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The Difference Is In Your Head
by Joe Saccullo
Have you ever thought about why do so many highly skilled and successful individuals (and the rest of us) fail so miserably trading the financial markets? Did you realize that more than 90% of people who start trading blow out their account within one year, never to return? Maybe that's why most brokers and money managers are always looking for fresh fish to fry! I know that this certainly does not apply to all, but it is true in many cases.
I call this the 10/90 ratio - 10% of the traders keep 90% of the money. When you consider that startling fact, a question comes to mind, "What do the 10% have or what have they learned that the 90 % have not?" I believe that the answer to this question may surprise many of you. It certainly shocked me.
When I began trading I thought that the reason I was not successful was a lack of knowledge about indicators, studies, or some 'insider secrets of market movement'. I am a firm believer in the necessity of good trading methodology and disciplined execution habits, but after re-tooling, and more re-tooling, and changing, and more changing, and workshops, and more workshops; you get the picture - I was still a poor to average trader at best, still struggling, still looking for consistency.
More info! More info! I need more info! By this time I had learned so much information about indicators and different methods that it would make most people's eyeballs spin in their sockets like a slot machine. My charts looked like I was plotting planetary orbits for the next space shuttle mission. But unfortunately I was still a poor to average trader at best. I was still trying to be consistently profitable. Anybody else there?
I was right about one thing. I did need more 'inside' information, but it was information that I could not apply to a chart. It was the kind that I needed between my ears and in my heart. You see, it was not my methods that needed the overhaul; it was JOE that needed to be re-tooled. I have come to realize that the difference between the 10 and the 90 is what's in their head and what's in their heart. The 10 have a different mind-set and have come to terms with some key issues that we will explore.
In my opinion the major reason for failure in the financial markets is that the average trader / investor is completely unprepared for the hostile environment that he or she is about to enter. We tend to jump into the market wearing rose colored glasses with dollar signs on them, thinking that we have found our own personal ATM machine.
The market can and does indeed become an ATM machine for some, but for most people (greater than 90%) their losses propel them to go find another hobby. Some say, "What's to worry? Your investment advisor is your best friend (hug!), and the other market participants really love you (group hug!) so forget-about-it. Buy and hold and trust the pro's." Makes you feel all warm and fuzzy doesn't it?
Let's take a hard look at the environment where many of us have chosen to make our living, and where many others are pinning their financial dreams for the future. First, a quick disclaimer. Warning: This subject matter is not for those with weak constitutions or those with unrealistic expectations. If you live in a dream world please consult your psychologist about returning to earth before you read this.
THE HARSH REALITY OF OUR ENVIRONMENT
Reality Check #1 - The Market Doesn't Care About You: The market could care less about you or your family. It doesn't care that you have a mortgage payment or that your son needs braces. It doesn't let you take a mulligan (for those golfers out there) if you mess up an entry or an exit or freeze at the trigger. It doesn't let you call time out because you are confused or have to take a bio break. You must remember that you have chosen to go fishing in a shark infested tank hoping to come away with a catch.
Reality Check #2 - The Market is the Big Dog: You may have been the toughest kid in school. When you graduated from high school you may have gone into the US Marines, where you volunteered to be a moving target. You may be a superior athlete, able to perform incredible physical feats, or you may be used to getting your way in the business world. You have good looks, a quality education, people skills, charm, and charisma! You've got it all baby - and it means nothing! You cannot manipulate, nor force your will on, the market. Try to 'make something happen' as we used to say in the corporate world. I guarantee something will happen?you'll get a margin call!
Reality Check #3 - You Start Out with a Losing Position: What, you say? Think about it: commissions, normal slippage (the spread) on entry and exit, bad executions, bad fills, etc. If you scratch a trade and go flat at your entry point you have not broken even; you have a loser. You need to make money just to break even!
Reality Check #4 - You are Only Accountable to Yourself: "Joe, come on! That can't possibly be a problem," you say! The market has great appeal. It is a boundless environment. You set your own rules and make your own decisions. You are your own boss. You don't have to be accountable to anyone. Let's face it, most of us are used to being in the opposite environment. We have a boss, a coach, a supervisor who sets necessary limits for us. Most people need that structure because they are not disciplined. Try trading without a high degree of self-discipline. Danger, danger, danger?
Reality Check #5 - The Market Gives You a Daily Report Card: Most people in business get quarterly and annual reviews. A sales force may have a monthly report. You, on the other hand, have the privilege of seeing that account balance change every day. You have the opportunity to feel like a hero, or a zero, on a daily basis. If you day trade it's even better. All your mistakes are neatly itemized for you! Isn't that special?
Feeling woozy? Don't worry, it will pass. Don't get me wrong, I love the markets. They are wonderfully exhilarating, and I love the challenge. But reality checks are good and very necessary things. Now, where do we go from here?
Well, the first question for the newcomer to the markets is, "How do I not only survive but ultimately prosper and thrive in such a hostile environment?" I believe the answer for the newcomer is twofold. You need sound methodology, a system that gives you an edge for the market you are trading and the proper mental mind-set to trade with confidence.
For experienced traders who have the methodology but have not achieved the consistency they desire, their focus should be more on the mental mind-set rather than methodology. So now that we have outlined the problem, let's talk about solutions.
THE TOOL WE NEED FOR SUCCESS
The System: You need a system, a sound trading methodology for the markets you are trading. Your system should reflect your personality and risk tolerances. Trying to trade a system out of line with these will lead to heartburn, indigestion, premature graying, and sleepless nights. If you are purchasing antacid tablets by the case load to get through the trading day, it may be a sign that you and your system are not bonding well. Don't go there, no matter how good the system looks. Stay within your risk tolerance and build confidence to take on more risk gradually. Remember, your system is nothing more than a means of giving you an edge. Your system, your edge, tells you that there is a greater probability of one thing happening than another at the current time. It will never be perfect because the market itself is driven by imperfect, emotional individuals. Since we can never absolutely know, without any doubt, what the market will do, the quest for the perfect system is an "impossible dream". If you embark on this quest, you will find yourself in the same information spiral that I was in, trying to bring security through surety, only to be let down and frustrated - again.
THE MIND-SET NECESSARY FOR SUCCESS
You Must Think in Terms of Probabilities, Not Certainties: The market is going to make me rich! Really? "And how, exactly, is it going to do that for you?" is my question. "Well, I'll put some money in it now, and then take more out than I put in later." Wow, great plan! This individual needs to re-enter earth's atmosphere. Unfulfilled expectations can be a dangerous thing. If you expect every trade to make you money, you will live from one disappointment to another. After a loss, when you have mustered up the courage to trade again, you will be let down - again. Why? Simply because the market is an uncertain environment. It is vital that we understand this. As traders we must learn to think in probabilities rather than in certainties. We must come to understand that probabilities are not certainties. If something is probable then there is a better than average chance that it will occur. However, just because it is probable, doesn't mean it is a sure thing. There will always be risk associated with every trade and you must accept and embrace that risk. Unless you are in an arbitrage, spread, or hedging situation, risk-free trades simply do not exist. Even these are subject to foul ups and miscues. So how do we manage the inherent risk in every trade and put the probabilities for a successful outcome in our favor? That is where your edge, your trading system methodology comes in. It puts the odds in your favor for a successful outcome. With this in mind, you are able to confidently take the trades that your system triggers, knowing that you now have the edge most of the time. Therefore, if you cut your losses systematically and manage the winners for profitability you will come out on top after a given number of trades because the odds for success are in you favor. This next statement may shock you: 'If thinking in probabilities is the key, then I don't need to know for certain what is going to happen next to make money in the markets.Read that again and get hold of it. Understanding this will take the pressure off you of trying to become the all-knowing guru of market data and information. Probabilities are really all that we have as traders, and they are enough.
Forget About Being Right: Some of us are overly sensitive to being right. Let's face it, most of us want to be, or think we are, right most of the time, and this works against us. How many good trades did we miss because we were afraid of being wrong? How many trades did we exit too early or enter too late because our natural pain-avoidance systems were trying to keep us from taking the risk and getting hurt. Have you ever been frozen at the trigger just waiting for a little more confirmation before you committed to the trade because you didn't want to be wrong, only to finally enter and find that the trade was over? How many times have you held on to a losing position too long, because if you go flat, you'll have to admit you were wrong? We must change our thinking. Trading is not about right and wrong. As we stated above it is about probabilities. It is not your job to be right. That is the job of your edge, your system. Your responsibility (and mine) is to muster the courage and make the decision to take the signal and manage the trade knowing that we have an edge.
Deal with Losses Correctly: This is another key issue in the life of every trader. How you deal with loss will tell you more than you care to know about yourself. I would be lying to you if I told you that this was one of my strong points. After getting beat up by the market on a trade, I used to mentally and verbally finish the job myself. What ever confidence I had left would run out my toes by the time I was done. Talk about being counter productive! Believe me, I am not advocating denying the facts. But we need to learn from them rather than using them as a weapon to finish ourselves off. So, what is the right attitude for dealing with a loss? You must understand that losses are part of the business of trading. Because we are dealing in probabilities, and not certainties, they are inevitable. Let me ask you this, "If you flip a coin would you beat yourself up and brand yourself a failure if you called it tails and it came up heads?" That would be silly, right? Trading losses are similar. You must not take them personally. Taking losses personally is debilitating. As Americans we tend to identify ourselves by what we do. We measure ourselves and others by our vocation and the corresponding success or failure we have in it. But you are more than your trading, more than your statement at the end of the day. Your trading results are only part of your life. They are not your whole life. You must look at them as the cost of your education when starting out. As you progress and have smaller losses, you consider them as the cost of doing business. All businesses have expenses. Good businesses keep expenses down. Being disciplined and following your system will help you do this.
Protect Yourself from the Unknowable and Unexplainable: As we have already stated, anything can happen in the markets. I have seen some very unusual things in my trading career. Let's say that you are trading one of the E-mini futures and you get a signal from your system to go long. Being the confident trader that you are you take the signal and put on a position. Suddenly, FOX News and CNBC report that there was an explosion somewhere. Buying pressure suddenly dries up and the market begins a free fall. "Hold on!" you say. "There was good economic news this morning!" The bottom line is anything can happen in a boundless environment. I have seen this intra-day all too often since 9/11.Since you and your system are not all-knowing, you must take steps to protect yourself, especially in this high speed, 24/7 news driven world we now live in. "Come on Joe, real men don't use stops." Let me tell you something. I have eleven children, I'm a real man, and I use real stops, unless I am at my computer screen with my finger on the mouse.
In your market journey you will regularly come across the new and improved, the bigger and better, the one and only (boy don't you wish that was true!?), proprietary this and proprietary that. There are people who are trying to get your business, trying to get you to open an account, close an account, and sign on to their service. There will never be a shortage of gurus who want to help you improve your trading by teaching you their market secrets for a very reasonable price (of course).
They guarantee that their method will work for you - after all it works for them! But do you realize that the reason it works for them is that they designed it for themselves, having their own unique issues, risk tolerances, and preferences in mind? What works for them may not be best for you.
Yes, I do believe strongly in education. Some seminars have been very good for me, and others, well, enough said. There is no substitute, however, for taking the time to read, review, tinker, and then apply what you have learned. I believe that for you to achieve maximum profitability you must create a methodology for yourself using the sum of knowledge that you have acquired so far, or you will always be a slave to another person's system that was not designed with you in mind. You may indeed have something good, but it won't be the best.
So I now release you to the market jungle with all its hidden dangers, traps, and surprises. Remember, in the mist of all the noise, news, and confusion there is one constant. That is YOU! So make sure that you are operating and thinking correctly, and enjoy success in the markets.
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