Attitude is everything. Ask any motivational speaker or “life coach” and I am sure they will confirm that. I would say to ask a paid trader, but in my experience many of them don’t understand the significance of attitude. I spent nearly twenty years getting to know and understand traders, and most of them genuinely believe that they get the majority of calls right, and that this is due to some ill-defined innate ability to make great decisions. In reality, however, a large part of their success is due to an ability to shrug off and forget losing trades and approach each opportunity with fresh enthusiasm. I doubt that many of them get a greater percentage of calls right over their career than do most day traders who pay, rather than get paid, to trade. What separates them is their approach to each trade.
In the forex market I noticed that most people, when they begin trading, follow the same pattern. I thought this was a currency thing, but have since learnt that it is a trader thing. They start out in a restrained way, cutting losses, often a little too early, but cheaply, and overall making small profits. Making some money gives them confidence and their position size increases. Profits increase as a result and everything is going well… right up until it all blows up. There is usually one recognizable point where things start to go wrong. There is one trade that powers past a mentally set stop loss, then stops, and the trader is faced with a dilemma. Should they cut now and risk hitting the bottom? Should they run the position further and hope it comes back? Should they buy (or sell) some more, improve their average and attempt to trade their way out?
Those that make the first choice will, most likely, survive and even prosper in the market, but they are rare. Those that make the second or third choices will be doomed one of two ways. Either their inaction or averaging will work, in which case they will be encouraged to repeat it until it doesn’t, or they will turn a manageable, if embarrassing, loss into a nightmare from which they may never recover. In a trading room those that learn from that mistake may well be given a second chance; the chances are that their losses aren’t devastating in the grand scheme of things. For a day trader who has just seriously dented their account balance, however, they are likely to either give up or take on excess risk trying to chase their losses. Either way, they rarely last long.
I am not sure it is possible to avoid that pattern altogether. I have seen some remarkably intelligent people who were warned of it still follow that path. I worked with a guy who demonstrated that. He was starting out and was allowed to run small positions, as long as the desk manager was aware of them. Generally he did OK, until that blow up came. He took a long position in GBP/USD and, before he could tell anybody, the market dropped 20 pips. At that point he could have cut for a few thousand dollars loss, explained what happened and moved on. He was, though, too embarrassed to own up and decided to average the position. Two days and several averages later he owned up to multi-million dollar losses; losses that came directly out of the desk’s bonus pool. He was fired on the spot and none of us saw him again, which was probably a good thing for his wellbeing.
For an individual trader the key is to recognize when you get to that point, and chose the safe, if boring option of taking a loss. In order to do so, you must take a successful paid traders attitude to losses. Losses are inevitable; they are a fact of life for anybody who trades anything. What you must learn is to celebrate a cheap cut, even if the market turned back after you cut, and you could have got out flat. Paid traders learn to be proud of their ability to take a loss. This lesson is even more important for individual traders, where second chances are harder to come by.
From an attitude perspective, then, learning to take pride in a cheap cut will preserve your account. The best way to grow it is to stop looking for home runs and hit a lot of singles and doubles. Be more Ichiro than Bonds. Taking a profit is as important as taking a loss, and one’s attitude to profits must also be controlled. Getting one, or even fifty in a row right doesn’t make you a super trader who can do no wrong. The market can make fools of us all, but has a particular penchant for bringing down the arrogant.
I am sure that most people reading this, if they have ever traded, will recognize the pattern I talked about; the steady profits followed by the trade, or day’s trading, that gave it all back and then some. If they survived and are still going, they undoubtedly made adjustments. What they changed, however, was probably their attitude. Obviously, each market has some trade set-ups and systems that are more reliable than others, but if you are struggling to recover from one disastrous trade, you may consider reviewing your attitude rather than your methodology. If you haven’t experienced that trade yet, know that it is probably coming. When it does, cut as cheaply as possible, take pride in the cut, and come back to fight another day.