Trading To Win Or Not To Lose

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Losing To Win

The hardest and most important lesson to learn in trading is how to handle losses gracefully. Most traders will inevitably encounter a string of losses at some point, so those who can’t lose without being thrown off their game won’t survive the market. The traders who have realistic win/loss expectations and a trading system they trust have the best chance of prevailing over tough market conditions. Here we look at what kind of losses traders can expect and how they can adjust their focus and strategy to deal with these losses.

Losing Battles …
Every trader worth his or her salt knows that trading against the trend is not a good idea. So it seems logical that the best trading systems would be those that follow the trend: when the trend is going up, take long trades only, and when it’s going down, it’s time to go short. That being said, you’d think that trend-following systems would have the best win/loss ratios, right?

In his book, “A Short Course in Technical Trading,” Perry Kaufman offers some sobering statistics on the matter. According to this veteran program-trading expert and author, “You can expect six or seven out of 10 trend trades to be losses, some small some a little larger.” Yet, Kaufman says that trend-following systems are some of the best trading systems around. In other words, trend-following systems won’t yield huge profits, but they’ll still do better than most systems.

It will probably come as a shock to those who have spent countless hours searching for a winning system, but Kaufman makes it absolutely clear in his book that having realistic win/loss expectations means expecting losses – lots of them. He states, “As a trend trader, you should expect mostly small losses, some small profits, and a few large profits.”

If it gets across this point alone,”A Short Course” is a worthwhile addition to your library. Kaufman provides an example to demonstrate a phenomenon that traders in the game for the long haul have come to learn the hard way:

“In a normal distribution of 1,000 coin tosses, half of them would be single runs of heads or tails. Half of those, 25%, would be a sequence of either two heads or two tails. Half of the remaining, 12.5% would be sequences of three in a row, and so on. Therefore, in 1,000 coin tosses, you can expect only one run of 10 heads or tails in a row.”

In other words, in 1,000 trading days – or about four years – a trader could expect to experience 10 wins (or losses) in a row only once; that is, if trading were as random (normally distributed) as a series of coin tosses, which it is not.

Therefore, your odds of winning with trend-following systems are better than your odds of winning a series of random coin tosses, but there are other challenges to having more winning than losing trades. Although markets are not random, you can still expect short-term random movements within a trend, major reversals at the end of each trend and the time lag most trend-following systems experience when getting into and out of the market.

As a result, thanks to lags and unexpected short-term random movements, you are still subject to the effects of randomness. Given enough time, an experienced trader can expect to suffer 10 or more losses in a row. It is not a matter of if, but when.

When asked about realistic trading expectations, Thomas Stridsman, author of “Trading Systems That Work” and “Trading Systems and Money Management,” had this to say:

“What is more important than how large your winning trade is when you win, or how many winners or losers you might have in a row. It is the mathematical expectancy of your strategy. That is, how much are you likely to win on average on all trades, winners and losers combined, and how much this value is likely to fluctuate in the short term.

“For an even further increase of peace of mind, you also probably are better off looking at profitable time periods, such as weeks or months, rather than profitable trades. Simply looking at a win/loss ratio is not enough.”

If you think that doing either more or fewer trades would be a more successful strategy, think again. Kaufman demonstrates in “Short Course” that the more trades the trader performs, the lower his or her profits over the long haul. On average, longer-term trades generate more eventual profits. However, if you’re a long-term trader, your risk of getting one or more big losses is increased, since you are in the markets longer and therefore exposed to risk for periods that are more prolonged. No matter what your trading style or preferred time in a trade, you will lose and lose big on more than one occasion.

Kaufman has the data to back up his claims. He has performed thousands of tests on various systems, and some of these are presented in “Short Course.” In one example, he tested Microsoft for 10 years ending January 2001 and covering a period when the stock moved from a pre-split price of $1.04 to a high of $60 in December 1999. It should be pretty easy to beat the odds following that kind of trend, right?

Using an 80-day moving average during the period to generate buys and sells, the system generated 88 trades, trading both long and short positions. Of these, only 36 trades – or 41% – were profitable. Kaufman comments in the book that “[t]hat’s actually good for a trend system, which often has closer to 35% good trades.”

These depressing stats are echoed by John Murphy in his book, “Technical Analysis of the Financial Markets.” Murphy says that professional traders, on average, experience losing trades about 60% of the time. In other words, they win only about 40% of the trades they enter. Given the grim facts, rookie traders may wonder how it’s possible to make money in the markets. All of this begs the question: how can a system that has more losing trades than winning trades be profitable?

. While Winning the War
Let’s look at an example of a system that does very well in a relatively short period, but falters over time. I ran a number of tests to determine if using commercial commodity traders’ net positions – published each week by the Commodity Futures Trading Commission (CFTC) in the Commitment of Traders (COT) reports – was useful in trading an index. Tests were performed for the period of 1999 through 2003 using the S&P 500 Index futures, and results were impressive.

Using a five- and 22-week simple moving average of commercial traders’ positions, buying each time the five-period SMA crossed above the 22-period SMA and selling when it crossed below, the strategy earned 804 points. Contrast this to a loss of 245 points for a buy-and-hold strategy during the four-and-a-half-year period between Feb. 12, 1999, and Oct. 3, 2003. If we assume the trader traded one S&P 500 e-mini contract with a margin (risk) of $1,800, the profit would have been more than $40,000 after commissions. Out of 12 total trades, seven were profitable – that’s a win/loss ratio of 58%.

The same tests were performed for the 13-year period from Feb. 16, 1990, through Oct. 31, 2003. Results were far less impressive. The system returned a total of 555 points, whereas a buy and hold over the same period returned 696 points. Our win/loss ratio also dropped: only 26 out of 55 trades were profitable, giving a ratio of 47%. Not only was the system not nearly as impressive over the longer period, but it was also significantly outperformed by a simple buy-and-hold strategy.

The Take-Away Value
The moral of the story? Whenever you see claims of systems generating outstanding returns over short periods, remember that such statistics are worthless without looking at the bigger picture. Even worse, these claims often create unrealistic expectations in the mind of the new trader who takes them at face value.

Stridsman explains how to compare a trading system to a buy-and-hold strategy:

“The trick here is to analyze the system for its effective time spent in the market. For example, if a system is in the market only 50% of the time, you can put on twice as many contracts each time the system enters into a trade, as compared to what you would have in a buy-and-hold situation over the entire period to achieve the same amount of contract hours spent in the market. Looking at it this way, the 50% case the profits made per contract traded should be at least half that of the constant-contract, buy-and-hold strategy. Proper money management also allows you to increase the number of contracts traded as your equity grows, whereas a buy-and-hold strategy doesn’t give you the same flexibility.”

When you approach trading with the assumption that there will be more losing than winning trades, your primary focus shifts dramatically. Instead of spending inordinate amounts of time buying, testing and discarding systems that fail to meet your unrealistic expectations of 70 to 80% (or more) wins to losses, you can concentrate your efforts in the more important but far less sexy area of money management.

On average, traders spend at least 10 times more time and effort on seeking the magic formula for trading than on learning to manage the trade. This is obvious if you compare the number of trading signal systems available to the number of money management systems available. The same is true for best-selling trading books. When was the last time you saw a best-seller that concentrated on money management? This may explain why so few traders actually graduate to the point of being consistent in the trading game.

The Bottom Line
Since a large number of professional traders experience more losing than winning trades, learning how to lose is essential to making it as a trader. Furthermore, an effective money management program is absolutely necessary to a trader’s survival and long-term profitability. A key part of any money management program is having an effective trading plan and sticking to it.

Consider what veteran trader and market teacher Larry Williams said in a 2004 e-mail: “Since losses are an integral part of this game, a strategy is as essential as the proper attitude. All jobs have good days and bad days so deal with it. There are no 100% certain trades.”

Looking for a system that will win 80% of the time or more is a fool’s game. Those who adopt a hope-for-the-best-but-plan-for-the-worst mentality and concentrate their efforts on far more important issues will set themselves up for long-term success. It is the difference between taking a short-term view to win a few battles at any cost and marshaling resources in the battles you lose to ultimately win the war.

If you’re serious about getting a handle on this topic, check out the books by Kaufman discussed in this article. You will also find Thomas Stridsman’s book, “Trading Systems and Money Management,” a worthwhile read for its detailed discussion of win/loss ratios, realistic expectations for various trading systems, and money management strategies. Consider it a reading assignment with potentially big dividends!

95% of retail Forex traders lose money – Is this Fact, or Fiction?

Updated: September 22, 2020

There is a well known statistic being passed around the Forex community and there is a good chance you’ve come across it, possibly numerous times. Basically, it says that ‘95% of Forex traders lose money’.

For traders who are chasing their dream of becoming a full time Forex trader, or at least trying to achieve even part time trading success; this statement can be a bit of a demotivator.

If 95% are blowing up their accounts, the statistics imply you also will be become one of the losses.

It’s not a very comforting thought is it! In a world of failing traders, what steps can you take to become the minority who survives and make consistent returns from Forex trading?

In this article I want to do some investigating. We are going to try verify the claim ‘95% of Forex traders lose money’. We’re going to go over some supporting evidence, and attempt to conclude if this just a phrase used for scare tactics, or if it is actually based on fact.

Special thanks to War Room member ‘kin’ (marketstudent) for helping me compile the information contained in today’s article.

Let’s go through some of the factual evidence we’ve dug up that supports the statement…

The Evidence that Forex traders lose money

China bans Forex margin trading

According to a Reuters article in 2008, the China Banking Regulatory Commission banned banks from offering Forex margin trading to their clients.

“Eighty to 90 percent of players in Forex traders lose money, through banks providing the service were generally making a profit from it, the banking regulator said.”

This quote is useful but far from conclusive.

The profitability of day traders

“The profitability of day traders” was an article written by Douglas J. Jordan and J. David Diltz, published in the Financial Analysts Journal (Vol. 59, No. 6, Nov-Dec 2003).

If you want to read the full article you will have to pay for it, but the abstract reads as follows:

“We used two distinct methodologies to examine the profitability of a sample of U.S. day traders. The results show that about twice as many day traders lose money as make money. Approximately 20 percent of sample day traders were more than marginally profitable. We found evidence that day-trader profitability is related to movements in the Nasdaq Composite Index.”

All this really does is support our own views on day trading. It’s harder and riskier than the longer term swing trading. But, this still isn’t enough to nail down the statistic as fact, so let’s move on…

The Cross-Section of Speculator Skill: Evidence from Taiwan

“The Cross-Section of Speculator Skill: Evidence from Taiwan” is a research paper by Barber, Lee, Liu and Odean published on 14th February 2020 on the Social Science Research Network.

Using data from the Taiwanese Stock Exchange, the performance of day traders over the 15 year period 1992-2006 was evaluated.

The following quote on page 13 is particularly relevant:

“In the average year, 360,000 individuals engage in day trading. While about 13% earn profits net of fees in the typical year, the results of our analysis suggest that less than 2% of day traders (1,000 out of 360,000) are able to outperform consistently.”

This is a very alarming statistic, only 2% of these traders were consistently profitable. Remember though, this study only had day traders under the microscope, and didn’t look any other style of traders. Let’s look at some evidence from the brokers themselves, which factors in a broader range of trading styles.

U.S. Commodity Futures Trading Commission Regulations

The U.S. Commodity Futures Trading Commission (CFTC) introduced new regulation in October 2020 forcing US brokers to lower the amount of leverage that can be offered to customers (maximum limits are 50:1 on major currency pairs and 20:1 on other currency pairs).

US forex brokers are now also forced to disclose the percentage of active forex accounts that are actually profitable.

Michael Greenberg of Forex Magnates has compiled the data for the first quarter of 2020.

The Magnates chart tells us that during the first quarter of 2020, the US brokers listed here reported that an average of

25% of their ‘active’ accounts where in profit. This is a dramatic increase in percentages that we’ve seen in the other reports we previous covered. This data however is still not good enough to start base conclusions that 95% of Forex traders lose money on for the following reasons.

  • The chart only shows a handful of US brokers. Aside from Africa, the US actually has the smallest of the retail trading population
  • The data collected is only really from a 4 month period, which is hardly anything
  • The data doesn’t specify if withdrawals and deposits are taken into consideration
  • The data doesn’t show if those accounts are experiencing growth over time, or are just simply ‘up’ from their previous 4 month figure
  • To reinforce on the last point, are these profitable accounts over their ‘high watermark line’, or have they suffered a massive loss, but recovered a small percentage within the 4 month period therefore considered ‘in profit’

The new CFTC disclosure requirements are certainly a step in the right direction towards greater transparency in the Forex industry. However, it is important to treat the percentage figures of winning and losing accounts with a degree of skepticism for the following reasons we just stated.

All of the brokers will be eager to present themselves in the best possible light – so it would not be too surprising if the figures were subject to some manipulation. If a broker can claim to have a higher percentage of winning accounts than their rivals, this may attract new customers to open up accounts with them.

It is important to note that the data only includes “active” accounts (and the definition of “active” maybe interpreted differently by different brokers). We have no idea how many new accounts blew up in their first few months of Forex trading and subsequently became “inactive” (and thus were omitted).

Oanda in particular have been guilty of some creative accounting – their data from Q3 2020 showed that a spectacular 51% of accounts were profitable, 18% more than the nearest competitor. However it turned out that included in their definition of “active” accounts were accounts that contained no trading activity but had simply accrued interest on the account balance!

The CFTC quickly put their foot down and 6 months later we see that the percentage of winning accounts at Oanda has dropped to 38.1%.

As disclosure requirements tighten in the future, these winning percentages are expected to fall even further.

What conclusions we can make from the data

Even with all the digging we’ve done, and all the evidence we have sifted through, we simply still don’t have enough data to conclusive confirm that ‘95% of Forex traders lose money ’.

One thing is for sure, it doesn’t look good for day traders. The evidence is basically conclusive that only

2% of day traders can actually consistently turn a profit. This is no surprise to us though, we know day trading is a really stressful and tiring way to approach the market.

Day traders are required to sit in front of the computer for hours on end, staring at price charts while waiting for an intraday trade opportunity to present itself. Most of the day trades are placed with the intention of quickly being in and out of the market over a span of a few hours. With so many retail Forex traders engaging in scalping or day trading strategies, I am not surprised that most Forex traders lose money .

This combination of high frequency trading, and staring at charts all day is very psychologically taxing. Most day traders are failing because their patience wears too thin. They begin to do silly things in the market out of boredom, fatigue or frustration. Swing traders like us, use the core movements from the higher time frames to take easy, longer term trades. Swing traders ride out the dominant market direction it much stress-less fashion.

By doing things like trading with the daily time frame, we don’t have to spend much time in front of the charts. This gives us the freedom to set our trades, and not have the burden of constantly monitoring them for hours. The idea is to be less involved with the market as a whole.

Even though we don’t have anything 100% conclusive to support ‘95% Forex traders lose money’ it’s pretty safe to conclude that a ‘high percentage of Forex traders lose money’.

We have a few variations of this statement that we believe to be justified…

“100% of traders blow their first trading account”

“95% of Forex traders lose money during their first year of trading”

“High frequency traders find it harder to make money consistently than long term traders”

How can you avoid becoming a statistic?

All of the anecdotal and hard evidence examined in this article strongly suggests that Forex traders lose money and the vast majority of traders are not profitable. It is not really possible to arrive at an exact percentage, but we can see that the most conservative estimate suggests that 87% of traders lose. So the soft quoted 95% statistic may be a little high, but it is fair to say that trading is NOT easy.

So how can we as traders avoid being one of the losing statistics. What are the small minority of successful traders doing that everybody else isn’t?

By working with many traders in our Price Action War Room, we’re always on the front line witnessing how traders are ‘shooting themselves in the foot’. Traders who struggle to move forward, and hindering any positive progress with their trading goals all seem to share some similarities.

  • The trader doesn’t have realistic expectations about the market
  • The trader is over complicating their analysis, trying to make sense of too many variables or looking ‘too deep’ into things
  • The trader is in a bad financial situation and trading with real money that is needed for bills, mortgage etc.
  • The trader is not using positive geared money management to ensure winning trades outperform losers
  • The trader is trading on low time frames, chasing price and market noise instead of using more reliable data from the higher time frames
  • The trader is spending way too much time in front of the charts and over trading
  • The trader has no trading plan and therefore no consistency
  • The trader opens positions during news releases hoping to catch big moves
  • The trader doesn’t know how to take a loss
  • The trader is impatient and doesn’t wait for high probability trade setups

When you read through that list, how many points are you guilty of? I would bet at least a few. Don’t worry, you’re not the only one. These are everyday issues which traders struggle with and really do hinder their progress of becoming a profitable trader.

Most of the problems are generally a result of psychological weakness. Traders are ‘giving in’ to their inner demons. Unfortunately most traders never build on the character and psychological traits needed to fight these inner temptations. You really need step up, and work on personal improvement to build what it takes to be a good trader.

It’s like a smoker, drug user, or an alcoholic working to overcome their addictions. Deep down they know it’s destroying their health and lives. If they’re not determined and focused enough, it’s easy to fall back into bad habits and start a vicious cycle all over again.

The market will rip you apart, psychologically, in ways you never thought possible. The financial sector is a cruel world which can easily reduce a grown man to tears. It’s important that you understand what your weaknesses are, and face them head on. You’re going to have ups and downs in your trading journey, but just remember …

“What doesn’t kill you will make you stronger”

Do yourself a favor and go back through your history and study your losing trades. Get a pen and paper and make a list of what you think you did wrong when executing each of those losing trades.

I bet you will see a common problem reoccurring on that list. Have that list in front of you when you go to take your next trade. Use this list as a nice reminder of last few times you’ve ‘traded against your better judgement’. Hopefully that it will deter you from making the same mistake again.

Start to tackle your trading weaknesses and self improving to make yourself into a better trader. Give yourself a higher chance of not becoming a fatal statistic. Most Forex traders lose money, but that doesn’t mean you have to. If you’re struggling to find a trading system that doesn’t require you to sit in front of the Forex charts all day.

You maybe be interested in our end of day price action strategies. Stop by the war room information page and check out our price action course details.

Best of luck to you on your trading journey.

The Winning Mindset of a Trader

What is the mindset of a Trader?

Being a Trader is not just about formulating better strategies and performing more extensive analysis, but is also about developing a winning mindset. According to many studies of traders, what separates a winning trader from a losing one:

  • It’s NOT that winning traders formulate better trading strategies
  • It’s NOT that winning traders are smarter
  • It’s NOT that winning traders do better market analysis Investing: A Beginner’s Guide CFI’s Investing for Beginners guide will teach you the basics of investing and how to get started. Learn about different strategies and techniques for trading, and about the different financial markets that you can invest in.

What separates a winning trader from a losing trader is their psychological mindset.

Most traders when they first begin trading mistakenly believe that all they need to do is find a great trading strategy. Technical Analysis – A Beginner’s Guide Technical analysis is a form of investment valuation that analyses past prices to predict future price action. Technical analysts believe that the collective actions of all the participants in the market accurately reflect all relevant information, and therefore, continually assign a fair market value to securities. After that, all they’ll need to do is come to the trading market each day, plug in their great trading strategy, and the market will just immediately start pumping money into their account.

Unfortunately, as any of us who have ever traded have learned, it’s not that easy. There are plenty of traders who use intelligent, well-designed trading strategies and systems who still regularly lose money rather than make money.

The few traders who do consistently win the game of trading are those who have developed the appropriate psychological mindset that enables them to be consistent winners. There are certain beliefs, attitudes, and psychological characteristics that are essential to conquering the world of trading.

Attitude About the Markets and About Yourself

Attitudes and beliefs about the market include things such as believing that the market is rigged against you. Such negative – and erroneous – beliefs can have a significant impact on your ability to trade successfully. If you’re looking at the market as being out to get you, then you’re not looking at it properly, in accord with reality, and therefore you can’t hope to be able to objectively evaluate market opportunities. The market is completely neutral – it doesn’t care whether you make money or lose money.

Our beliefs about ourselves are critical elements of trading psychology. One personal characteristic that almost all winning traders share is that of self-confidence. Winning traders possess a firm, basic belief in their ability to BE winning traders – a belief that is not seriously shaken by a few, or even several, losing trades.

In contrast, many losing traders have serious, nagging self-doubt. Unfortunately, if you see yourself as a losing trader, cursed with bad luck or whatever, that belief tends to become a self-fulfilling prophecy. Traders who doubt their ability often hesitate to push the button and initiate trades, and thereby often miss good trading opportunities. They also tend to cut profits short, overly fearful that the market will turn against them at any moment.

Winning traders have a healthy respect for the fact that even their best market analysis may sometimes not match up with future price movements. Nonetheless, they possess an overall confidence in their ability as traders – a confidence which enables them to easily initiate trades whenever a genuine opportunity arises.

Key Characteristics of a Winning Trader

Psychologically, the very best of traders share the same key characteristics, including the following:

  • They are all comfortable with taking risks People with very low risk tolerance Risk Averse Definition Someone who is risk averse has the characteristic or trait of preferring avoiding loss over making a gain. This characteristic is usually attached to investors or market participants who prefer investments with lower returns and relatively known risks over investments with potentially higher returns but also with higher uncertainty and more risk. , who cannot accept losing trades, are not cut out to be winning traders, since losing trades are simply part of the game of trading. Winning traders are able to emotionally accept the uncertainty that is inherent in trading. Trading is not like investing your money in a savings account with a guaranteed return.
  • They are capable of quickly adjusting to changing market conditions They don’t fall in love with, and “marry”, their analysis of a market – If price action indicates that they need to change their view on probable future price movements, they do so without hesitating.
  • They are disciplined in their trading and can view the market objectively, regardless of how current market action is affecting their account balance.
  • They don’t give in to being excessively excited about winning trades or excessively despairing about losing trades Winning traders control their emotions rather than letting their emotions control them.
  • They make the necessary effort and take the necessary steps to be self-disciplinedtraders who operate with strict money and risk management rules Winning traders are not reckless gamblers. They carefully calculate potential risk against potential reward before entering any trade.

One of the most important psychological characteristics of winning traders is the ability to accept (1) risk and (2) the fact that you may well be wrong more often than you are right in initiating trades. Winning traders understand that trade management is actually a more important skill than market analysis. What determines profits and losses is often not so much a matter of how or when you enter a trade, but much more a matter of how you manage a trade once you’re in it.

Understanding How Trading Works

Winning traders know the difference between a “bad trade” and a trade that loses money. This is a critical point to understand. Just because you end up losing money on a trade, that doesn’t mean it was a bad trade – it just means that it was a losing trade. What makes a trade a good trade is not whether it wins or loses – a trade is a good one as long as it offers greater potential reward than risk, and the odds or probabilities of it being successful are in your favor, regardless of how it turns out. If you take a trade for good reasons and manage the trade well once you’re in it, then it’s a good trade, even if you end up getting stopped out for a loss. (Conversely, even if a trade happens to make money, if it wasn’t initiated for good reasons and with a favorable risk/reward ratio, then it’s a bad trade even though it may have happened to turn out profitably).

Winning traders operate on the premise that if they continue to make “good trades” as defined above, that they will ultimately be profitable overall. Losing traders incorrectly identify any trade that loses money as a “bad trade” and any trade that makes money as a “good trade,” regardless of whether there was a reasonable basis for making the trade – and that leads to bad, losing trading in the long run. Evaluating trades solely on the basis of whether they happen to win or lose is doing nothing more than looking at random rewards similar to playing a slot machine.

The Upside-Down Mental Attitude of a Winning Trader

One reason that losing is so common among traders is that many attitudes and principles that serve us well in life do not work well at all in the profession of trading. Unaware of this fact, most traders lack a basic understanding of what trading is all about.

In our ordinary, daily lives, we are taught to avoid risky situations. But trading is all about taking risks.

Trading is an inherently risk-filled endeavor.

Winning traders who genuinely accept the risk of trading have the ability to enter a trading opportunity without hesitation and to just as easily close a trade when it isn’t working. They are not burdened with the emotional pain that causes them to lose their focus or self-confidence as a result of a trade not working out.

Traders who have not learned this attitude toward trading are driven by emotional reactions to winning or losing trades and have not truly accepted the fact that trading is a risk-filled business. Because they are not acting in harmony with reality, they do not make the best possible trading decisions.

Engaging in trading – and being successful at it – puts a huge demand on us, namely the demand that we maintain confidence while dealing with the continual uncertainty of trading in the markets.

In the profession of trading, facing the truth about what we’re engaged in is one of the key elements to success.

Habits of Winning a Trader

Winning traders regularly review and evaluate their trading performance. They understand that trading is a skill that is only mastered through rigorous practice over time.

Winning traders are flexible. They aren’t ego-invested in their trades. They are able to always view the market objectively and easily cast aside trade ideas that aren’t working.

Winning traders do not hesitate to risk money when they see a genuine profit opportunity based on their market analysis and trading strategy. However, they do not risk money recklessly. Always aware of the possibility of being wrong, they practice strict risk management by putting small limits on their losses.

Understanding that the Market can’t be Predicted

Winning traders are aware of, and accept, the fact that the market is ultimately unpredictable, that there is no surefire market analysis technique or strategy that will infallibly predict price movements. Because they are keenly aware of this fact, they carefully watch for signs that their analysis is mistaken, and if they see such signs, they quickly adjust their trading position.

In contrast, losing traders, once they have put a trade on, tend to only look for market action that confirms that they are right, and minimize or rationalize away any market action that seems to contradict their analysis. Thus, they often end up staying in losing trades too long and taking unnecessarily large losses.

Freedom and Discipline of a Trader

Trading is basically without boundaries, the markets a completely free environment. You are free to buy or sell, enter or exit, at any point in time. There are basically no rules that require you to either open or close a trade at any given price or time. Despite the fact that one of the primary attractions of trading is the complete freedom to make our own decisions – to basically do whatever we want, whenever we want – the only way to consistently succeed in trading is to self-impose a set of rules to govern our trading and to practice strict discipline in following those rules.

What’s the problem? The problem is that we all instinctively love having the freedom to do whatever we want and hate having any rules and restrictions placed on us, even those of our own creation.

Self-discipline is critical to winning trading. Unfortunately, self-discipline is typically the hardest discipline to come by. Most of us do a better job of abiding by the rules imposed on us from outside ourselves, e.g., a “No Parking” sign, than we do of abiding by the rules we create for ourselves. Our attitude tends to be one more of, “Well, I made the rule, so I’m free to break it”. While that’s technically true, it’s not an attitude that will serve you well in trading.

The Solution is Within Yourself

Losing traders mistakenly believe that mastering the market itself is the key to winning. They fail to face the reality that the market can’t be mastered. You can’t control the market.

What you can control is yourself, what you do in relation to the market’s actions. Winning traders realize this fact and put greater effort into mastering themselves and their trading actions than they put into trying to master market analysis. It’s not that market analysis isn’t useful. It’s just that the amount of available information available to consider, as well as the number of different technical or fundamental indicators, is virtually endless. Plus, what’s significant at one point in time may be utterly insignificant at another point in time.

It’s just all too much information to sort out and ultimately impossible to deal with perfectly. A trader’s time is better spent on mastering themselves and their trading skills.

Learn About “Turtle Trading”

If you want to learn more about what it takes to be a master trader, check out to learn about Turtle Trading rules and philosophy.

Summary of Being a Winning Trader

Trading is a difficult game to master. Very few people become highly successful at it. However, it is possible for virtually anyone to become a master trader as long as they are willing to make the necessary effort.

Attaining the proper psychological mindset for winning trading requires rigorous self-examination and self-discipline. You have to learn to cultivate good trading habits because they aren’t things that come naturally to most people. Making the necessary changes in yourself that will enable you to become a consistently profitable trader will more than likely affect how well you deal with life overall, not just how well you deal with trading.

Bottom line: Make the commitment to becoming a winning trader and that will enable you to become a winning trader. You can do it – but it’s up to you, not the market, to put money in your pocket.

Learning to Win by Learning to Lose

It does not matter how good your trading system is – you will not win 100% of the time! A fact! The way you deal with this fact will go a long way toward determining how big a winner you become. In fact, after so many years spent in the financial arena, I have absolutely no doubts in my mind that one of the most essential keys to winning is learning how to lose .

Learning how to win by learning how to lose in trading – just stop for a second and think about it:

To most people it is, and that is why they end up being bad traders and consistently losing! To market professionals, it is a fact of life- losing is the cost of doing business in this field. If you can’t accept it, probably trading is not a field for you. Market professionals do not lose sleep if a given trading position ends up in a loss. In fact, they are concerned with far more important factors: A) what is the net result of ALL their trading efforts and B) where they will call it quits if some of their positions are moving against them.

The Way to Approach the Market

As can be seen from a few of my latest articles, I have been misled by the market on a few occasions. Let’s say the last DAX trade . I was expecting more buyers to push the price up and the German stock index to continue its climb. What happened was that buyers’ enthusiasm was extinguished by more sellers pushing the price down from the resistance area of 9800 and this led to a massive sell-out. In fact, the candle just after I did give the trading signal was an inside bar, which indicated the hesitance of the buyers. Even before that happened, I did spot a few worrying signs from the intraday charts that were hinting for a reversal. Learning how to win by learning how to lose is the key ingredient for a consistent and successful trading. In my experience, one thing I have learnt the hard way and it is the last sentence:

Having learnt from my mistakes, I can bravely claim that the hardest thing still remains to cut losers fast . The second hardest is to let winners run for as long as possible, but without those two qualities no trader could ever succeed in the long-term.

We all have heard about the large-scale cycles of nature: day follows night and summer follows fall… just like a cycle in the stock market. But not everybody appreciates how cycles at every scale ( from atomic to astronomic ) are the hidden rotors of the splendid phenomena of nature. Just like a Fibonacci sequence , they do tend to reveal a wonderful microcosm of repetitive patterns that drive major changes and rule trends.

Two brilliant inventions – the internal-combustion gasoline engine (by Nikolaus Otto) and the diesel (by Rudolf Diesel) have changed the world. They both exploit cycles and just like in trading they follow a pattern- four strokes for the Otto’s engine and two strokes in the Diesel cycle before they come back to the initial stage. Just like a price action pattern, which has tested resistance two or four times and returns back to the initial level from where it started… numerous links could be found between nature and trading. Cycles tend to repeat themselves and the details of these cycles have been “optimised” by an R&D cycle of repetitions centuries old.

At an absolutely different scale did our fathers discovered the efficacy of cycles in on the great advances of human prehistory: the role of repetition in manufacture . Take a stick and rub with it a stone and nothing happens. Take the same stick and rub the stone a hundred times and again- nothing. Start all over again and repeat the process a thousand times- you will have a sparkle. By accumulation of imperceptible increments, the process creates something completely new.

You are probably either asking yourselves what is wrong with me or by this time you have already closed this page. In case you are still on the same page as me, I will continue with my description of trading when you are in a losing position- learning how to win by learning how to lose. This could be a completely novel way of seeing the market for a lot of you, but in my opinion even with the best trading strategy, if you don’t acknowledge the importance of objectivity, you are doomed. Ego, greed or fear – they don’t have place amongst winning traders. Although cycles do tend to repeat themselves as discussed earlier, they are sometimes very hard to discern.

That is why, objective trading is the most important skill a trader can gain over the long-haul . You can’t make money in the long-term by strictly abiding to a trading strategy without having strict rules when to cut a losing position. That is what I have been sharing with all of my followers that have known me for a while. I would like to help traders become profitable and that is why I keep repeating that you can’t keep averaging down or throwing good money after bad. Traders keep repeating the same mistakes over and over again. What drives us to that destructive behavior:

Traders in general think that if they pick a big winner, they are a genius, but if they pick a loser, they feel stupid. In my opinion, neither are right. In the case of a winning trade- it could have been because of a poor tactics, which turned out to be a home-run. In the case of a losing trade- it could have been a perfect trade, but bad on timing, even though you have followed a disciplined approach. Playing the market with the sole aim to brag about at cocktail parties is probably the worst way you can look at this business. Invest your time in getting the necessary knowledge and then wait for the “stars to align” in your direction before pulling the trigger.

The destructiveness of the ego could be seen day after day. Go in any broker house and listen to the daily conversations that the sales department is having with their clients. You will hear clients talking to their account managers that they will sell their stock when it comes back to where they are even. You will hear traders making deposit after deposit in order to maintain their balance, so they are not margin called. You will see traders that keep on adding positions to a losing trade (averaging down) until they are broke. For ego-driven traders/investors, “break-even”=”not dumb”. All they can see is their winning or losing positions. They stop thinking objectively and forget that the most essential factor in making money in trading is looking it as a business.


How does emotions influence decision making in trading?

Researchers involved with trading have made important progress toward understanding how specific emotions influence our trading judgements and objectivity. The research was based on how positive and negative moods affect objectivity in trading. For instance, it was found that a good mood increases the likelihood of a more biased judgements. On the other side, bad mood decreases this likelihood. A number of scholars found that bad moods can trigger more thoughtful processes that could reduce biases in judgement . A few scholars have even shown that sad people are more likely to be affected by obstacles in trading or a losing streak and thus will make worse trading decisions. On the other side, those ones in a happier mood would be more likely to make better trading decisions.

Specific Emotions

Emotions are the same across different cultures. Basic emotions such as happiness, sadness, fear and anger are the same for people from different cultures. Each of these are making traders from different cultures to respond to certain market conditions in the same (or very similar) way. For example, fear makes traders’ minds sensitive to risks. Sadness makes traders to focus on the self and motivates them to look for a change. Anger is a particular emotion. Although it is a negative emotion, it does share a lot with the features of happiness. Some of the shared factors are increased confidence and decreased sensitivity to risk. Therefore, for a trader it does not really matter if he/she is losing/winning. The feelings of anger or happiness are distorting his/her objectivity in the same way.

Let’s take an example- I am going long the GBP/USD today. By the end of the week I am 1) up 200pips or 10,000GBP 2)down 200pips or 10,000GBP. Obviously in the first case, I would be extremely happy and ready to take even higher risk. In the second case, I would be really “neck-down” and will be looking to break-even as soon as possible, thus increasing the size of my next trade. In both cases, my reaction will come across as overconfident to market participants. In the first case, this would be due to my “happy mood” and in the second, it would be due to my “angry mood”. In both cases I am making a mistake. I am trading with blurred objectivity, which is prone to big trading mistakes . This leads us to the next point:

The above explored example is very similar to the “endowment effect”. Endowment effect is described by the value traders place on a certain commodity they own. The value is greater if they own the commodity than if they don’t. As deduced by Bazerman&Moore:

Lerner and her colleagues (2004) explored what happens to selling prices of a commodity (set by those who own it) and choice prices (set by those who are choosing between a commodity and money). They distinguished between two states- sad or disgusted state rather than in a more neutral state. They induced disgust by showing participants a film clip depicting intimate use of an unsanitary toilet from the film Trainspotting. They induced sadness by showing participants a film clip dramatising the death of a boy’s mentor (from The Champ). The results showed that disgust triggered the desire to expel. This led potential buyers to lower how much they would be willing to pay. In contrast, sadness triggered the goal to change one’s circumstances. This increased people’s willingness to pay to buy and decreased the price they demanded to sell.

This study is confirming once again how traders are making decisions based on their emotions. It is imperative that you understand how your emotions are shaping your trading decisions, before you become a winner in this zero-sum game. Emotions are so much ingrained in our daily reflections that even the weather can influence our moods. For example, pollsters have gathered information that people report to be less satisfied with their lives on cloudy than on sunny days. It has been shown by researchers that this effects even extends to the stock market. Thus, prices are more likely to go up on a sunny day in New York than when it is cloudy.

These final examples are key to understanding our own psyche better. If we want to achieve success in trading, more important than anything else is to first start with ourselves and building a trading plan . Experience has taught us that even with the most prone-to-errors system with the highest risk:reward ratio, there comes a moment when its reliability is tested. What I am trying to show my readers and the people who have taken my trading course is that a trading system is not the only essential factor for making the right trading decisions. A variety of factors play essential role, but understanding our own psychology is one of the crucial factors. What builds successful traders in this zero-sum game is more than discipline- it is a total control of our own feelings.

About the author: Colibri Trader is a price action trader that is constantly looking for the apha. In the meantime, he does not forget to enjoy life, travel and even mentor other traders.

Edited January 11, 2020 by Kim

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