Among the myriad of terrible trading advice out there none is worse than the idea that you need to have a “winning attitude” in order to be a successful trader.
Successful trading is all about losing, and a “winning mindset” is just about the worst possible posture you can assume because it’s the farthest thing from reality.
This realization hit me like a ton of bricks yesterday as I was walking through frigid Central Park (I want my global warming now!) listening to the inimitable Aaron Fifield interview a trader named Ben, who goes by the handle of @BLB_Capital.
Ben comes from a blue-collar background and had a very refreshing take on trading, far different from the sterile, quant driven, MBA-processed ideas that dominate today’s discourse.
But it was this exchange that really made me perk up.
Aaron: What were the some of the challenges that you had to overcome?
Ben: The fear of losing… The fact that you are going to lose a good percentage of the day is pretty scary to most people.
How many gurus ever tell you that you will spend a good portion of your trading day, sometimes all of it -- losing?
The fear of losing is behind every bad trading behavior there is. It’s behind the idea of trading with no stops. It’s behind the notion of martingaling your way out of trouble. It’s even behind the idea of index investing. Because what is index investing but simply the hope that if you hold equities long enough they will rally and make you money?
I know that I am tilting at windmills and talking blasphemy when I challenge the orthodoxy of index investing, but the simple truth is that we’ve had a 40-year bull market and there is absolutely no guarantee that the trend will extend indefinitely. In fact, there is a good reason to believe that it won’t. You don’t even have to use the Nikkei which has been under water for nearly 50 years, to see what I mean. I’ve posted this chart before, but it bears repeating. Here are four distinct periods in the 20th century when 10 to 25 years of investing would have yielded you exactly bubkas.
So stick that into your 401-K.
But back to Ben.
“It scared me at first too,” he notes. “ But then I realized that it’s part of the job. It just like tuition”
Or like the cost of goods sold. Sometimes you are like a guy who runs an ice cream store and the electricity goes out and all your product melts. Do you blame the ice cream wholesalers (dealers) do you blame your competitors (the other traders) for your woes? Of course, you don’t. Stuff happens, markets change on a dime and a setup that was working for ten straight days suddenly fails every time.
This is where being comfortable with losing is key. If you know you are going to lose. If you EXPECT that you will lose, you will be much less surprised, much less hurt by the situation. You will trade the right size. You will honor your stop. You will preserve the capital so that you can make it back another day. Most importantly, you won’t reflexively change your setup at the first sign of difficulty. I am not saying you shouldn’t IMPROVE it if you see legitimate input from the market that could sharpen your edge, but way too often the pain of losing makes us abandon the trading premise altogether -- and that is a sure sign of ruin. Because I can assure you of thing. There is no trading without losing. There is no trading without pain. There is no trading without a struggle. If you want all that put your money into a Treasury bill and collect 1% per year.
But if ever want to achieve more, if you ever want to get true control over your capital, get comfortable with losing, it is the single most important skill in trading.