Why ALL The Habits of Success are Critical

BarroMetrics Views: ALL Why The Habits of Success are Critical

I call the three essential elements for long-term trading  achievement “Habits of Success”:

Winning, Psychology (60%) x Effective Risk Management (30%) x Written Trading Methodology (that has an edge, 10%) = $UCCE$$

I received a post challenging my view. The author took the position that all that was needed was a Method with a high win rate (above 70%) that was profitable.

Readers of this blog know I take a diametrically opposite view.

I believe that while all three elements are essential, the least important is the method. The reason for my belief is found in the nature of the markets. At some point all methods encounter a period when market conditions do not suit the plan – what I call the Ebb State. During this phase it’s not a question of ‘if we’ll take a loss’ but ‘how much that loss will be’.

The effectiveness of our psychology and risk management will determine how large the losses will be. If we can keep them small during this phase, then we encounter the phase where we can do no wrong (Flow State), we’ll have a great bottom line; if our losses are large we may lose all our capital before we encounter the Flow or the profits from Flow may be enough to make up the losses.

I believe that the implementation of all the habits is so important that I hold the Habits of Success seminar at a nominal cost. At least it does not cost participants an arm and a leg if they  decide that the habits are beyond them.

In answer to my correspondent, I could point to most trading catastrophes: Long-Term Capital Management, Sumitomo, Orange County (for a complete list of losses over US$10,000.00 go to: http://en.wikipedia.org/wiki/List_of_trading_losses): the failures occurred because of a failure to contain losses. But I can point to an even more interesting experiment.

With the help of a broker friend and 23 willing volunteers I began an experiment June 1 2009 to test my ideas about the importance of the Habits of Success. The volunteers had accounts ranging from U$10k to US$175k; none of them had shown a consistent profitable trading record. I agreed to provide entry, exit (stops, profit exits etc) and position sizing based on their account sizes. (The smaller accounts had to trade CFDs on futures). In return they agreed to execute only in accordance with my instructions.  The experiment terminated on June 30.

In the testing period the recommendations showed a small profit in the two entries for the DX and a scratch result for the ES trades. Since the method was proven (and if all that is needed to succeed is a robust method), then the attendees ought to have shown similar results. Nothing could be further from the truth.

  • One trader lost over 30% of his account. The only profit he made was on the first DX entry at 79.97. Thereafter his ES and DX trades bore no resemblance to the advice.
  • The others all broke discipline(i.e. they  more or less followed my instructions but did not follow the advice to the letter) and the breaches all resulted in greater losses than otherwise would have been the case.

The experiment is the best counter argument to focusing only on method. The point I am making is if you believe that all you need to succeed is a robust plan, tuck your money in your pocket and walk away from trading:  with that belief, your most likely result over the long-term  will be failure.

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