Blog for Trading Success

BarroMetrics Views: Dr. Janice Dorn, “Why Traders Fail”

Today I was going to comment that part of the success equation on which newbies focus: the trading methodology. Specifically I wanted to  ask the question: what constitutes a robust plan?

But then Dr Janice Dorn’s July1 newsletter hit my mailbox. It’s so good that I want to share it with you not only because it well-written, but also because it fits neatly into our current theme. And while I may not agree with Janice’s view of the purpose of the market, it is an angle worth considering.

Thanks Janice, for permitting to replicate it.  By the way guys and gals, Janice has a great, free newsletter at her site: www.thetradingdoctor.com

“Most traders come to the markets because they see a way to break from the 9-5 routine. They want to make their own decisions, say” bye bye” to working for the boss man (or woman), set their own time schedules and routines.  There is a magnetic attraction to the idea that you can make money, sitting in your pajamas, typing on a keyboard and doing what is called “playing” the markets. Playing at home in pyjamas…sounds like a teenage slumber party with lots of fun, doesn’t it?

But wait—it can’t be that easy, can it?  Of course not.  If it was that simple and a sure thing, everyone would not only be doing it, but would be happy, joyous and free. Clearly that is not the case.  So why?

I believe that everyone can attain personal and financial success using his or her own unique ability.  Many of you have proven this in life outside the markets.  You are successful in real estate, accounting, medicine, engineering, the law, sales, etc.  So why are you struggling with the markets and why is this pyjama game not working so well?

The answer is really quite simple, and—just like so many secrets—is hidden in plain view.  The type of thinking that made you successful in life outside the markets is the mirror image of that in the markets.   In “regular” jobs, in the world of real life—there are rules.  These rules are set down by other people.  Other people make rules and you follow them.  If you do not follow the rules, you risk  losing your job or your license.  Think of medicine:  a doctor must abide by many rules set forth by state medical boards.  If they do not, they are warned, disciplined and may have their licenses revoked.  The rules are out there and doctors follow them—or don’t (at their own peril and that of their patients.)

Now we come to the markets.  Yes - there are rules of trading set by regulators, exchanges and the brokerages, but they really are minimal in the overall scheme of things.  Unless, of course, one is a criminal or Madoff-variety sociopath and then things can get tricky and nasty fairly quickly.  So - who makes the rules for your trading?  You do.

Who executes trades based on the rules you make for your trading?  You do.

Who tells you if you are right or wrong about the rules you make?   Well, the markets tell you but you have to listen and take action.  So, once again—it’s about you.

In this type of environment, many people flounder.  They are not used to making their own rules, executing them and taking personal responsibility when their rules are shown to be an illusion by the markets.

Please listen closely to the webinar posted on the Trading Wisdom Blog on June 21.  It talks about illusions and “convenient lies” in trading.  It speaks to the self-deception and what is called “confirmation”  bias. This means that you stay stuck with certain ideas and look anywhere for something that confirms this to you.  Nothing is correct except what the markets are saying.  It doesn’t matter how flowery or convincing the prose, the charts, or the analysis.  It’s all an illusion unless the markets confirm.  All of it.

In the end, your freedom in the markets is solely a property of who you are, what you believe, what you believe that is not true and what you do about it. In most cases, it is the ability to think in probabilities in a counter-intuitive manner that separates the losers from the winners.  In other words, the same type of thinking that brought you so much success in the world outside the markets will not bring you success in the markets.  Think about this for a second, please.  Let it filter in and then try to get your brain around this concept.  It is critical to understand this at the deepest level in order for you to move forward as a trader.

This is a new game, possibly unlike any other you have played in your life.  Realizing and truly “getting” this can be a very lonely and alien experience for many people.  Additionally sharks circling quietly in the murky waters are waiting for those who do not understand the nature of the game they are playing.  Remember, the purpose of the markets is to remove as much money as possible from as many people as possible. It’s not a “play nicey nicey, throw feather pillows and eat popcorn” pyjama party.  It’s a brutal and vicious game where the stakes and freedom and that freedom is in the form of money”.

The emphasis above is mine. if you reflect upon and come to understand the ramifications, you’ll go a long way to attaining consistent success.

Bookmark to:

BarroMetrics Views: Trading’s Most Critical Mistakes

I love to teach. My main payoff is the satisfaction I feel when I know I have had the same impact on traders’ results as Peter  Steidlmayer had on mine. At the same time, I take another step towards achieving one of my deepest desires: to leave a positive legacy.

Recently I met with the 2008 attendees of the Habits of Success seminars, and it brought home to me that those that succeed correct    critical mistakes:

1. They formulate rules that define the opportunity i.e. define when the probabilities are on their side. One caveat is important here. Neurological evidence shows that our brain is a pattern-seeking machine and we will react to patterns. It’s important therefore to allow some room in our plan for a variation to our plan. This is akin to our plan to wait for the lights to turn green before crossing the road. But if it’s a straight road with a clear view and there is clearly no traffic coming in either direction, I think it senseless to wait for a ‘green walk sign’ before crossing. The rules were designed with a certain context in mind and if the context does not fit, we change our game plan. What is important is we have benchmarks for the new plan in the same way we did for the old.
2. They have trading rules but fail consistently to execute them.
3. They add to losing positions.
4. They over trade i.e. either take position sizes so large for their accounts that the risk of ruin is great or they trade too often.

All four have as their prime cause the unconscious motivators and poor habits. One way of re-framing the problem to provide a solution is to define a loss as a breach of the rules rather than as a financial loss. Viewed in this light, we are less likely for example, to add to losing positions. Of course when I say ‘add to losing positions’, I don’t mean the situations where we have planned progressive entries.

Instead, what I am alluding to are those occasions where we have planned a position size and exit strategy and then rather than take a loss, added to a losing position to ‘average our entry’. Here our motivation is to run from the feelings generated by the price action rather than a reasoned/emotional response to probabilities on offer.

In the last few posts (including the Habits of Success announcement), I have focused on the need to start with the foundations of trading success: risk management and psychology because although more important than a set of trading rules,  usually, they are at best given lip service and at worst ignored or disseminated with out-of-date material (for example: trade without emotion!).

My advice: undoubtedly, you need a set of rules but start with a simple one and focus on cementing the foundations.

Bookmark to:

BarroMetrics Views: Habits of Success

 First off the blog announces the Habits of Success webinar to be held over two weekends:

• Sat & Sun Aug 29 & 30 @ 7.30pm - 11.30pm HK/Singapore time
• Sat & Sun Sep 5 & 5 @ 7.30pm - 11.30pm HK/Singapore time

And now to the reasons for the change from a seminar to a webinar.

Normally I hold the event as a seminar over a Saturday and Sunday. But this year, for personal reasons, I am unable to commit to the seminar. So I have converted it to a webinar over 4 days. The odd times are to accommodate the US traders on Eastern Standard Time with those in this part of the world. It’s difficult to set a time that suits everyone; the times I finally decided upon are the best compromise possible.

There is a reason why  I choose to do a webinar rather than just cancel the event. This year I have had numerous requests by traders living  in  Indonesia, Malaysia, HK and Singapore to make Habits of Success available. Well now I have. If the numbers justify it, I shall  hold both a seminar and webinar next year.

I am most often asked: why is the price so low? In this part of the world US$650 (about S$850.00) for the equivalent of a 2-day event with videos of the event thrown in is unheard of! The lowest price  for a 2-day trading event (that I know of)  is S$2500.00 and the top end is S$6000.00.

The reason has nothing to do with the quality of the content. If this were a commercial event, I’d be charging S$4000 to S$5000.

I keep the prices low because it’s my annual ‘give something’ back. The fees only cover my costs; my time is freely given. I choose this content because I believe that most traders are unsuccessful because they lack the foundations for success. Newbies focus on the ‘plan’; for them, it’s the ‘holy grail’ of success. For most newbies, the mindset is: ‘easy’, ‘few if any losses’, no need for ‘effort and time’ to learn the basic skills and 80% to 90% of newbies fail.

They fail because the reality for success comes from a very different mindset.

You need to put in the ‘effort and ‘time’ to acquire the appropriate set of skills. And this leads to the key question: what skills in what areas do I need to succeed. In this event I seek to impart  the foundations of success at a price that allows you to say: ‘Thanks, but trading is not for me’. Or “Great! The roadmap provides the skill set I need to master.”

Once the foundations are in place, you are free to pursue greater market understanding.

I liken this quest for the ‘holy grail’ to a novice golfer who can’t even hit the ball but who pays large dollars for the best equipment and attire. Unfortunately the money is ill-spent. Until he learns the basic skills, he will not become a better golfer no matter how much he spends on equipment. On the other hand, in the hands of  Tiger Woods, the quality of the equipment makes a difference. So too with the trader:

• He first has to become competent in the basic skills - the foundational elements.
• Once he is competent on the foundational elements, a better plan i.e.,  a more robust understanding of the nature of markets,  will make a difference to his bottom line.

For more details go to: http://www.tradingsuccess.com/hos.html

Bookmark to:

BarroMetrics Views: Our Unconscious Motivators V

An example

The last trades I took in the DX (US Dollar Index Futures) and the ES (e-mini S&P Index Futures) highlight the importance of being aware of our unconscious motivators.

Regular readers of this blog know that I started 2009 trading results with a  whimper. I failed to recognize that my trading was in an Ebb state and as a result suffered the largest monthly loss since I started managing my private, closed fund in 1990. Since then I have been struggling to make a significant dent in the losses.

I had great expectations for the two trades, DX and ES.  I’ll focus on the DX here because the ES trade is well documented on the Video/Forum/Twitter free service.

Everything had lined up perfectly and I was very confident that my favoured scenarios would unfold. I entered my first positions at 79.67 and a second set at 80.49 After both entries, the market immediately went my way.

But then the DX stalled.

I had been looking for a simple correction but instead we saw a small trading range develop (see Figure 1).  The second set of positions I had added to the DX 80.49 proved to be around the middle of a congestion zone bounded by 81.97 and 79.62.

On Thursday June 25, the DX went to the Death Zone of the congestion zone mentioned above and sold off. I was faced with the prospect that:

• The DX would at least break 79.62 and if it did that, a breach of 78.83 was likely. A breach of 78.83 probably would resume the US Dollar bear market. If I did not exit and the market broked as expected, I’d be faced with a loss or breakeven trade after the market had moved  in my favour.
• Or would the DeathZone sell signal play false? If exited the positions, would the DX go up rather than down and I would exit my positions prematurely? What if I exited and did not see another setup and trigger to re-enter the trade? I’d lose the one chance I had to make substantial inroad into my losses.

I have reproduced some of journal entry to give you an insight into my state of mind. I am comfortable losing up to 20% of my capital - I don’t like it but accept it as part of the trading game. When I lose more than 20%, my anxiety levels rise. I respond by cutting position size and making it a priority to bring the losses down under the 20%.

Unconsciously I had placed great faith that these two trades would not only bring me under 20% but would also substantially reduce the losses. ‘Then the blinking market  had do this……!!’ (quote).

Whenever I feel great stress, I find it useful to rant in my journal - it blows up steam and it allows me to safely fully experience what I am feeling. Once I have calmed down, I return to myself and then the markets. I realized that the loss and market information I had received on Thursday had triggered my unconscious motivator. Hence the emotional response. That awareness allowed me to deal with the market information more centered than I would otherwise would have.

Having made a decision, I implemented it and felt better for the way I had gone about it. If I had acted when my unconscious motivator had hijacked my emotions and reason, whatever decision I would have made would have been wrong for me.

Figure 1 DX September

Bookmark to:

BarroMetrics Views: Our Unconscious Motivators IV

In this past week, I have been focusing on identifying our unconscious motivators. The key one is the one I label our ‘default future’; unconscious, automatic responses learnt in our childhoodl the stuff that governs our default responses which, unless identified and dealt with, will continue to provide the same responses - responses which may or may not be appropriate. Since our default future falls into the ‘what we don’t know, we don’t know category’, how do we identify it?

The easiest way is to observe our stated outcomes, our behaviour and our results. If our behaviour does not lead to our outcomes but we persist with the behaviour, you can bet your bottom dollar that some unconscious response is at play.

For example, you’d have a screaming pointer of a response at play if your goal is to attain consistent trading success, and yet you continually breach your trading rules.

I have chosen this example because it allows me to bring in the two human traits I wrote about on Wednesday:

1. The Impulse/Risk Manager decision-making process and
2. The Fixed/Growth Mindset.

But before I get into that, let me bring in one more important variable. Denise Shull rightly promotes the idea that as long as we are executing our trades (as contrasted with a computer executing our rules), we must allow for some form of discretion. In some quarters, this may be seen as a breach of rules but she likens it to a coach giving his team the play and having the quarter-back make the on-the-field decisions. A good example of this took place for me on FOMC night.

I had decided to sell the ES if:

• I saw volume at 896 and
• The volume occurred no earlier than 10 minutes after the rate decision was announced.

Well, right on the button, strong selling volume came in and at 899, I decided that the strength of the volume meant that at 896 we’d see the volume that would trigger the sell signal. So, I took the trade and got filled at 898.75. If I had been proven wrong, I’d have exited the shorts.

 Denise is right, if we don’t allow some room for our discretion, we are doomed to not ‘following our rules’ in situations which not following is the ‘correct’ thing to do.

Which brings me to the next point. My dominant decision-making process is that of a Risk-Manager which is why I have better trading results as an 18-day swing trader than a da-trader. But there are times (usually in the execution of a trade) that I act more like a Impulsive decision-maker and I am OK with that - as long as I exit the position, if the market fails to do what I was looking for.

So, if you are someone who is not ‘following your rules’, check to see your decision-making style. (an aside, most ex-floor traders, for example, fall into the Impulse category). If your style is the Impulse mode, then make sure you do some pre-planning as this will help your intuition. Then just execute on your intuition BUT after executing, check the reward:risk, benchmarks etc. If the trade does not qualify, just exit. Don’t anchor your entry price - just exit. In other words, the decisions normally made by the Risk Manager before the trade are carried out by the Impulse Trader after the trade.

An acquaintence recently told me: “You know… there’s one simple reason why most people don’t make the improvements in their lives they long for: The reason is that nothing is going to change in their lives if they don’t take conscious actions to make a difference. You’ve got a choice: Either go after the knowledge and opportunities that will make a difference in your life…or stay where you are.”

The problem is it is only now that we are discovering how to identify and change ‘what we don’t know, we don’t know’. And until we do that, until we change that to ‘we know what we don’t know’, all the innovations and discoveries will not make one iota of difference.

Bookmark to:

BarroMetrics Views: FOMC Trading Pattern

First off an apology: I wrote my piece late last night - actually early this morning - and with preparing for FOMC and attending to the new Forum/Twitter Service, I overlooked clicking the ‘Publish’ icon. As a result, my “Unconscious Motivators III’ has been delayed by 24 hours.

Today I want to focus on a pattern that is reasonably reliably for FOMC rate decision announcements. Last night it again proved its worth.

“Wait around 10 minutes after the announcement before putting on a trade - only then does the ‘true direction’ reveal itself”

 And so it proved last night. Ten minutes after the announcement a down move started that lasted until 15:20. Note that last night’s post FOMC trading was a mute affair. I have seen some wild gyrations in the first 10 minutes that was followed a sustained and strong directional move into the close.

FIGURE 1 10-Minutes after FOMC

Bookmark to:

BarroMetrics Views: Our Unconscious Motivators III

The biggest block to our trading success is what I call our ‘default future’.  In our childhood we encounter events to which we develop strategies to enable us to be safe, secure and survive. In time, these strategies become automatic, unconscious responses. To the extent we come from a functional environment, is the extent to which we achieve success - the responses become our strong suits; to the extent we develop dysfunctional responses, is the extent to which we will ‘fail’. By functional, I mean ‘with the ability to deal with reality’.

But whether the responses are functional or dysfunctional, they key points is they are unconscious and automatic responses - and as such, until we become aware of them, they create a default future. In short, the responses are ‘what we don’t know, we don’t know’ and until they become known to us, we are will continue to respond in the same way, especially during times of stress.

In addition, it appears that humans are hard-wired with two traits:

1. our decision-making process falls predominantly into the Impulsive or Risk Manager mode. It’s important to understand that the terms describe a mode of behaviour we tend to fall into; we need to execute our trades in the manner best suited to one of the two modes to which we belong. For more information read: ‘Day Trade?‘. And,
2. we invariable develop two unconscious strategies; the fixed mindset and the growth mindset. We have both but one tends to predominate. The fixed mindset says that our ability and intelligence is limited. Therefore our success is dependent on the talents we have. Since that too is limited to what we were born with, there is no point in seeking to improve and enhance it. This mindset is seen most clearly with talented individuals who do little to enhance their abilities e.g John McEnroe.  I would venture that this mindset predominates with those that enrol for the ’sure win, no effort’ school of trading.

• The other mindset is the growth mindset that believes in constant and never ending improvement. It is the basis of the recommendations in the Cambridge Handbook of Expertise and Expert Performance and in the book, “Talent is Overrated“. With this mindset, the we believe that success lies in our actions and it is up to us to achieve what we can with the talent we were given.

 Like our ‘default future’, these traits are unconscious responses and not something that ‘we know, we know’ or that ‘we know, we don’t know’. Rather like our unconscious strategies they fall into the category of something ‘we don’t know, we don’t know’.

On Friday, I’ll conclude the series by drawing the various strands together.

Bookmark to:

BarroMetrics Views: Our Unconscious Motivator II

Tonight I’ll continue with Monday’s topic. But before I do that, I want to address a point Krasimir raised. He postulated that the time it takes to progress from novice to master partially accounts for the large loss rate (80% to 90%). I partially agree with the observation. But what concerns me about the losses, is the fact that the losses are for a substantial percentage of the starting capital. With the advances we have seen, that percentage loss would have declined had the advances been implemented - we ought to have seen in trading results the same sort of advances we have seen in sports and chess. But this has not been the case.

So, the question arises: why not?

I think  partly,  trading is a probability game and because it is a probability game, on any one trade, a raw novice will ‘beat an experienced trader’ i.e. the novice will make money in the trade while a master will lose money in the same trade. This aspect exists only in trading: if I took Mike Tyson or Tiger Woods or Natal, I’d have no chance of beating them in their chosen sport. As a result of this quirk of nature, the mental paradigms which would be  difficult  to overcome, become even more formidable. It doesn’t help that the paradigms are unconscious and that the trading environment is surrounded by two additional barriers to success:

1. There is no formalised educational structure in  trading. The gamut ranges from someone like Dr. Brett Steenbarger who devotes his considerable expertise freely and for no charge to the assist the retail trader to the scam artists who falsify results to prove that their trading systems will have a ‘90% return and turn $1 into $1M in 3 months or less’.  As a result, the environment inadvertently strengthens the unconscious barriers.
2. The low barrier to entry. In sports, to compete with the best in the world, you need to attain a certain level of competence -not so with trading. Indeed with CFDs, you can enter the arena with as little as S$1000.00 (about US$750.00).While  I am a great believer in the benefits of CFDs in the appropriate context, in this case, all it does is encourage a novice to trade when he has little chance of success.

So, we have so far traced four reasons ‘why the more things change, the more they stay the same’:

• Human nature: wanting something for little effort
• The fact that on any one trade a novice can ‘beat a professional’
•  The lack of a formalised educational structure and
• The low barrier to entry

All of these factors impact on the three most important and unconscious barriers. I’ll deal with this tomorrow.

Bookmark to:

BarroMetrics Views: Answering Questions on New Service

I have been inundated with e-mails asking about the new service. Here are my answers:

1. There is no charge.
2. This is not a tipping service; it is designed to assist my students and readers of my book the Nature of Trends. Treat it as an educational tool - as a way of obtaining a greater understanding of the practical application of the ideas in Nature of Trends.
3. There are three parts to the service. Go to yesterday’s Announcement for full details. You need to register for each of the three services: the weekly video, daily forum and daily twitter service. The 3-parts form a comprehensive outline of my process of thought.
4. I will not provide specific questions whose answers are answered in the Nature of Trends e.g.”what period ATR do you use?”.  In replying to these type of questions, I shall only state that the answers are in NOT.

Bookmark to:

BarroMetrics Views: Our Unconscious Motivators

Given the tremendous advancement in understanding how our brain works and the role of emotion, I’d have expected that the ratio of successful traders to unsuccessful traders would have improved since I started trading over 30 years ago. But, looking at the figures, the ratio remains the same - 80% to 90% are long-term losers. And this, despite the fact we went through one of the most sustained bull markets in stocks, gold, and crude oil. That environment should be conducive to trading success but this had not proven to be the case.

Of course, one answer  lies in the unrealistic expectations of each generation of newbies. Relatively few (if any) budding doctors, lawyers, architects would believe that by attending one paid seminar, and/or reading one book and/or attending a series of free previews, they will acquire the knowledge to succeed. But this is not the case with trading. The fact that we are bombarded by hyperbolic claims of easy, quick and meteoric success suggests that the ads work i.e. the purveyors sell enough products to make it worthwhile. On the other side of the equation, the relatively fewer realistic ads would suggest that genuine vendors are less successful.

My experience in Singapore bears out this deduction.

But this factor is not the complete answer; I have met many genuine committed budding traders who have failed. The question is why is this so? In the coming blog or two, I’ll examine why I say: “God may play dice with the Universe”.

Bookmark to: