Why we add to losing positions

Pierre Charlebois over at FXStreet (in his excellent blog) talks about why traders add to losing positions:

We hate to be wrong. It’s that basic. Think about it. When was the last time you were really wrong about something. How did it feel? Did you feel embarrassed? Stupid? Like you should have known better? I know that is usually my first reaction.

It's true that most retail traders hate to be wrong.  Just look at the firestorm that erupted when a bunch of traders blindly followed an analyst's proclamations.  More than that, traders are embarrassed about being wrong.  We want to bravely proclaim that some currency pair is overbought, or ready for a breakout, and we want the rewards of being able to scream to the world about how smart we are.  Or at least brag to our friends. 

The problem comes when we have put so much money on that "great idea" that, when it starts to go against us, we not only look bad (hate to be wrong) but we are losing a crapload of money (embarrassing). 

Most of us are never taught to enjoy the process of losing (obviously).  Or the happiness that can come from making a bad decision.  But we should learn to find peace in being wrong; to discover the strength that comes from admitting our faults; to enjoy the profits that come from being responsible about how much we risk on a single position.

Last of all, because we want to avoid embarrassment about our trading, we often follow someone else into a trade.  That way, our decisions are not completely our own (in our mind).

Nothing is more dangerous than that.

P.S.  I'd love to have Pierre on the radio show to talk about this.

We Reach for Certainty. It isn't There.

Today I was interviewed for a television program; I arrived early at the studios and listened to the other interviews.  One thing that I noticed in nearly every interview was a tendency to speak about the market in such certain terms; when it came time for me to do my interview, I found myself making "certain" pronouncements or predictions or market forecasts.

That makes for reasonably good TV (as did the shoes I wore, see below), but it doesn't make for very good trading.

The truth about trading is that it never gets certain.  We never figure it out.  We manage our money well, we obey risk management principles, but the best traders I know have come to accept that they are never going to "figure it out," and they have learned to live in the gray space between profits and uncertainty.

What are the Basics?

At the most basic level, what do you need to trade? 

A computer (can you do with an older one?)
One monitor (do you need more than one?  Really?)
Your own office
50 books on trading
Expensive software with flashing lights

I have found that most of the successful traders I know and count as friends are people who when they were starting up their trading careers, they were unimpressed with fancy monitors and huge trading libraries.  Most of them are still operating with the same inexpensive equipment. 

One of my friends, who helps to run a hedge fund, is still using an older laptop that he could easily afford to replace.  One friend used a computer that took what seemed like hours to startup to run his trading software; he declined to update it because he was making money and paying off bills.

I think it makes sense to be frugal in your setup, your software, your books, your approach to what it takes to be successful.  There is something about getting by with less that makes a trader hungry to succeed.

The Abundant World We Live In

If you could make your own world, what would you make it?  Triffany asked her kids that.  At the breakfast table.  Here's what she told me this morning:

Triffany: My kids and I had the greatest conversation yesterday at breakfast...

Triffany: it started out, "if you could make your own world what would you make it?"

Rob Booker: cool! [this was my obligatory quick comment to make sure she knew I was listening.  this was the best chat I've had in a long time.  you'll be reading more from it.]

Triffany: And we came to an amazing discovery....

Triffany: That we would want a world that made itself more readily available to feed our souls, our spirits.....rather than our material needs....

Triffany: BUT ... here's the kicker...

Triffany: We couldn't think of anything other than the world we have that could do that....

Triffany: amazing nature would do that

Triffany: loving beings aroud us would do that

Triffany: appreciation and gratitude would do that

Triffany: So... that great thing is

Triffany: We already live in a world that can feed us deeply....

If you could start over and make your own trading world, from the ground up, what would it look like?

1.  What book would you read first?  Mine is Zen Mind, Beginner's Mind.  Thank you a million times over to Donald who reminded me that I needed to be reading.  It's the best trading book not about trading that has been written.

2.  What schedule would you keep?  How would you balance family and work and trading?  Would you get up early and be consistent about it, at least a few times a week?  Would you shut off the computer and stop looking at the market at a set time? 

3.  How much money would you make?  How much is enough for you?  What are your real financial goals, not your immediate emergency financial goals?  What can you live without that you can sell or give away today? 

The world is more like clay, or a blank canvas, than we give it credit for.  What are you going to create from your trading career?

What a Currency Pair Has to Do

Today Jason Smith wrote me a brilliant email.  He said:

One thing that i am learning and that i think i almost have completely learned is that currency pairs do not have to trade in my direction. It doesn't matter how pretty the setup is.  I have been trading for quite a while and one would think that i would understand this by now...but i guess that i haven't.  the coming weeks will determine how much i do finally understand this concept.

Some people never learn this.  I burned an account, spent thousands of hours, drove myself nuts for 12 months before I came to this realization.  Possibly, we all have to pass through a lot of frustration before we admit that what Jason said is true: no currency pair, stock, mutual fund, or futures contract ever HAS to do ANYTHING.  The market wants what the market wants, and statistics, technical analysis, fundamentals -- they never control the market.

Make a List. Tear it Up.

Today, I made a list of my three favorite indicators.  Here's the list:

The Booker Bands
The Bossilator
The 62 Exponential Moving Average

I built the first two myself. 

After I made this list, I wondered what life would be like if I couldn't have them anymore.  Let's say the charting gods looked down upon the earth and were unpleased with my charts, and erased all memory of the creation or use of these indicators.  I started to think:

Man, there is a part of me that would be relieved.  It's so easy to get caught up in the "science" of an indicator, or the importance of it.  We start worshipping them.  That's dangerous. 

So I tore up the list.  I decided I could care less if I never made those indicators, or used them ever again.  Certainly, I'll use them, but the exercise was helpful to remind me that no indicator is more important than the market.  Or my own clarity of mind.

How Much is Enough?

How much is enough?  This week we're taking some time off to reflect on what's most important, get some important things done, and generally simplify our lives. 

This got me thinking: how freaking complicated have I made my own life?  Not just my trading life, but my real life: what's superfluous?  What's getting in the way? 

What can I remove?  What life-rubbish can I remove? 

For a long time, I've been an advocate of dumping nearly every indicator from off your chart (see my other blog here to see what my charts look like). The process of simplifying one's charts is a purifying, refreshing experience.  With lots of indicators and crap, we start to buckle under the pressure to comply with conflicting rules and procedures.  Trading, for me, is about one very simple rule: don't ever lose very much money on a trade idea.  The rest, including what to trade and when, isn't so complex. 

Or at least it doesn't have to be.

What can you simplify in your own trading life?