Trading From Strength Rather Than Weakness

[Rande Howell 10]

What's the gap between actual performance when the money counts and classroom knowledge? This past weekend while waiting to speak at the Options Industry Council Conference in Chicago, I was listening to a highly successful trader give a presentation. And 250 attendees were rightly riveted on his every word.

 

He made a statement about certain conditions in which he would not trade that went against the grain of conventional wisdom in options trading. The hands shot up. Why? Why? Why? Everyone wanted to dispute his reasoning -- even before they knew his reasons. They wanted to know the rule that produced the certainty of his decision. What's the theory? How is that part of a reasoned methodology?

 

His answer -- "I got tired of being bludgeoned to death, so I changed. I moved on. No big deal." That was his trading rule based on mistakes he had made over 25 years of trading. And it had served him well. He made a mistake (and lost) and learned from it. He learned how to manage his risks in his trading world and he moved on. There was not a "reason" -- there was a "learning moment" that he became open to because of the pain of his mistake.

 

It was his openness to learning from mistakes and moving on that impressed me. Meanwhile, many people in the audience were not ready to let this one go. They wanted to know the real reason. Then he asked the audience, "How many of you people keep making the same mistake over and over again? How many of you people learn when you lose from your mistakes? And how many of you people insist on being right even if it is costing you money? Then I say you don't know how to lose." Read that last sentence again.

 

There was an awkward silence, and no one raised their hand. Then he said to them, "Learning how to lose, so that you learn from your mistakes, is the biggest lesson you'll ever learn in becoming a successful trader. You have to become very comfortable with losing because if you trade, you are going to lose. And if you don't learn from losing -- then you continue losing. This is how you manage risk." You might want to imprint those sentences into your memory circuits.

 

So, how do you lose? Look to your performance when you lose, rather than the explanation you create about your losing. Have you developed a mindset that allows you to learn from your mistakes? Or do you keep hanging on to your losers -- not acknowledging that cutting your losses is simply an integral part of trading? Or do you take a preemptive strike and avoid getting in trades so you don't lose -- and forfeiting the opportunity to learn from losing?

 

How do you build a mindset like this trader's? Use this newsletter to explore this question. Even losing, when you have an effective mindset, becomes a tool for becoming an effective trader. This month's article explores this very point.

 

Speaking in NYC, Las Vegas, and Charlotte

 

Depending on where you live and/or your motivation to learn and travel, I cordially invite you to one of my live presentations this Thursday November 3 at 6 PM at 120 Wall St at the offices of Forex Club, at the Traders Expo in Las Vegas at 8 AM on Friday, November 18, or at the Market Technicians Association's Charlotte chapter in early December. Learn about the skills and tools for developing your mind for trading. It's usually forgotten as you learn to trade. But it keeps biting you until you learn to respect this need.

 

Learning to Lose Effectively

 

Become the commander of your journey into trading. Learn to walk the walk. Build the mind that you bring to your trading. It is the one thing in trading you can control. Seize the opportunity that is knocking at the door of your mind. Explore the contents of this newsletter. Go to the website. Read articles. Listen to videos. Read my book, Mindful Trading: Mastering Fear and the Inner Game. Then read it again. Sign up for one of our free webinars. Turn your mind from "fearing to lose" to the mindset that allows you to learn how to win from your losing. Step out of your comfort zone about winning and losing. Confront your complacency and fear that prevents you from taking action on developing your mind for trading. This is the game changer.

 

To your prosperity,

 

Rande Howell

[SpideySense 10]

"Learning how to lose, so that you learn from your mistakes, is the biggest lesson you'll ever learn in becoming a successful trader. You have to become very comfortable with losing because if you trade, you are going to lose. And if you don't learn from losing -- then you continue losing. This is how you manage risk." You might want to imprint those sentences into your memory circuits.

 

As with so many such statements this one is useful but far from complete. It seems to imply that you should learn from each loss. But that would push the novice towards one of his greatest mistakes --- continually trying to fix each trade or series of trades that loses and thus chasing systems or system perfection.

 

The reality is that losses within the system are just losses. And there is little to learn from them except, should you not yet have it, the ability to lose without pain.

 

Only excessive mistakes, or losses that show some underlying change in the market/strategy fit need to be learned from by the trader. These are a couple of the lessons that Demming and statistical process control bought to the car industry - identify whether the process is ok or not before you try to fix everything; and don't blame the worker, improve the process.

 

The trader above fixed something that was repeatedly messing with his process. It is doubtful that he was trying to fix every losing trade as implied by "And if you don't learn from losing -- then you continue losing."

[MightyMouse 12]

What was the successful trader selling at the Option Industry Council?

[Qiman 10]

Hi Randy,

 

From the outset, let me state that I enjoy your contributions to the forum, and I have also read your book, which I found useful.

 

But this latest article has a certain aspect (from the other presenter) which I disagree with, based upon my many years of actually being in the market, and it is even contradictory.

 

The statement made by the presenter at this conference:

"You have to become very comfortable with losing because if you trade, you are going to lose. And if you don't learn from losing -- then you continue losing"

 

This statement is accurate on one hand: You are going to lose as a trader. That is an inescapable fact --for as long as one trades.

 

On the other hand, the statement implies that if one learns from losing, one would eventually stop losing. And this is absolutely not the case.

 

In a probability game such as trading, I can do EVERYTHING perfectly: Entry, Exit, Mechanics, Setup, Rules and yes, even Psychology--and yet still lose. And what did I learn from that trade about losing? Nothing!

 

If one's edge enables on average a winning percentage of lets say 60%, then anything above and beyond that is usually just a lucky streak. In the same way, one might have a string of losers so that for awhile the winning percentage is far below that typical %60 percent.

 

This doesn't mean that the trader somehow screwed up, and needs to "learn from mistakes" so that the losing gets back to the normal ratio. It just happens in the course of trading.

 

One of the biggest myths of trading is about being " right" or "wrong", and that losing is caused by mistakes.

 

Some losses most certainly are mistakes and might be caused because one broke the rules, lost focus, was distracted by a pretty woman, was trading while exhausted, etc. These mistakes can be learned from and rectified.

 

But most of my losses over the years were "caused" by probability and nothing more.

 

And when traders really surrender to losses as an inescapable and unchangable part of the great game, they stop harming their psychology with the whole right or wrong, beating themselves up, I made a mistake mindset. And instead they just move on with the next trade, and let the probabilities work out as they will, knowing that OVER TIME the probabilities work out in their favor due to their consistent application of their edge.

[jackb 10]

 

And when traders really surrender to losses as an inescapable and unchangable part of the great game, they stop harming their psychology with the whole right or wrong, beating themselves up, I made a mistake mindset. And instead they just move on with the next trade, and let the probabilities work out as they will, knowing that OVER TIME the probabilities work out in their favor due to their consistent application of their edge.

 

Right on the money Qiman, except I would add that OVER TIME current system probabilities can and will change permanently and if one is complacent and unwilling to adapt, they will end up trading a system that no longer has an edge. The rub, of course, is that there's no way to know if the system is just going through a temporary excursion or if it has permanently changed (system bust). What doesn't change, as you so eloquently stated, is the inescapable fact that losses will need to be endured even with a system that's firing on all cylinders.

[Rande Howell 10]

What was the successful trader selling at the Option Industry Council?

 

Nothing. He was paid by the Options Council to present. They are very serious about education. He is simply an independent trader willing to share his wisdom. Sense I did not have permission to cite him by name (the OIC is very serious about this stuff), you an contact the OIC directly and ask who the first speaker was.

 

Rande Howell

[Rande Howell 10]

Right on the money Qiman, except I would add that OVER TIME current system probabilities can and will change permanently and if one is complacent and unwilling to adapt, they will end up trading a system that no longer has an edge. The rub, of course, is that there's no way to know if the system is just going through a temporary excursion or if it has permanently changed (system bust). What doesn't change, as you so eloquently stated, is the inescapable fact that losses will need to be endured even with a system that's firing on all cylinders.

 

There is more to it than simply moving on. When a loss occurs, there are 3 primary domains that is associated with the loss. Methodology, psychology, or the wrong side of probability. If the first two, then you learn the lessons from the mistake in your performance. If probability, then you move on.

 

Rande Howell

[Rande Howell 10]

Hi Randy,

 

From the outset, let me state that I enjoy your contributions to the forum, and I have also read your book, which I found useful.

 

But this latest article has a certain aspect (from the other presenter) which I disagree with, based upon my many years of actually being in the market, and it is even contradictory.

 

The statement made by the presenter at this conference:

"You have to become very comfortable with losing because if you trade, you are going to lose. And if you don't learn from losing -- then you continue losing"

 

This statement is accurate on one hand: You are going to lose as a trader. That is an inescapable fact --for as long as one trades.

 

On the other hand, the statement implies that if one learns from losing, one would eventually stop losing. And this is absolutely not the case.

 

In a probability game such as trading, I can do EVERYTHING perfectly: Entry, Exit, Mechanics, Setup, Rules and yes, even Psychology--and yet still lose. And what did I learn from that trade about losing? Nothing!

 

If one's edge enables on average a winning percentage of lets say 60%, then anything above and beyond that is usually just a lucky streak. In the same way, one might have a string of losers so that for awhile the winning percentage is far below that typical %60 percent.

 

This doesn't mean that the trader somehow screwed up, and needs to "learn from mistakes" so that the losing gets back to the normal ratio. It just happens in the course of trading.

 

One of the biggest myths of trading is about being " right" or "wrong", and that losing is caused by mistakes.

 

Some losses most certainly are mistakes and might be caused because one broke the rules, lost focus, was distracted by a pretty woman, was trading while exhausted, etc. These mistakes can be learned from and rectified.

 

But most of my losses over the years were "caused" by probability and nothing more.

 

And when traders really surrender to losses as an inescapable and unchangable part of the great game, they stop harming their psychology with the whole right or wrong, beating themselves up, I made a mistake mindset. And instead they just move on with the next trade, and let the probabilities work out as they will, knowing that OVER TIME the probabilities work out in their favor due to their consistent application of their edge.

 

I appreciate your comments. When loss occurs, a trader will discover that a mistake has occurred in his methodology or his psychology, which need to be addressed. If not one of these two, then most likely probability is the issue -- being on the wrong side of what your preference was. And you move on.

 

I find most trader simply make more and more subtle mistakes as they gain competence. Distinguishing mistakes from probability becomes very important.

 

Rande Howell

[Rande Howell 10]

To all

 

I was actually surprized to see this posted. It is my opening comments in my newsletter. I am not sure if I accidentally posted it thinking that it was this month's article of if TL posted it. Makes an interesting post none the less.

 

Rande Howell

[MightyMouse 12]

Nothing. He was paid by the Options Council to present. They are very serious about education. He is simply an independent trader willing to share his wisdom. Sense I did not have permission to cite him by name (the OIC is very serious about this stuff), you an contact the OIC directly and ask who the first speaker was.

 

Rande Howell

 

He wasn't selling anything but he got paid. That is interesting. I suppose I can assume that not everyone who gets paid is selling something.