Just read this nice peice from Brett Steenbarger:
Learning to Win at Trading by Learning to Lose
One of the fascinating conclusions of the research I posted yesterday is that traders learn by trading; that it is the number of trades placed--not the amount of time spent trading--that best predicts success in markets. That same research, however, finds that there is a very high attrition rate among traders; the most common learning that occurs in markets, quite literally, is that traders find out that they can't make money at what they're doing.So we have a catch: traders need to learn by trading, but they also need to preserve their capital as they traverse their learning curves.As I stressed in the Trader Performance book, much of learning in trading is pattern recognition. If that is the case, than it may be the frequency and intensity of exposure to patterns--and not the trading itself--that facilitates learning. This very much fits with my experience that traders can accelerate the development of competence by engaging in simulated trading (with live data) and by reviewing their trading via video. "Any techniques that you use in trading--whether for money management, self-control, or pattern recognition--require frequent repetition before they will become an ongoing part of your repertoire" (Psychology of Trading, p. 154). Traders drop out of markets, perhaps not because they lack talent, but because they fail to achieve the necessary repetitions to internalize skills prior to depleting their capital.They also fail because, even with repeated trading, they do not have a system for reviewing their performance, setting goals for improvement, intensively working on goals, and holding themselves accountable for those. Instead of a week's worth of experience, they repeat a single day's learning five times over.The research cited yesterday, as well as this interesting study, suggest that an important component of learning to trade is learning to avoid behavioral biases in taking profits and losses. The traders who lose their disposition to sell winners early and hold onto losers are those that tend to be most successful. Ironically, turning loss-taking into routine behavior may be one of the most important learned skills in the evolution of a trader's success. The key is staying small enough, long enough to learn from the experience of losing.
One of the fascinating conclusions of the research I posted yesterday is that traders learn by trading; that it is the number of trades placed--not the amount of time spent trading--that best predicts success in markets. That same research, however, finds that there is a very high attrition rate among traders; the most common learning that occurs in markets, quite literally, is that traders find out that they can't make money at what they're doing.So we have a catch: traders need to learn by trading, but they also need to preserve their capital as they traverse their learning curves.As I stressed in the Trader Performance book, much of learning in trading is pattern recognition. If that is the case, than it may be the frequency and intensity of exposure to patterns--and not the trading itself--that facilitates learning. This very much fits with my experience that traders can accelerate the development of competence by engaging in simulated trading (with live data) and by reviewing their trading via video. "Any techniques that you use in trading--whether for money management, self-control, or pattern recognition--require frequent repetition before they will become an ongoing part of your repertoire" (Psychology of Trading, p. 154). Traders drop out of markets, perhaps not because they lack talent, but because they fail to achieve the necessary repetitions to internalize skills prior to depleting their capital.They also fail because, even with repeated trading, they do not have a system for reviewing their performance, setting goals for improvement, intensively working on goals, and holding themselves accountable for those. Instead of a week's worth of experience, they repeat a single day's learning five times over.The research cited yesterday, as well as this interesting study, suggest that an important component of learning to trade is learning to avoid behavioral biases in taking profits and losses. The traders who lose their disposition to sell winners early and hold onto losers are those that tend to be most successful. Ironically, turning loss-taking into routine behavior may be one of the most important learned skills in the evolution of a trader's success. The key is staying small enough, long enough to learn from the experience of losing.
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just to remind myself in future about the critical period I have been going thru here..
It's 8.11.2008 - my third week in China.
I lost the first stake of $6k I had in the GFT account upon departure for China - don't really remember how I did it - it just happened so quickly in a monday morning - I have been crying and maning and feeling desparately helpless.
Then I transferred another $5k - made them $9k in a week and lost them 2 days ago...
Then the only $450 lost in the account I made a nice trade with 50pip stop and 150 pip target -- it was great and it happened nicely to my profit.
Then I had a long long day starting with 1 mini lot in eurusd, then added 1 in gbpusd - then 1 more in eurgbp, then also 1 in audusd, then also 1 in usdcad...
well from a starting point of 650 I nearly managed to make them 2 times 800 then I closed it a few times around 500 or 450 - the last time I just lost control and hit the sell with 6 mini lots audusd and I just lost all.
At that time I was also trying to trade futures contracts in gold, S&P and Crude Oil..
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Man, what the fuck?!?!?!?!
Just anybody looking at me would say the obvious: Stop!
I felt very sick and I was and I kept saying well stop you are very sick and it doen't help to try to strain your nerves for noting but I just kept.
Then I just realized I would have benn much wealthier /and I keep reminding to myself every day/ if I just didn't try to multiply all the money I had. Instaed it was just pure gambling and loss after loss -- what did I learn actually?
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Thinking critically I realize a few points:
1. I overtraded massively
2. I didn't have any plan
3. I didn't have any specific goals or targets for both risk or profit
4. I didn't let my SL to be hit nor let the profitable trades to proceed
5. I kept changing my mind on a 15-min chart swings and was just jumped from timeframe to timeframe - from 15-min - to daily > to weekly > and all the way back = just to realize I was totally lost ..
then it was like a revelation to me once my mind started clearing and the sickness starting fading away...
here is the Daily chart of EURUSD -- I have been trading this chart 2 weeks and lost 2 accounts -- what do you see?
It is a 2 week extended rangebound congestion!
Damn - isn't it so hard to recognize it -- 2 week congestion without any sign of a breakout or anything -- pure consolidation after the steep trend...
they say usually time of price movement is spread like this:
60% consolidation and 30% trend... anyway that's technical analysis discussion..
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So am I doing or thinking wrong:
1. Clearly I lost only because I was impatient
2. I overtraded
3. Never ever got a plan to follow
4. Didn't have any risk management rules to go by
5. Switched my mind and reversed my positions on 15-min chart swings so many times - most of the time just to realize if I made just one trade with 1 lot I would have made /MADE!!!/ money instead of losing them all.
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So why is this story so long?
Think it's long because of the pain and the insight I get after the pain starts to diminish and the mist is starting to clear.
You can't get rich in a flip of a coin - you made it a few times just to realize it was due to massive and totally unexcusable risk!
I clearly remeber August maybe 19 or 20 when I was in Ljubliana on the Euro trip - then I was chatting with my Mentor AL Benjamin -- then I told him I was feeling something was very wrong with me and my trading.
It was too easy back then -- getting at the average daily range's high /low and just averaging out with huge 1, 1.5 mio positions for a nice 10-20 pip profits...
I also felt I had stopped learning. I felt dumb as a stone. Had lost my spark.
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Anyway I feel a bit different now - think I got the spark again.
I know I need to develop a system that fits me and represents my understanding of the market.
I know I have to make and follow my risk management rules.
I know I have to manage my position sizing to reflect my Equity size.
I know I have to kep things simple. KISS rulez!
I know I have to undertrade! Bruce Kovner says 'whatever the position you think - cut in half'.
I know it's good to take losses!
I want to take the losses. Every time I have stop loss level I want to let it go.
I want to learn to be disciplined and control my own decisions.
I know it is important to have a plan and execute it step-by-step.
I know hard work is the source of satisfaction.
I know one is purified by hard work, exhaustion and determination to reach his goals.
I know one has to go through a very miserable period to understand the reality.
I know there is no easy way, no shortcuts.
I know too much - better just start doing. Period
