Why Traders Fail 2.0

I have recently been asked a good question in relation to our recent workshop webinar with guest trader Matt Bacon-Hall:

It’s a good question. For example, we’ve written many times about successful ways to attack the market. Yet even when confronted with a good recipe, people can’t seem to make any headway. So today’s article is my reply to his question. I’m going to build upon an article Sam wrote some time ago, about why most traders fail and why others, instead, reach consistency.

We’ve recently written about the challenges of retail traders. So just a quick recap: the margins at the retail level are very tight and you absolutely can’t afford to waste energy, effort or money. I have seen various traders, even those with a reasonable handle on things, eventually drown through lack of adequate capitalization. What happens is that traders on a tight budget have trouble maintaining a long-term view and take successive losses personally. This tends to fuel impatience, whith results in excessive risk taking and  holding onto stale positions too long.

Once this negative cycle starts, psychological issues begin taking hold and all prior progress gets thrown out of the window. So it takes a certain aptitude, psychological discipline and a decent personal (financial) situation to fight through the drawdowns, and still have the confidence to hold onto (and pyramid into) winning positions when conditions dictate.

Discipline Revisited

The obvious “cure” to the difficulties listed above might appear to be “discipline“. It’s true that discipline, in various forms, is one of the common traits found in all successful traders that I’ve met over the years. But I’ve also seen discipline “castrate” traders. So more than discipline alone, we might want to speak about “personal balance“.

Here are the differences between balance and discipline:

• traders that get caught in the notion of discipline will keep very detailed journals and checklists to monitor every wiggle in the market, hence getting “too close” to the market and missing the forest for the trees;
• traders that get caught in the notion of discipline will most likely also keep detailed journals of their own habits and routines, essentially becoming so self conscious that they are no longer in sync with the market;
• traders that lack personal balance will seek a disciplined way to trade the way they “believe” is best for them. One common error is attempting to trade around a day job by pursuing short-term trading without properly assessing whether there are actually any opportunities that legitimately exist during those particular times;
• traders that lack personal balance will contaminate a good trading plan with their own behavioural traits: being overly cautious (finding excuses for not taking trades), being a gambler at heart (finding too many excuses to take trades), being emotionally unstable (trading impulsively);
• traders that lack personal balance will also have a skewed relationship with money: with being too attached to money, your emotional swings will depend on your p&l swings; with being too detached from money, you will fail to appreciate nuances in the market and be reckless with your risk taking.

Maintain Your Edge

Once you have a good personal balance, you will be able to objectively view the markets and exploit recurring patterns – whatever they may be. That’s where edges lie and there’s nothing overly complex with finding an edge in the markets. So long as you observe or identify somerecurring behavioural pattern that is based on effective participation, you can study it diligently and test it.

Whether you find an affinity for breakout/pullback patterns within a trending phase, volatility breakouts, or anything else, just remember to be objective and well balanced when deploying your bets. Once again let’s recap the ingredients for staying afloat and building a track record that will then allow you to access bigger & better things?

• Recognizing when trending phases are either temporarily or permanently exhausting.
• Determining when to stand aside & allow the price action to offer more concrete information before stepping in.
• Identifying when a pair or currency is experiencing a volatility contraction or expansion
• Remaining in touch with market drivers

Trading will require adaptation to market conditions and the above ingredients are the only way I have personally been able to stay in sync with the market – more often than not. It’s true that there are many paths to success in the markets, but they will all entail specialization, which requires time, dedication, passion and a personal situation that allows to deal with the uncertainty which is inherent in the markets.

All successful speculators took bits & pieces of information and, acting like scientists, through trial and error created something viable. Hence the existence of multiple methods and edges. So I dare say: roll up your sleeves and get your hands dirty!