An interesting article on failure.
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Today's Featured Article
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Why Most Traders are Virtually
Assured to Fail
By Ryan Jones
The purpose of any article is to educate. But educate to what end? The purpose of this article is to educate, but to an end that is actually meaningful to you. The title of this article is not just to give you information that makes you realize you are in a certain category or class of traders...but to give you the information so that if you are in this category, you can successfully extract yourself from it.
Whenever the opportunity arises, I remind traders that the statistics support the assertion made by the title of this article. It is estimated that in any given year, 85%-95% of all individual traders are in the red. I have many logical theories about why this is the case, many of which I am going to list for you in this article. But more importantly, for each cause that can be attributed to the failure of so many traders, I will also provide a solution.
I have been trading the markets since 1987 in one capacity or another. I have been involved in this industry full time since 1992. Over the years, I have talked with a lot of traders, analyzed countless strategies, and as a result, built a list of contributing factors to failed attempts at profitable trading. It was necessary for me to not simply build the list of contributing factors, but to also address each one if I had any chance of extracting myself from this category as well.
I recently posted a video online of a student who began trading one of my strategies back in August of 2004. Since then, he has seen that strategy, coupled with my Fixed Ratio money management strategy, grow over 800% in 3.5 years. The only reason he has been able to be successful is because he addressed the list I am about to give you. After you finish this article, you can watch the video by going to the following link:
http://www.smarttrading.com/UTPresentationFS.html
Contributing Factors to Virtually Assure Failure:
1. False Expectations
People, by nature, see what they want to see and tend to subconsciously ignore things that may cause problems. It is almost like the ostrich that sticks his head into the sand when trouble comes. In trading, this is a recipe for disaster. For example, if I say I have a strategy that can potentially produce 1,000% in the next 3 - 5 years while risking 50%, there is equal discussion in that sentence with regard to profit potential and risk, but they see the profit potential being so big that the risk can't possibly be real. Anything that has a potential return of 1,000% must work to some degree no matter what, or so they subconsciously reason within their minds.
How do I know this? I have had similar situations like this in the past and after 3 months (even though it was based on a 3 - 5 year potential), a trader was not making money and claimed that I had made promises of 1,000%, which could not possibly be true since after 3-months, the strategy was not making anything, but actually showed losses.
There is a simple solution to this, at least simple to speak with words. The solution is to simply make a conscious effort to not trade anything without repeating to yourself, out loud, that there is the possibility that this venture will lose money. Say, out loud, how much you could lose. You will find that this will often cause you to look at the strategy a little closer and analyze whether the profit potential AND the probability of reaching the profit potential, is actually worth the very real risk.
2. Lack of Commitment
People get involved in trading for one reason...the opportunity to earn a greater return than putting the money in a CD or lower risk mutual fund. For some, that greater return actually means huge returns...perhaps big enough to allow them to quit their job and trade for a living.
There is nothing wrong with the above. However, what happens is that traders' expectations are no longer reasonable as far as time is concerned. They reason that if they are going to reach their goals, it has to begin to happen immediately. I estimate that the average time a trader will remain committed to a strategy that is in a drawdown is 3-months. If they haven't produced profits within 3-months, they are on to the next best thing and the previous strategy was just a scam.
Don't get caught into the trap that just because the trades themselves are short-term, the venture itself is not a long-term investment.
The solution is simple. When you determine what you are going to trade, set the boundaries and commit for 3-5 years. The boundaries need to be based on time and performance. You also need to make sure these boundaries are inextricably related to the strategy being traded. One set of boundaries may be suited for one strategy, and not applicable to another strategy.
For example, you have a strategy that has never shown a losing month in the last 5 years of testing. My time boundary for this strategy might be based on a minimum trading period of 6-months. If the drawdown expectation was 15%, I might create a boundary of 30% to account for the unexpected. So, if after 6-months, I haven't hit a 30% loss, I will analyze the performance. The only thing that would keep me from trading this for at least 6-months would be the 30% risk boundary being crossed. Otherwise, I am committed.
On the other hand, if the strategy I am looking at has gone through several 6-month long drawdowns, then the absolute minimum I will commit to this is 2-years. And, as long as I do not hit my risk level boundary within that 2-year time period, I will continue trading.
The student mentioned above who began trading back in August of 2004 was barely over breakeven after a full year of trading. Since his 5-year goal is a 2,000% return with this strategy, he was somewhat disappointed. However, he made the decision to stick with his trading plan (which was a 5-year trading plan), and because of his commitment, is now up over 800% with that strategy.
Do not underestimate the power of commitment.
---------------------------------------------------
Today's Featured Article
----------
Why Most Traders are Virtually
Assured to Fail
By Ryan Jones
The purpose of any article is to educate. But educate to what end? The purpose of this article is to educate, but to an end that is actually meaningful to you. The title of this article is not just to give you information that makes you realize you are in a certain category or class of traders...but to give you the information so that if you are in this category, you can successfully extract yourself from it.
Whenever the opportunity arises, I remind traders that the statistics support the assertion made by the title of this article. It is estimated that in any given year, 85%-95% of all individual traders are in the red. I have many logical theories about why this is the case, many of which I am going to list for you in this article. But more importantly, for each cause that can be attributed to the failure of so many traders, I will also provide a solution.
I have been trading the markets since 1987 in one capacity or another. I have been involved in this industry full time since 1992. Over the years, I have talked with a lot of traders, analyzed countless strategies, and as a result, built a list of contributing factors to failed attempts at profitable trading. It was necessary for me to not simply build the list of contributing factors, but to also address each one if I had any chance of extracting myself from this category as well.
I recently posted a video online of a student who began trading one of my strategies back in August of 2004. Since then, he has seen that strategy, coupled with my Fixed Ratio money management strategy, grow over 800% in 3.5 years. The only reason he has been able to be successful is because he addressed the list I am about to give you. After you finish this article, you can watch the video by going to the following link:
http://www.smarttrading.com/UTPresentationFS.html
Contributing Factors to Virtually Assure Failure:
1. False Expectations
People, by nature, see what they want to see and tend to subconsciously ignore things that may cause problems. It is almost like the ostrich that sticks his head into the sand when trouble comes. In trading, this is a recipe for disaster. For example, if I say I have a strategy that can potentially produce 1,000% in the next 3 - 5 years while risking 50%, there is equal discussion in that sentence with regard to profit potential and risk, but they see the profit potential being so big that the risk can't possibly be real. Anything that has a potential return of 1,000% must work to some degree no matter what, or so they subconsciously reason within their minds.
How do I know this? I have had similar situations like this in the past and after 3 months (even though it was based on a 3 - 5 year potential), a trader was not making money and claimed that I had made promises of 1,000%, which could not possibly be true since after 3-months, the strategy was not making anything, but actually showed losses.
There is a simple solution to this, at least simple to speak with words. The solution is to simply make a conscious effort to not trade anything without repeating to yourself, out loud, that there is the possibility that this venture will lose money. Say, out loud, how much you could lose. You will find that this will often cause you to look at the strategy a little closer and analyze whether the profit potential AND the probability of reaching the profit potential, is actually worth the very real risk.
2. Lack of Commitment
People get involved in trading for one reason...the opportunity to earn a greater return than putting the money in a CD or lower risk mutual fund. For some, that greater return actually means huge returns...perhaps big enough to allow them to quit their job and trade for a living.
There is nothing wrong with the above. However, what happens is that traders' expectations are no longer reasonable as far as time is concerned. They reason that if they are going to reach their goals, it has to begin to happen immediately. I estimate that the average time a trader will remain committed to a strategy that is in a drawdown is 3-months. If they haven't produced profits within 3-months, they are on to the next best thing and the previous strategy was just a scam.
Don't get caught into the trap that just because the trades themselves are short-term, the venture itself is not a long-term investment.
The solution is simple. When you determine what you are going to trade, set the boundaries and commit for 3-5 years. The boundaries need to be based on time and performance. You also need to make sure these boundaries are inextricably related to the strategy being traded. One set of boundaries may be suited for one strategy, and not applicable to another strategy.
For example, you have a strategy that has never shown a losing month in the last 5 years of testing. My time boundary for this strategy might be based on a minimum trading period of 6-months. If the drawdown expectation was 15%, I might create a boundary of 30% to account for the unexpected. So, if after 6-months, I haven't hit a 30% loss, I will analyze the performance. The only thing that would keep me from trading this for at least 6-months would be the 30% risk boundary being crossed. Otherwise, I am committed.
On the other hand, if the strategy I am looking at has gone through several 6-month long drawdowns, then the absolute minimum I will commit to this is 2-years. And, as long as I do not hit my risk level boundary within that 2-year time period, I will continue trading.
The student mentioned above who began trading back in August of 2004 was barely over breakeven after a full year of trading. Since his 5-year goal is a 2,000% return with this strategy, he was somewhat disappointed. However, he made the decision to stick with his trading plan (which was a 5-year trading plan), and because of his commitment, is now up over 800% with that strategy.
Do not underestimate the power of commitment.
