BarroMetrics Views: Why Traders Fail
Let’s start with the all-important question: why do traders fail?
They fail because:
• They don’t know what is needed for success i.e. they lack the foundation for success. For example, let’s say you wanted to be a world-class chess player. This first step would be to learn the rules so you would know how the King moves, the Queen moves, et cetera. Then you would learn the rudiments of chess strategy; then you would learn the strategy relating to the open, the middle game, and endgame. And so.
In trading, the foundational concepts are:
1. mind (the psychology of consistent execution),
2. money (the sides of position sizing and risk management), and
3. method (the plan that delivers a positive expectancy).
‘Positive expectancy’ refers to the formula: (average dollar win x win rate) – (average dollar loss x loss rate)
The formula (i.e. your trading result) must give a positive result. We shall be returning to this concept later in the series. At this stage, it’s enough to say that too many newbies attempt to trade without first acquiring a solid foundation.
• Traders also fail because they don’t do what they know. For example, in chess, the norm is to castle and protect the King as soon as practicable. Yet many new chess players failed to do this. So too it is with traders. They learn that to be successful you need to manage your risk. But, time and again, they overtrade: in terms of position-sizing, and in terms of frequency.
Again, we shall be returning to these ideas later in the series.
There are two skills that I shall not be considering in any detail.
The first is skill acquisition. There have been great advances in this field. If you are interested, you should study the ideas of Anders Ericsson and his deliberative practice method of skill acquisition.
Effective skill acquisition is necessary for learning any new skill – and it’s essential if we are to learn to trade well.
The second prerequisites are the values of honesty and integrity. By honesty I mean “never consciously faking reality”; and by integrity I mean, “keeping my word.” And, in the case of trading, it’s ‘keeping my word to myself.’
Without these values, we can never become successful traders.