It’s not your fault you can’t trade.
Really.
It’s nobody’s fault.
Not being able to trade is simply the default starting point.
Very few people see success from day one.
The more interesting question is why some people develop into fantastic traders and/or investors…
While others end up stuck, crying about manipulation, irrationality, market makers & bubbles…
I could give you a thousand explanations for this.
One differentiating feature is (cringe, but true) the relentless pursuit of progress and improvement.
Another is asking for help & being curious…
More than anything else though, there’s one big problem that we all have to overcome…
The Default Human Operating System (Human OS)
It doesn’t matter how many indicators you use, or how many systems you trial.
Your brain’s default wiring simply isn’t optimised for the challenges the market will throw at it.
You have to get comfortable with being uncomfortable…
With looking uncertainty dead in the eyes and not flinching…
And embracing the inherent market chaos as an opportunity rather than a threat.
A feature rather than a bug…
Sounds easy enough, right?
And it absolutely CAN be done…
As long as we’re mindful of one key failing that WILL trip us up if we let it…
“Humans never genuinely pursue happiness; they only pursue relief from uncertainty. Happiness emerges momentarily as a byproduct whenever uncertainty briefly disappears.”
A quote that perfectly encapsulates the default human condition.
Neurological studies have shown that participants are far more stressed by not knowing if they’ll receive an electric shock (uncertainty) than they are by knowing that they’ll definitely get zapped (certainty).
Think about how INSANE that is for a second.
Our brains would choose 100% probability of pain over a 50% probability of pain.
Certainty is one hell of a drug.
“Uncertainty is an uncomfortable position…”
“But certainty is an absurd one”
~ Voltaire
— Tim (@VolaTim) November 13, 2021
Think how this maps to markets and how people behave in them…
A classic example is the breakeven stop loss
“Stop to breakeven. Whatever happens, I can’t lose”
Sure. Unless you get slipped, this statement is literally correct.
But there’s more to it.
What’s driving that decision to place the stop loss at breakeven?
Is this the BEST way to manage risk?
Or are you sacrificing the potential long term return of the trade to relieve yourself from the discomfort of short term uncertainty?
Essentially begging the market to take you out rather than accept any potential for loss…
(forgetting that you might be killing the potential gain at the same time)
So when traders say they ‘can’t lose’ with a stop loss at breakeven, ask what a ‘loss’ actually is.
The opportunity cost (i.e. the lost OPPORTUNITY) of missing the upside can be far larger than any ‘losses saved’.
Back to the original question then…
How do successful traders overcome the deficiencies of the default Human OS?
By focusing on what really matters…
Decision Making Under Uncertainty
- Decision-making under uncertainty involves choosing actions when the outcomes are not fully known.
- This differs from decision-making under certainty, where the consequences of each choice are clear.
- Uncertainty can arise from incomplete information, unpredictable events, or difficulty in assessing probabilities.
Three lines that perfectly describe the challenge of profitable trading & investing.
Successful traders deal with this by building decision support tools…
- Systems
- Processes
- Frameworks
The obvious caveat here is that the tools have to be based on solid trading principles (we’ll get to that shortly)
Have you ever wondered why so many trading systems fail?
In my experience, it’s because they’re not based on solid principles.
Too many are rooted in the avoidance of uncertainty, and some level of naivety.
“If I simply keep my losses small and my wins big, I can’t lose!”
You might be onto something there chief.
Amazing that nobody thought of this earlier…
The paradox is that it really IS this simple…
Even though there’s much more to it.
Simple doesn’t = easy.
Where most fall down is that they stop at the desired outcome:
“I will simply keep losses small and ride winners”
But they neglect to develop the processes & frameworks that LEAD to that outcome.
They forget to build the systems that help them repeatedly make clear decisions in pursuit of that goal.
They don’t think about the environment their strategy will work best in…
Or the markets that are best suited to that approach…
Which means they can’t review and improve them over time.
Instead, when it goes wrong, they fall prey to shiny object syndrome.
Oooooh a new indicator, a new market, a new THING
They try to reinvent the wheel, and repeat the cycle again (and again)
Fact is, the things that work in markets don’t really change.
There’s Nothing New Under The Sun
Take trend-following for example:
Empirical research has reconstructed trend-following strategies (such as time-series momentum) using historical market data back to the late 19th century.
These studies show that trend-following strategies would have been profitable in each decade since the 1880s, suggesting that the phenomenon is not a recent development but has been a persistent feature of stock and commodity markets since their modern origins ~ Perplexity
Think about that.
Over two CENTURIES (at least)
And it still works.
Because human emotions don’t change.
The default Human OS is still stuck in the caveman era.
Tech companies know this.
Marketing teams know this.
And they leverage it to their advantage.
Anyone trying to extract returns from the market should be doing the same…
Try this for one month
Instead of seeking out the bestest, newest, shiniest thing…
Build the most basic trend-following system you can and test it.
Whack some moving averages on the charts.
If a stock is trending above a shorter term moving average, buy it.
When the stock drops back below that moving average, exit.
Note down what happens next.
Does the stock recapture the trend or continue to fall?
Look for patterns that repeat.
Think about what you could have done differently in each scenario.
Look for patterns that repeat…
Tweak your approach to incorporate the feedback from these repeating patterns with one goal in mind.
How can I make more from the winners and minimise the (inevitable) losses from the losers?
Then do it again.
Our entire approach was built using this process.
Constant iteration & feedback.
A consistent process, refined & improved over time, will compound positively.
So the next time you’re tempted by the latest & greatest, newest, bestest strategy ever…
Stop & Fink
Can’t believe I just said that.
Cheesy af.
Memorable though.
Consistency Beats Novelty.
Let’s wrap this up with a quote from Richard Dennis, famed Turtle Trader & ‘Prince Of The Pit’
I always say that you could publish trading rules in the newspaper and no one would follow them.
The key is consistency and discipline.
Almost anybody can make up a list of rules that are 80% as good as what we taught people.
What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.
Bang on.