also plan for “unexpected gains” – detailed Plan B to make “profits run”?

  2. I have just started trading mainly one hour chart. I did demo for a few months and the result is good. However, result did not go my way when I turn to real account, having a small loss right now.

    The temptation is super high to increase lot size and to over trade to win back my losses.

    I have some rules to remind me as below:
    -Get used to sticking to plan and not avoiding losses.
    -Risk and Money Mgt KEY to LONG term profit
    -Market is ever-changing, there will come a time, your system is unable to perform at all during market condition that doesn’t fit your trading method, so that’s when you need to endure and stay alive through GOOD MM and Risk

    It does help to remind me not to help young trader mindset.

    One qn is how to you get a successful state of mind?

  3. Thanks for sharing.

    Traders Sate of Mind – I ‘borrowed’ the phrase from Ramde Howell

    (http://www.tradersstateofmind.com/trader_psychology.html).

    I define it as a state where our emotions and intellect are as one AND where we are focused on only on the data the market is currently providing.

    Compare this state with the one most traders have while trading (any time frame): somewhere lurking in the background there resides their fears and hopes for the trade. And, this background, influences their thoughts and actions and may even control them

    In this state, we make the optimal decision given our knowledge skill and experience.

  4. Hi Ray,
    1. Is it true that all (or most of the) successful traders “let profits run”?

    2. Assuming a position trader only long NZD/USD. He has enough
    capital to hold multiple existing winning trades and to enter new trades
    should the opportunities arrive.

    He loves the positive rollover interests.

    Also, assuming that NZD/USD is in a bull run. There are a series of
    XAB structures (as taught in HOS 2011). The first XAB structure has
    points X1, A1, B1, and the remaining profitable 3rd contract Z1.

    The second XAB structure has points X2, A2, B2, and the remaining
    profitable 3rd contract Z2.

    Now new X3, A3, B3 are being formed.

    Question:
    How should this trader moves the profitable training stops for Z1 and
    Z2, in order to “let the profits run”?

    3. “Normally” (say 70% of the times), in a bull run for NZD/USD, what
    is the maximum number of XAB Structures could be expected to be formed before it
    turns into a bear swing?

    In that case, should this trader exit all his winning positions?

    Please advise. Thanks.

    Paul

  5. Hi Pie,
    1. You wrote:
    “I have just started trading mainly one hour chart. I did demo for a few months and the result is good. However, result did not go my way when I turn to real account, having a small loss right now.”

    OANDA told me that their demo-account sever is the same as real-account server.

    How about your broker?

    2. You also wrote:
    “…there will come a time, your system is unable to perform at all during market condition that doesn’t fit your trading method”

    How do you define market conditions?

    What market conditions fit your trading method?

    Haha, may be we could ask Ray! 🙂

    Paul

  6. Hi Paul,

    I used Axi trader and demo is a bit different. For me a few pips difference, is fine with me. For some broker, their demo and real account do not match at all like fx open.

    Sometime, your method would not work in certain market condition or time line even when there is set up. I think what is impt is NOT to force a trade, average down and NOT increase lot size.

    However, I would wish to learn from Ray one day. For now, I want to make sure my 1 hour is stable and good before I learn other things.

  7. hi Pie,
    1. Do you trade trends, or ranges, or breakouts, or …

    2. If you trade trends, how do you define the market condition is trending now?

    Based on:
    1. Moving averages?
    2. Support and resistance?
    3. Trend lines?
    4. Barros Swings?
    5. …

    Ray would tell you what he thinks is the best!:)

    3. Without a useful appreciation of the market conditions, how does a trader know which trading systems to use now
    – trend system, or
    – range system, or
    ….?

    ___

    Few years ago, I was told by a professional trader that a broker’s demo-account server could be different from the real-account sever
    – so that you could have winning demo trades, but most likely will be losing trades if using the real-account server!

    The price behaviors are different for the 2 servers!

  8. I have around 10 steps before I enter a trade.
    S/R, candle formation, ema, stochastic, TL breaks, MACD (1 hour) then check where is price with 40EMA and then 5 mins to make sure ema 5 and ema 11 cross ema62 3 TF to consider ema 200.

    You know some people use their EA and trades demo, they earn tons but lose when use real account. Some brokers demo and real account do not match. However, unless you are scalping, a few pips are not that impt.

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