Cut losses short: let profits run. An age-old adage that’s stood all tests of time for great reason. It’s a pillar of trading success, a testament to trading from a position of confidence and strength rather than weakness and fear. That guy Churchill had it partially right. The only thing traders have to fear is fear itself. Of course in most cases that fear is based on valid concerns. Too many traders operate from positions of fear because deep down they know it’s a gunfight they attend which finds them holding knives. Dull knives. Butter knives.
Confidence = Correct Actions
You’re the general manager of a professional football team. How would you prefer, make that demand your starting quarterback to think? Would you prefer him to have the confident mindset of a Peyton Manning, Tom Brady, John Elway or Dan Marino? Or would you prefer a fear-based minded QB like Jim Everett instead? It’s your team. A team you are preparing for the long, tough road ahead from preseason to SuperBowl quest. Do you want the captain of your team to stand tall under pressure and adversity while steadied by true confidence, or would you accept a QB who when the chips are down and heat is up takes a phantom sack when gripped by fear? Which mindset are you going to stake your professional and financial career as the general manager of a professional football team (aka your business enterprise) on?
The term “confidence” does not describe cockiness, arrogance or false bravado. Please don’t mistake all those social masks of fear with calm, quiet, inner confidence. That is a belief system which doesn’t waver regardless of the present temporary conditions around. Confidence is a knowledge that performing certain tasks regardless of short-term results will have a positive long-term outcome. Said another way, there is no need for constant reassurance or biofeedback to assuage insecurities and fears with constant support. Confidence does not need short-term approval because it knows the delayed gratification pays off in long-term success with unmatched levels of reward.
Randy Moss may be the most talented & gifted wide receiver to ever play NFL football. Others have worked harder and accomplished more, but none before him had greater raw skills. Right now that description probably fits Larry Fitzgerald best. There is not a more dominant wide receiver in the NFL today. Defensive backs forced to match up with those two athletes in their primes were in most cases overmatched. It was/is pretty impossible for corners and safeties to have a good day when facing those two at their respective zenith.
On the other side of that field, Deion Sanders was arguably the most complete cornerback in NFL history. In his prime he was the epitome of shutdown corners who could essentially take any receiver out of a game. In his respective prime, “Prime Time” could be left solo on an island with either Moss or Fitzgerald and the general outcome thru numerous games would be washed. The receivers would make some catches, Deion would make some picks. You can pretty much count on that overall edge being negated for those single games.
The good news for all athletes involved is they wouldn’t face one another every single game. Invariably, Moss and Fitzgerald would line up against inferior athletes just like Deion would. Their respective “edges” which will send all of them in time to the Hall Of Fame in Canton, OH was consistent application of their developed skills into the entire football season.
Short-Term Results <> Long-Term Decisions
Now, it’s entirely possible if not probable that over the course of their careers, either wide receiver might have a solid day’s performance against the world-class defensive back. Or vice-versa. No one should expect a stalemate every single time they face one another. Right? So let’s say Randy Moss has eight catches and two touchdowns against Deion in their first of two matchups during a season. Should the defensive coach pull Deion from the next random game and stick a rookie draft pick in his place instead? After all… the last game resulted in failure using Deion. What makes you think the next game won’t follow suit?
By the same token, assume Deion had three interceptions and ran two of them back for touchdowns against Fitzgerald in game one of two matchups per season. Does the QB completely ignore Fitzgerald in the next game scheduled? After all, he got dominated in the last game… maybe he “stopped working” and hit his all-time peak forever. Maybe there’s zero upside for him from here. Maybe he offers no long-term edge after all. It was just an illusion.
We’ll get back to those thoughts in a bit.
Ignorance + Realization = Fear
Show me a trader who is gripped with fear, and you are pointing toward someone who knows they don’t have a true, all-encompassing method or approach with a profitable edge. Knowing one has a trading edge means the entire gamut is covered: entry points, risk management from loss to profit exits and mental operation of such with steady hands thru all market conditions. A true “edge” is far more than the act of entering a trade when some squiggly lines cross or price meets a supposed objection point. Your edge as a trader compiles many things into one complete package.
Too many aspiring traders spend months, years and entire careers searching for the holy grail of trade entry secrets with false assuption that the right combination of indicators or settings will result in overall winning trades performance. It goes without saying that trade entry tools and the decisions they lead to are a critical component of success. But there is no magic “system” that can be followed by blind monkeys that will take an undeveloped trader from neophyte to consistently profitable by itself. That has never happened, does not happen now and will never happen in the course of human history, with absolutely zero exceptions.
All aspiring traders want the same thing: quickest path to success with least amount of effort and delay possible. Who doesn’t? Everyone who comes into this profession does so first for the money. No one ever decided to become a trader simply because it pays out high-score credits applied to War Of World craft. We become traders with expectation that the end result will be money, real dollars accumulated in an account to be spent as our hearts desire.
That quickest path to success means working with or working around any current flaws or weaknesses. Just give us the patch repair fixes to whatever holes lay in the path between right here and consistent $ millions trading profits. When it comes to building a base of knowledge > base of belief system, that doesn’t sound too good. It sounds a lot like there is time, effort, cost and (perish the thought) delayed gratification required. Worst of all, it might be expected of us to make some personal changes, too. We might actually have to do some things that clash with our emotional weaknesses and flaws. Personal weaknesses and flaws we full-well realize exist, but don’t want to face any more than a habitual smoker diagnosed with emphysema wants to face the addiction of smoking and how to deal with that.
So with false hope that a trader can be successful with limited knowledge or skills, emotional warts & all, they too often dump real money in a trading account and wade right into the daily fray. A great part of that false hope is bolstered by reality that blind luck can result in pure profit. It is physically possible to place a trade or sequence of trades and hit a blind winner’s run from nothing more than statistical random chance. Maybe, just maybe that trader can get started with minimal knowledge and sometimes minimal cash but make enough correct errors to wind up profitable despite it all.
That pure gambler’s mentality squelches more fledging trader careers than any other single factors. Such “traders” are included in the overall stats of massive failure in this profession when reality is, they were nothing more than two-bit casino gamblers in the first place. They never got started with a sound base of knowledge, skill set, practiced application of knowledge and skills in simulated fashion or experience dealing with ever-changing market conditions. Nope, forget about wasting time with boot camp and basic training. That sounds like too much time & effort preparing to be a U.S. soldier. Hey, just read a few books about warfare, spend an hour online learning how to fire a gun and have the Marine Corp drop you off in the mountains of Afghanistan hours after enlisting for service.
Does that sound to you like a recipe for success? It is exactly what a vast majority of “traders” do to launch their careers. Why? Because it is statistically possible to risk x-amount of money in the market and harvest a return of y-amount of profit as a result. It is equally possible for a totally green soldier to engage the enemy in a live firefight and survive to fight another day. But how many days, how many firefights will be survived? What happens when the first situation of inferior defensive position, outmanned and outgunned situation or lack of ammo & weapons against superior firepower is faced? How will our untrained soldier adapt and overcome then? Sadly, he won’t. Neither will the untrained trader when he faces the first bout of inevitable adverse market conditions. Both the untrained soldier and trader have exactly zero expectancy for long-term survival in their chosen professions.
Hardware – Software Compensation
Traders with an affinity for math or technology that know they haven’t developed an edge seek end-around solutions down failed paths. Many try to compensate lack of learned skills with computation power. Rows of 24″ screens to monitor everything makes them feel like they should likewise spot something. Endless hours spent back-testing systematic parameters makes them feel like they should stumble onto a profitable solution in the same manner a cure for polio was discovered. Rather than studying market action, price action and how to aptly measure such, they seek immediate solutions hoping for instant gratification instead.
Despite all those attempts of using science (computation power) to dominate basic human nature (historical financial market behavior), deep down inside these aspiring traders know that they don’t match up against financial market action thru the long-term basis of evolution. The real road to successful systems trader is longer, harder and requires an equal degree of patience & discipline if not more than it does a pure discretionary trader. Anyone who thinks they can mindlessly operate a profitable system trading financial markets has some real self-realizations straight ahead.
Small Win + Big Loss = Fear
This one is the classic “scalper” equation. After dabbling around with enough stuff long enough, developing traders realize they have limited skill-set development to deal with financial markets. They look around for what appears to be viable with the current set of tools to apply. It seems like a majority of trades taken go at least a little bit in favor somewhere or another before hitting stop-out orders. Hey… here’s a novel idea: what if that trader simply widens the initial stop further away from the entry point? Never mind that it risks -$3 for every +$1 potential gained. All that matters is winning enough times to make them feel good about the whole process. “Ring the register”, as Buzzy Schwartz wrote in his book. Force enough positive biofeedback into the process for making said trader feel like he’s on the right track.
Never mind that even a +80% win ratio would result in +$800/ -$600 performance before commissions, trade costs and taxes are subtracted from that paltry gross. Block out the fact that somewhere or other, a losing streak of four ~ five consecutive trades at -$300 each is a statistical certainty. Not probability: a mathematical certainty. How does that scalper handle the very next day following a session of four straight losing trades equaling drawdown of -$1,200 per contract? Will that proverbial QB look to the same all-pro receiver for critical touchdowns tomorrow? It’ll take twelve (12) straight wins with no losses with that -3/+1 approach just to reach prior peak equity high before new costs incurred. Does the trader trust his scalping method = star athlete enough to stick with his long-term gameplan? Or does he begin taking phantom sacks for new youtube material instead?
Think of that failed logic as your football team running a no-huddle offense with empty backfield in five-wide set, every down. Targeting +4 yards per play = +12 yards in three plays or a successful first down. Meanwhile, all of those little pass completions in that pure-pass scalping playbook makes the QB stats and percentage of positive plays really pop out in impressive fashion. Keeps the chains moving, correct? Sure it does, in theory. But blackboards and gridirons aren’t synonymous. That gameplan requires perfect execution with no interceptions, fumbles or sacks to disrupt the sequence. Any negative yardage plays result in forced punts to the opposing team, or far worse.
Biggest Size @ Largest Point Of Risk/Ruin
A first cousin to the risk -3 make +1 set is the martingale or average-down player. Someone who keeps buying into a falling market or selling into a rising one with hopes of catching a price halt & turn, a reversal that takes the big-loss position slightly positive for profitable exit. Now I will tell you that some traders do learn to apply parts of that approach successfully. It’s a market marker’s tool, basically. Anyone who uses that approach of building trade positions as price action moves against them will likewise tell you that all of the time they are gripped with fear. If they are honest with you, they will report how many times they sweated out positions that went against them to mere ticks from exiting at huge, painful loss that luckily turned right there and wound up being slightly profitable in the end. You may see strings of winning trades, winning days, weeks or months with no losses realized. What you don’t see are myriad large unrealized losses that were not taken. Unrealized losses that drove said trader to the literal verge of puking, right before nothing more than random blind luck alone saved him from misery & despair.
They Talk About Fear
You’ll see, hear and read about traders discussing fear all the time. What is labeled as a “healthy dose of fear” actually describes respect. Respect in this context as a performance athlete or trader is not fear: it is a complete understanding of your adversary, strengths and weaknesses alike. You know and admit that the opponent has strengths and advantages. You know equally well that you are equipped to deal with, negate and overcome those adversarial strengths with a defined edge of your own… applied thru all conditions over the course of time. That does not mean you can win every time. That does not mean you cannot or won’t take losses. That does mean you have a solid gameplan for the entire season that permits wins to exceed losses in the end. Long-term objectives instead of short-term emotional gratification.
Professional traders don’t harbor fear. They control it. There is no fear of inevitable loss, because they are confident their learned skill-set will prevail over time thru all market conditions. They don’t fear risk of ruin on any single trade or series of trades because their money management approach won’t let that happen.
Neophyte traders constantly talk about fear and how to massage it. Yes, financial markets are one collective sum of variables with few constants. Yes it’s true that anything can happen at any time, even the least expected if not unthinkable. For sure it’s a fact that unforeseen adverse moves against open trade positions can result in larger than expected net loss. Those factors are all part of a trader’s edge which encompasses everything. A trader’s “edge” doesn’t stop at the decision to enter a trade. It doesn’t begin at the point of where an open trade needs to be managed for locking in some portion of unrealized gain. The edge is not exclusive to monitoring an individual’s mental – emotional state OR equally applicable mechanical system’s optimization for same current conditions. A trader’s edge includes all.
Once you have that entire package under wraps and only when you do is it possible to have real, honest confidence in your operation as a trader.
Fear and trading success are polar opposite ends of the spectrum. You should not be able to see one from the other on a bell curve. The opposite of fear is not arrogance, cockiness or bravado. Those are false expressions of fear itself. The opposite of fear is calm, quiet confidence in the overall outcome being as expected long-term regardless of what happens short-term in between. Our task as traders is to move ourselves as far from the bell-curve end of fear as possible… which naturally moves us toward the goal of confidence on the opposite side. That’s where our long awaited, very hard-earned pots of gold await us all.
Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures and commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. Click here to visit CoiledMarkets.