Why don’t most win at trading when they know what’s required: cut losses and let profits run? It seems simple but it seems only relatively few who commence the trading project go on to become consistently profitable. Why is that the case?

There can be reasons for the lack of success which can be rationalised. The ‘trader’ could approach the market as a hobby, as fun and as a diversion from other life issues. Watching a market is inherently interesting and an occasional dabble seems ok. Winning is not as important as involvement.

However, although few traders do consciously set out to lose, most do lose or fail to win consistently. There is a real incongruity here. This occurs despite the huge industry in trader education, trading software, and cheap brokerage on internet trading platforms and so on.

What’s missing? Why can’t people cut losers and work winners? The statement of this simple proposition belies the psychological, intellectual and activity demands required for success.

The answer is that to be successful the trader must engage with the imperative and processes of best professional practice. In this article we will cover the psychological foundation of and elaborate on best professional practice for trading success.
 

The market is reality

Markets tell the truth. If you are dealing on a public exchange then each trade, each and every deal between buyer and seller is recorded and won’t be changed. You always know the score in one of the most open and transparent of businesses. Real and precise information is at your fingertips so that you can assess risk and the efficacy of your current position. (This is not necessarily true for Over the Counter products as we have witnessed in the subprime crisis).
 
Agree with the market and it will pay you. Disagree, you pay. If you are not winning then you must be disagreeing with or ignoring reality: to win you have to learn how to respond to and deal with reality. Sounds simple and it is. But it is not nearly as easy as it sounds. Knowing the reality that a jumbo jet will lift when the speed of the air over the wing reaches a threshold does not make you a pilot.

In life we have to face another huge existential reality that our bodies are going to die one day, and furthermore that life can present terrible arbitrariness and calamity. As our consciousness develops in early childhood this reality is dealt with by repressing it. We develop character attributes that reflect a refuge of denial from harsh reality. These attributes are essentially personal illusions or lies that help us cope. This is an essential coping strategy for a child. But in adult life we can easily become embedded in our general culture that reflects our immature yet comfortable illusions that are predicated on the limitations of fear and denial. Yet this response both personally and culturally is essentially neurotic although appears to be ‘normal’. 

When perturbed by life’s issues we have two choices. New information can either be incorporated enabling us to change and grow from our former limiting beliefs (i.e. accept the challenge) or be denied to consolidate our prejudices (i.e. stay as we are). The choice is stark. The cultural norm is one of hopeless defeat by the fact that we are indeed limited by bodies that will wind down and die. The alternative and better choice is to accept the limitations that our bodies and life imposes upon us and to experience the challenge and liberation of extending ourselves and really going for it.

If we choose to trade then we are choosing to interface with one form of reality, market reality, which is much bigger and more powerful than ourselves. This form of reality is always in a state of flux- it’s dynamic. Yet its acceptance is a must.  Our culturally programmed default life coping mechanism of biases and prejudiced illusions simply won’t suffice. You may be able to live in your sheltered comfort zone but neurotic fear and denial makes market success impossible. Narcissistic views that irrespective of the market truth we should automatically win, or that we are entitled to a positive outcome won’t suffice either. In addition, acceptance of market reality means that we have to relinquish the idea that the market will conform to our own ideas and views for it. 

Again we can convert this into a positive. The fact that markets tell the truth makes the trading task easier than many other life projects. The market always lets you know the success or failure of your current trading position each moment in time. Rather than deny this reality, the rational response is to assume responsibility for taking advantage of the truth. In other words the market tells you when to cut and when to hold irrespective of what you may happen to think or feel at the time.

We have to overcome our neurotic tendencies and grow if we are to accept and then harness the market reality. If we don’t accept the reality of the market then we are doomed to failure. Denial in the market can be catastrophic.

Heroes

A common feature of the human trapped in the cultural norm of denial and mediocrity is the search for a hero who has been able to shine. It may be a movie star, sportsperson, a politician, or someone outstanding in one’s area of interest. The idea is that the individual can transfer their own need for liberation and achievement onto the hero so that he or she can remain comfortable without threatening their own illusions. Of course if the hero falls then there is someone to blame and more evidence that indeed becoming outstanding is not worthwhile. 

In trading there are plenty of gurus that can conveniently fulfil the role of hero for you.

Nevertheless we have the capacity and power for creativity and self actualisation not only so that we can deal better with life’s realities but also have successful and purposeful lives. This is the process of growth or self actualisation that is a requirement for a healthy and a more satisfying life. 

Rather than just going through life we need to engage with our ‘super conscious’ selves. This is the place in our psyches where we acknowledge and use our latent courage, resourcefulness, creativity, decisiveness, clarity, and inner wisdom as well the sense of gratitude, love and altruism. Some psychologists call this the hero’s journey.  Without your personal hero’s journey you are prone to just exist, to cave in to ordinariness, to be unfulfilled so that you will realise on your death bed that you never extended beyond your comfort zone; that you have essentially blown it. Tragic!

In essence the legitimate task of growth and success is to become your own hero: to have the courage and self belief to initiate, enjoy and learn from the ups and downs of your own hero’s journey.

This is what we need to tap into for trading success. To become successful in trading you need to embark on your own hero’s journey.

Of course many people have successfully undertaken the hero’s journey in the markets. There are plenty of really successful traders around. Some like to take their success public and even perhaps create courses based on their approach and understandings.

One thing you have to guard against is that you don’t project onto a market guru in order to replace your own hero’s journey. It’s a common trap.

When you read books by, and pieces about successful market traders, a couple of key points should emerge. Firstly, success is doable by ordinary men and women like yourself because they have chosen to be different from the norm. They exhibit dedication, resilience and disciplined focus on cutting losers and working winners. Secondly, each market wizard has achieved success in an individual way. They all are indeed different from each other. The pathway to success is different for each individual. The hero’s journey is unique to each.

Indeed the courses and insights of market gurus are worthwhile. They are very useful success models to commence your practice. They show you the journey can be done, but you have to derive and apply your own uniqueness. Unfortunately, following a guru does not guarantee the success they achieve as your own. Only you can do that when you employ the template of cutting losers and working winners and choose to risk the venture of your own journey.

A model to create your success

Knowing that your journey is doable because others have done it, do you have to go on it blindfolded? Certainly not! I would like to share with you a model that I use to help individual traders become professional and to reach for success.

Here it is in its basic form:

This feedback model is not only useful for traders but also is applicable to many life situations. 

You already use it consistently and diligently when you drive your car. It enables you to continuously drive safely and precisely so that you get to your destination despite complex changing conditions relating to the road and traffic. When you drive, you continuously engage the feedback model instant by instant.

Notice something really important here: you trust yourself to flawlessly and instantaneously do what the model suggests when you are in command of your car. You take complete responsibility to engage and adhere to the process when you drive. Because you have practiced the skills in many situations, you implicitly trust your capacity to implement the actions the model mandates. Denial of information flowing to you via the model could be so disastrous that you could endanger others and even lose your life.

When you drive, your use of the model is unconsciously competent. You are in the zone.

Since you learn to use this model successfully when you drive, doesn’t it stand to reason that you can learn to engage and adhere to the model in the trading environment? It’s a must and this is where I start to create best professional practice in clients. This is what the market heroes do.

Now let’s have a closer look at the model as it applies to trading.

A key point I want you to note is that it is a complete feedback loop. Each stage is important. Furthermore, the model is applied consistently and continuously time and again without fail. Once one feedback loop is over, another is ready to commence. Each individual trade is conducted on its own merits independently of the previous one within the context of the model. The success or failure of your next trade is physically and psychologically independent of the past under this model. Too often beginning traders err by acting as if this current trade is a rerun of the previous one or two. Now this model requires you to focus on what is happening at this moment just as you do when you drive your car.

One of the biggest ways traders come to grief is that they trade their selves: they narcissistically trade what they think and feel and what they want rather than the reality of what the market is presenting to them now. The feedback model allows you to trade the market so that you can be detached and free to act in line with your objective observations and evaluations. You don’t have to guess the future; you just have to act appropriately now if your observations and monitoring tell you to do so. Keep working the model and you will achieve your desired outcome.

Now let’s turn to the key elements of the model.

Unfortunately there is a misbelief out there that if you dwell on getting the best observations you will surely win. In other words it is easy to become over reliant on analysis. This is encouraged I think by non traders who pedal analytical software. However it’s what you do with your observations that is important to trading success.

The role of observation is to identify points at which risk is worth taking. Unfortunately many try to analyse risk out of the trade entry. Remember the risk reward relationship: higher risk equals higher reward. We are looking for quality set ups in the current trend and volatility conditions that will give the biggest bang for our buck. We are not looking for certainty because the reward would be inconsequential. We are instead observing those conditions that when traded upon create a return that covers losing trades together with making the business very worthwhile. Since 20% of your trades will give 80 % of your profit, the observational task is to identify for execution that premium 20%. 

Some spend so much time on observation that when it’s time to act they can’t do it. They become immobilised by fear that the trade won’t work or hesitate waiting for more confirmation. Of course hesitation can only reduce the reward if the trade does go on to be a winner. On the other hand some are so eager to pull the trigger that they act impulsively rather than wait patiently for a premium set up to occur. Both hesitation and impulsiveness are the by-product of that neurotic denial of market reality I mentioned earlier.

The next stage is to act on the observation. 

This is where work for the successful trader begins. Unfortunately for many this is where it ends. Of course you have to believe your observation has presented a quality entry for you to act. But there can only be two outcomes. Either the trade will work or it won’t, and the model prepares us for that. 

If you observe and act and don’t employ the full model, you are gambling. At the track you select the race horse you like and put your money down. Then there is nothing you have to do. You just have to accept the result at the conclusion of the race. The full model is not available to the race track or casino gambler. But a professional trader cannot gamble because the race is never over in markets. He or she is a risk manager and monitors and evaluates in preparation for the next action which will inevitably be called for. This is imperative in leveraged markets whereby unlike the track gambler you could lose much more than your original stake by not monitoring, evaluating and acting.  

Monitoring, that is observing whether your position is advancing or retreating as the market moves on, and evaluating for your next action, whether it be attacking or defensive, are crucial elements of the model. When you are in a trade you need to remain responsible for the outcome. You must maintain vigilance and be prepared to act. You cannot afford to go to sleep at the wheel. 

If the trade begins to fail it will be cut (remember the stop loss idea) and you go on to a fresh cycle of the model. On the other hand if the trade goes well then the action of holding onto it and possibly adding to it will be called for (remember the work your winners idea) as long as your continuous monitoring of the market calls for this. Monitoring and evaluation continues until the market indicates the move is over. Action: take the profit. And then what happens: the model kicks in for a new beginning as part of an ongoing process.

So by now you will have concluded, the model I have presented here is a Stimulus- Response model as a basis for successful trading. Observation and monitoring gather the stimulus from the market for the response which is to act according to what is happening in the market. You have to learn to trust the model by applying it at first consciously and deliberately in controlled conditions, just like when you learned to drive a car. 

Ultimately it is a question of your personal choice to take response-ability, the ability to perform a correct response (act) in accord with the truth the market is presenting to you now. 
 

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