What Causes Failure? Part Two of Three

[PristineTrading 10]

Good Morning All:

 

Over the years, I have written many articles. Hundreds, maybe even thousands if you include partial repeats and every short lesson. Sometimes the lesson is a partial re-write, or a new take, or a new way to explain or organize the information.

 

While there are many summaries out there on various topics, and while the topics on this lesson may be found somewhere else, I began last week answering a very direct question. What causes failure in trading? This will be a no-nonsense, nuts and bolts look at the question, not a philosophical dissertation. I will discuss the top three over three letters. Last week I discussed 'discipline'. Today I will discuss the second of the three reasons for failure. To clarify again, most people actually fail because they do not get an education. However, that is decision people make. I want to discuss why the people who really try, can still fail.

 

Last week I opened here telling you of an inescapable truth I discovered long ago. Everyone who enters trading is exactly the same, and stay the same for a long time. Reason number two for failure continues that tradition. Reason number two, is the lack of, or the inability to, focus.

 

Yes, all of these topics are somewhat interrelated. Nevertheless, they each also have their own merit. Discipline and lack of focus are not the same thing. You may not have focus due to a lack of discipline, but you may not have focus by design.

 

Many traders come to the market with the view that they have to become the master of all around them. They feel they need to learn about economic data, currency rates, foreign politics, and the list goes on. When traders learn technical analysis, the feel the need to put everything to use. I have seen trading plans that have 14 strategies spelled out for a new trader. Yet, all of that information is not going to change what a stock does that gaps over a red bar and pulls back to minor support. It will not change what happens to a stock that is in a perfect 15-minute uptrend.

 

Closing Comments:

 

Perhaps you have read the book "Market Wizards" by Jack Schwager. You should take note of the point of the book. In this book, the author sets out to interview 25 successful traders to determine what they have in common. He wants to find out what strategy it is that they all do, or how the strategies are similar. He finds two things that all traders have in common. One of them, the one we care about, was that no two did anything remotely similar in strategy, however, they all focused on one unique thing, waited for it to happened, and did only that. Focus.

 

Paul Lange

Vice President of Services

Pristine Capital Holdings, Inc.

[steve46 12]

The impression Schwager's book gives is characterized by the original post....that there are many different ways to make money in the markets....this may be true, however thats only part of the story......if the reader looks a bit closer......each of these traders had to engage in extensive research........but you don't read about that in Schwager's book.......and what "really" happened was....some of them found an edge (something that provided a mathematical advantage) that enabled them to make a lot of money.....from my point of view the important question is, "did that edge last, or did it eventually disappear and did they adapt"?

 

Now....some years removed from the original publication of Jack Schwager's books, we know some of the answers to those questions.......some of those traders are known either adapted to a changing environment, or they found themselves back where they started....(refer to Linda Raschke, and Tom Baldwin for example)

 

Yes, there are many ways to make money in the market, but regardless of the method you choose, you still have to do the research....to make sure that the method you choose, (indicators, price action, or magical incantations) provides a real mathematical edge....

 

Interestingly, these vendors never seem to be able to provide that kind of very real education to their students....and on the other hand I have to say...students are easy marks, because invariably they don't WANT to do that research......one gets the impression that both parties "deserve each other".....lol

Edited October 14, 2012 by steve46

[Vince50 10]

The impression Schwager's book gives is characterized by the original post....that there are many different ways to make money in the markets....this may be true, however thats only part of the story......if the reader looks a bit closer......each of these traders had to engage in extensive research........but you don't read about that in Schwager's book.......and what "really" happened was....some of them found an edge (something that provided a mathematical advantage) that enabled them to make a lot of money.....from my point of view the important question is, "did that edge last, or did it eventually disappear and did they adapt"?

 

Now....some years removed from the original publication of Jack Schwager's books, we know some of the answers to those questions.......some of those traders are known either adapted to a changing environment, or they found themselves back where they started....(refer to Linda Raschke, and Tom Baldwin for example)

 

Yes, there are many ways to make money in the market, but regardless of the method you choose, you still have to do the research....to make sure that the method you choose, (indicators, price action, or magical incantations) provides a real mathematical edge....

 

Interestingly, these vendors never seem to be able to provide that kind of very real education to their students....and on the other hand I have to say...students are easy marks, because invariably they don't WANT to do that research......one gets the impression that both parties "deserve each other".....lol

 

No, I dont think they deserve each other, but there is no enjoying the fruits of your labor if you are constantly wondering when your system is going to fall apart either. This makes you stay up all night creating back up systems for when the shoe drops. Then the enjoyment of trading slowly goes away as you start to feel like a hamster on a wheel never able to rest. I wonder how many of the guys in Market Wizards had guys doing that "For" them or at least with them. I mean notice in this 3 year bull market , how many more vendors appeared out of nowhere. It means they had winning systems and suddenly they stopped working because too many of them are way too elaborate to have just been created as scams. IMHO as a swing trader for over 14 years and a day trader for a few, Paul Lange is one of the few that has survived. Yet even he wont go out on his own, he likes that monthly check from Pristine as his backup. You think he wants his kids college education depending on his ability to stay constant with its ever changing behaviors. The fact that Paul never started his own small fund or private pool says a lot. And he is about the best out there. What do the rest of us do? BTW.....I know from being in Pauls room, exactly what he advises traders to do. I know all the steps he made us write down. But, I also find there is an adverse corrolation to studying your charts "past a certain point" to starting to go in reverse and second guess yourself, especially after youve lost a few days in a row. Many of Pauls students use scanners and its just my opinion that luck plays a part in simply when you lift your head up to glance at the scanner to see what stock is in play. I was on the verge of putting 1/2 my life savings into an acct in fact drom what I learned just in Pauls books and tips, let alone the room when suddenly family tragedies occured for several months, and when I got back into trading after a year break, I lost something I still to this day cant get back. BTW.....Im not ashamed to say I am first going to read Pauls article now, because after over a year studying with him, Im pretty sure I know what he will say.(smile)

 

Vince

[steve46 12]

Well "Vince" respectfully I would suggest you are missing the point....professionals do not stay up nights worrying about when their systems are going to fail.....Instead of worrying constantly, they maintain good records, and they continue to do research KNOWING that at some point, they will need to adapt as the markets change around them...

 

With respect to your comment "wondering if these market wizards have others doing research for them"....I know a few of these traders, and those that are known to me do their own research or at the very least, they collaborate with other traders...why? because when you do your own work, you know that you can trust the results...this becomes very important because these are folks who often put on size (when I last talked to Linda Raschke, she was trading mutiples of 20 contracts at a time). You can't really do that unless you have confidence that your system has a significant mathematical edge.

Edited October 15, 2012 by steve46