Saturday, 21 January 2012

The Winning Curse

I firmly believe that if I had started my trading life badly, I would have improved a lot quicker. The worst thing that can happen for a newbie trader is to go immediately on a winning run. It gives you false hopes; you think trading is easy and you're about to make vast sums of money at the click of a mouse, day in, day out. I remember after my first month of trading (with tiny stakes) I had done really well and thought it was just a matter of upping stakes............how wrong I was. It's a classic mistake made by novice traders and one which I believe ends the brief trading life of the majority of people because eventually they start losing, only the stakes are now enormous relative to their experience.

I was using £250 stakes after less than 6 months, which I believe is way too big. It was almost a whole year before I reduced those stakes to something more suitable to my level but even then, I probably should have gone back to the drawing board and started on tiny stakes. My stakes now are less than half of what I was using after 6 months and the liability is usually even less but I am far more profitable. So it never fails to amaze me the number of times I read about traders who have been learning for just a few months but are playing around with 3 figure sums, even over £500. It's just ludicrous for the average person to risk that amount when they are still learning the ropes.

But I guess that's the problem; these people don't recognise that they are still an apprentice. They think they are either some sort of prodigy or that their short term success is going to last forever - it rarely does. And so when that rough patch comes and the losses mount up, they have no idea how to deal with it. All they've known is success and when defeat comes, it will be a huge blow to confidence because the stakes were upped so much. Then comes the chasing and we all know how that ends!

I reckon some people never recover from that stage because they lose so much from having upped stakes too soon, that they can't get over it. Either they chase it all back (which can then give the false impression that they still have a gift for trading) or lose the lot and give up. Those who survive will probably go through the 'boom and bust' cycle for ages, because whenever they have a winning streak, it reinforces the belief that they don't need to change anything. Often only hitting rock-bottom can force them to make changes required to be successful.

Now imagine what would happen if you started out losing. If you blow your bank, you probably were using small stakes so the amounts being used can be easily re-loaded and you give it another shot. You also now should realise that trading is tough and you will have to make an effort to learn the ropes and take your time. This can only help your patience and discipline, the most vital components for your trading arsenal. You are also less likely to up stakes too soon because you know how easy it is to lose your whole bank. Basically, your whole approach will be more cautious and this can only benefit you in the learning process.

Also, you won't have that mental scarring built up from messing around with high stakes. There won't be those huge losses or those heart-busting moments fretting on big red positions etched into your brain and so that subconscious need to chase or needless fear of the markets won't be there. That's the theory, anyway! No one really knows how they will handle losing until it happens, though you are far more likely to still be in the game if you don't up stakes so quickly and the only reason people up stakes is because they think they are doing well. Usually though, this is just a short term fallacy and people often find that results will average out over the long term. You only have to look at John O'Dwyer and his attempts at trading on his blog. A classic case of someone who hit a big winning streak and thought he'd cracked it but then lost thousands. Unfortunately, he still thinks what he was doing was the right way. The winning curse had well and truly been cast.

OFF-COURT BEAUTY: World number 12, America's Serena Williams:


4 comments:

  1. A very good post Sultan and I could not agree more.

    I see our friend Mr.O'Dwyer added a post a few days ago moaning about the fact that nothing had changed in his life and then in true John style removed it, I had made a comment to him advising that nothing had changed because he had done nothing to try and change things, but as we all know he doesn't like to face reality does he.

    Anyway I do like reading your Blog even though I am not a tennis trader it is always a good read.

    Would appreciate a link exchange:

    http://layawayforaprofitableday.blogspot.com/

    Regards

    Neil

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    1. He certainly doesn't! I've added your blog - hope it's better than O'Dwyer's, though that post you mentioned sounds interesting!

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  2. I think I might just love Serena, what a woman !

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  3. Good Post. I go by the saying that if you always do what you've always done then you'll always get what you've always got. The key to becoming successful, in my opinion is to constantly review your style and adapt. If you stagnate so will your progress and as the markets evolve you'll start going backwards.

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