How to Eat Lions!
The best selling book in the Serengeti
The zebras have been buying up all copies of this hot-selling reality book. What a boost to be able to turn around the victim mentality that has beleaguered the zebra community for thousands of years. Hey, it might just work; after all, zebras outnumber lions.
Even
as a child watching
The idea of overcoming obstacles, changing one’s nature and winning against the greatest odds makes for the best stories. As exciting as it may be, it still seems that sticking to one’s nature offers the best chances for survival.
Whether for the zebra or futures trader, disregarding the odds, taking unnecessary chances, being too cautious or accepting too much risk is just a recipe for disaster.
Fortunately for me in my trading career, one or two mistakes did not result in financial disaster.
So for most of my money management life I have encountered people who mostly find methods, rules, books, gurus and systems and then trade them into the ground. It is almost a rule of nature that it must be like that. Let's face it, a zebra can buy a book, "How to eat lions," a best seller in the herd, but that zebra still better run fast and use his stripes to confuse the real lions.
Traders do not have to worry about lions; there are other measures of risk. What has helped me during my learning process is how to manage risk. First of all, most traders do not realize that as soon as they put on a trade, if the trade begins to accumulate profits and the trader has not adjusted the stop loss, instead of being rewarded, the trader is actually increasing the risk of that trade. How so? If one buys index x at 520 with a 20 point stop, or a risk of losing 20 points, if the price climbs to 528 and the stop is not adjusted, then that trader is now unwittingly accepting 28 points of risk (8 points of profit plus that 20 points of loss).
We try to find out why traders come into our trading room. Most of our traders have read at least 2 books on trading. Many of these books are regarded as valuable. Yet the traders report they are unable to make money following the setups and methods that they have learned. Why is this?
Why do so many attend seminars, learn new trading setups from many skilled traders, yet the student is unable to turn a consistent profit using these methods?
Perhaps a study of the workings of nature is not as crazy as it might seem. Charles Darwin, one of the great thinkers of the Nineteenth-Century, described natural selection as a natural way the strong get stronger at the expense of the weaker. There is a building collection of evidence that a trader’s psychological makeup and not the setups the trader uses determine the level of profitable consistency that one develops or fails to achieve.
As Mark Douglas tells us in Trading In the Zone, “learning more and more about the markets only to avoid pain will compound his problems because the more he learns, the more he will naturally expect from the markets, making it all the more painful when the markets don’t do their part.
Most traders may be “too” educated when it comes to identifying setups, methods, and trading strategies. On one hand a trader feeling overconfident and knowledgeable will gladly announce, “the double top is complete---shorting here.” When the market does not cooperate and goes up the trader wants to wait as long as possible, waiting beyond normal stop loss levels for the fading chance to announce that the trader is exiting with a profit.
The other side of knowing “too much” presents itself to the trader who actually enters a trade that begins to work immediately. If the trader takes a quick, small profit, at least the trader earns the bragging right and can save a previously wounded ego. The process exacerbates itself as the profit begins to mount. A “smart” trader who has bought a rising market can easily find more and more “logical” reasons why the trade should be exited quickly. Stochastics are above 80, the cycle is due to top out, price is approaching a pivot point; the list goes on. The real reason is, “I don’t want the market to eat me for lunch.”
Being
so informed, the inconsistent trader moves from method to method giving one
style a whole month or two to perfect; when riches do not accrue, one setup is
discarded quickly for another. When one advisor enters a drawdown the trader
finds a new advisor. When a trader is not playing musical gurus the trader may
even change trading styles within the same day to adapt to the changing market
conditions.
In my early trading days I went through each of these steps and trials. A bad trading day had me blaming the teacher. A good trading day saw me ready to take on more risk the next day. Only by first recording the reasons for my trades and later reviewing the week by week trades did I see that I was not eating any lions but was the lunch.
Over the course of four years I had taken personal training with a number of successful traders who were also well respected trading coaches. Instead of taking up a favorite method and discarding others I began to look for confluence and commonality from my coaches. Most suggested to stop trading during what we call the “dead zone,” the time period between 11:45 AM and 1:45 PM. I did that.
By insisting that more than one condition be met, taking some advice from each of the mentors, the total number of trades drastically decreased. Inadvertently that eliminated another major flaw: over trading and revenge trading. It lead to what we call “The Filters.”
The other trait common to the best traders I have encountered that almost jumped out as the real reason behind their success, is the utter calm that accompanied their trading. They never “knew what the market was going to do; they did know what they were going to do when the market made various, unpredictable moves.”
So the key is to accept one’s role as a new trader. Embrace that experience. Play defense. Do not have an opinion about the market. Look for ways to reduce risk as soon as possible. The nature of a new trader should be one of learning to attain discipline.
The nature of a zebra is to confuse a lion with its stripes. This is only effective if they stick together in a herd. A zebra seeking to avoid the panic that engulfs the herd when a lion approaches, by hiding out by itself is an inviting target that results in the lion winning about 80% of the time. If a lion attacks a herd of zebras though the targets seem unlimited, then the lion will be successful only about 25% of the time. The lion finds it extremely difficult to focus on what becomes a maze of whirling stripes.
Funny how new traders fail about the same rate as the solitary zebra who tries to eat lions!
.
GREAT TRADING AHEAD!
Alex
L. Wasilewski
Co-Founder
& Head Trader
Trades
That Work
1-877-GOLONG1
(1-877-465-6641)