Why Success Breeds Failure in Trading

My last night in London I was having dinner with David Aranzabal and Ashraf Laidi at a very posh restaurant in Mayfair (I was with Asharf after all) and conversation turned to stories about many wealthy clients that each one of encountered over the years that managed to blow up tens of millions of dollars trading FX. Most of these people were extremely successful entrepreneurs, often self made men who started with literally nothing, to accumulate vast fortunes in shipping, real estate, construction and other business endeavors. Clearly these were capable, talented men (and they were uniformly male) yet they managed to blow up their massive accounts with alarming speed.

Why?

Our uniform answer was ego. Each one of these men battled very long odds and through sheer will power were able to succeed and bend the market to their will making fortunes in the process. Having won in such difficult conditions, they couldn’t imagine the possibility of losing and therein lie their demise.

In real life you can often bully your way to the top. But in trading you cannot. The market is always bigger and always richer than any one individual. The London Whale was only the most recent of long string of traders to discover that naked truth. Above all else trading is about the suppression rather than expression of ego. Trading is always first and foremost about being humble.

However humility is not a common trait amongst most traders. Most of us are well educated, intelligent people who have enjoyed a fair measure of success in life (we wouldn’t be attracted to the markets if we weren’t intellectually curious). But it is precisely those qualities that make us very vulnerable to failure in the markets. Stubbornness in the face of adversity is frequently necessary to succeed professionally in real life, but it is a guaranteed recipe for loss when it comes to trading. That’s why some of the smartest people often make the lousiest traders. Let’s all try to remember that the next time we battle with the FX market.

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