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99% of Traders Can Do Better If They Just Do This
Everyone wants to be a big swinging d-ck.
Hollywood is full of stories of an underdog who takes on an insane risk and wins against all odds to becomes a hero for life.
All or nothing.
Let it ride.
Go big or go home.
We are all so familiar with these story arcs that we can probably recite them in our sleep. The emphasis in all these stories is always on winning it all. Indeed the central myth of America is winning. Just ask Donald Trump who has managed to make a career out of exploiting that myth for all its worth.
In real life however, and especially in trading, success goes to those who seek to win, but to those who learn how not lose. Like Warren Buffett. The difference in approach is exemplified by what I call the two models of trading – the insurance model and the lottery model.
99% of us, whether we admit it or not, chase the lottery model. Have a hunch bet a bunch. Double your account in a week! Take $10,000 to $1 Million in…. You can fill in the blanks as easily as I can but you know deep down in your soul that its bullshit. The lottery is the ultimate suckers game, yet we all fall for it. Because we are all greedy.
I on the other hand try to spend all of my time being fearful. I love my trading models. They have served me very well, but that doesn’t mean that I follow them blindly. I never, ever, trust the market. Through the school of hard knocks, I learned that markets can always do the unexpected and they can always push prices beyond all reason and sanity. So I spend all my day passing up, rather than taking trades.
On any given day I must pass up at least 5 to 10 perfectly good opportunities to make money. Why? Maybe the price action looks a little too violent. Maybe there is news just a few hours ahead. Maybe I already have a very similar trade on the books and I don’t need to double my risk. Maybe the market just missed my entry price which happens so frequently that if I could bottle that frustration I would make my own line of cologne.
I’ve mentioned many times before that you can either predetermine your entries or your exits, but you can’t do both. I focus on entries because I can’t predermine exits. I exit early almost every time because of fear. Is that stupid? Maybe. It’s certainly easier to make 10 pips from one trade than to wring 10 pips from 5 trades that you closed out too soon. But you need to focus on the goal.
What’s the goal?
The goal is to make 10 pips moron!
Neither the market, nor your mother nor your family cares how you made your 10 pips. They just care that it was done.
In the very turbulent markets of this past week I’ve been running two accounts side by side. In my master account I’ve been trading like the meekest of accountants, blowing out of trades at any sign of trouble. In my beta account I just let it ride. My beta account had some really nice swings – up as much as 2% on some days. Like the guy who hit 5 blackjack hands in row, I was living large!
But by the end of the week, guess which account was ahead? That’s right in real life the meek little accountant beats the big swinging d-ck every time. Because in real life lottery is for suckers and real money is made by the insurance companies who spend their every waking moment making sure they don’t lose.