Stock Trading Losers Anonymous | Elder
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STOCK TRADING LOSERS ANONYMOUS
A social drinker enjoys an occasional drink, but an alcoholic craves alcohol. He denies that alcohol controls and destroys his life — until he reaches a personal crisis. It may be a life-threatening illness, unemployment, desertion by a family member, or another unbearably painful event. AA calls it "hitting rock bottom."
The pain of hitting rock bottom punctures an alcoholic's denial. He sees a stark choice—to drown or to turn and swim up for air. His first step to recovery is to admit that he is powerless over alcohol. A recovering alcoholic can never drink again.
Loss is to a loser what alcohol is to an alcoholic. A small loss is like a single drink. A big loss is like a bender. A series of losses is like an alcoholic binge. A loser keeps switching between different markets, gurus, and trading systems. His equity shrinks while he is trying to re-create the pleasurable sensation of winning.
Losing traders think and act like alcoholics, except that their speech is not slurred. The two groups are so much alike that you can predict what a loser will do by using alcoholics as a model.
Alcoholism is a curable disease —and so is losing. Losers can change if they start using the principles of Alcoholics Anonymous.
The Urge to Trade
Successful traders treat drawdowns the way social drinkers treat alcohol. They have a little and stop. If they take several losses in a row, they take that as a signal that something is wrong: It is time to stop and rethink their analysis or methods. Losers cannot stop —they keep trading because they are addicted to the excitement of the game and keep hoping for a big win.
One prominent trading advisor wrote that the pleasure of trading was higher than that of sex or flying jet aircraft. Just as an alcoholic proceeds from social drinking to drunkenness, losers take bigger and bigger risks. They cross the line between taking a business risk and gambling. Many losers do not even know that line exists. Furthermore, these losers forget the importance of having a back-up plan or something that will serve as a life insurance if something goes wrong.
Losers feel the urge to trade, just as alcoholics feel the urge to drink. They make impulsive trades, go on trading binges, and try to trade their way out of a hole.
Losers bleed money from their accounts, sometimes having to seek a cheap cash advance just to satisfy their cravings to trade. Most of them bust out, but some turn to managing other people's money after they lose their own; still others sell advisory services, like burned-out drunks who wash glasses in a bar.
Most losers hide their losses from themselves and from everyone else. They keep shuffling money, keep poor records, and throw away brokerage slips. A loser is like an alcoholic who does not want to know how many ounces of liquor he drank.
Into the Hole
A loser never knows why he loses. If he knew, he would have done something about it and become a winner. He keeps trading in a fog. A loser tries to manage his trading the way an alcoholic tries to manage his drinking.
Losers try to trade their way out of a hole. They switch trading systems, buy new software, or take tips from a new guru. They act out a rescue fantasy—a charming belief in Santa Claus. Their desperate belief in magic solutions helps many advisors sell their services to the public.
When losses mount and equity shrinks, a loser acts like an alcoholic threatened with an eviction or a firing. A loser grows desperate and converts outright positions into spreads, doubles up on losing positions, reverses and trades in the opposite direction, and so on. Losers get as much good from these maneuvers as an alcoholic who switches from hard liquor to wine.
A losing trader careens out of control, trying to manage the unmanageable. Alcoholics die prematurely, and most traders bust out of the markets and never come back. New trading methods, hot tips, and improved software cannot help you until you learn to handle yourself. You have to change how you think in order to stop losing and begin your recovery as a trader.
Losers get drunk on losses; they're addicted to losses. Traders prefer profits, but even losses provide plenty of excitement. The pleasure of trading is very high. Few losers are actively trying to lose—but then few alcoholics are consciously trying to end up in the gutter.
A loser keeps getting high from trading while his equity shrinks. Trying to tell him that he is a loser is like trying to take a bottle away from a drunk. A loser has to hit rock bottom before he can begin to recover.
Rock Bottom
Hitting rock bottom feels horrible. It is painful and humiliating. You hit it when you lose money you cannot afford to lose. You hit it when you gamble away your savings. You hit it after you tell your friends how smart you are and later have to ask them for a loan. You hit rock bottom when the market comes roaring at you and yells: "You fool!"
Some people hit rock bottom after only a few weeks of trading. Others keep adding money to their account to postpone the day of reckoning. It hurts to see a loser in the mirror.
We spend our lifetimes building up self-esteem. Most of us have a high opinion of ourselves. It hurts a smart and successful person to hit rock bottom. Your first impulse may be to hide, but remember you are not alone. Almost every trader has been there.
Most people who hit rock bottom die as traders. They slink away from the market and never look back. Brokerage records indicate that 90 out of 100 people trading today will probably be gone from the markets a year from now. They will hit rock bottom, crumble, and leave. They will try to forget trading as they would a bad dream.
Some losers will lick their wounds and wait until the pain fades away. Then they will return to trading, having learned little. They will be fearful, and their fear will further impair their trading.
Very few traders will begin the process of change and growth. For these rare individuals, the pain of hitting rock bottom will interrupt the vicious cycle of getting high from winning and then losing everything and crashing. When you admit that you have a personal problem that causes you to lose, you can begin building a new trading life. You can start developing the discipline of a winner.
The First Step
An alcoholic needs to admit that he cannot control his drinking. A trader needs to admit that he cannot control his losses. He needs to admit that he has a psychological problem with the losses and that he is destroying his trading account. The first step of an AA member is to say: "I am an alcoholic, I am powerless over alcohol." As a trader, you have to take your first step and say: "I am a loser, I am powerless over losses."
A trader can recover using the principles of Alcoholics Anonymous. Recovering alcoholics struggle to stay sober, one day at a time. Now you have to struggle to trade without losses, one day at a time.
You may say this is impossible. What if you buy, and the market immediately ticks down? What if you sell short at the bottom tick, and the market rallies? Even the best traders lose money on some trades.
The answer is to draw a line between a businessman's risk and a loss. A trader must take a businessman's risk, but he may never take a loss greater than his predetermined risk.
A storekeeper takes a risk every time he stocks new merchandise. If it does not sell, he will lose money. An intelligent businessman takes only risks that will not put him out of business even if he makes several mistakes in a row. Stocking two crates of merchandise may be a sensible business risk, but stocking a full trailer is probably a gamble.
As a trader, you are in the business of trading. You need to define your businessman's risk—the maximum amount of money you will risk on any single trade. There is no standard dollar amount, just as there is no standard business. An acceptable businessman's risk depends, first of all, on the size of your trading account. It also depends on your trading method and pain tolerance.
The concept of a businessman's risk will change the way you manage your money (see Chapter 10, "Risk Management"). A sensible trader never risks more than 2 percent of account equity on any trade. For example, if you have $30,000 in your account, you may not risk more than $600 per trade, and if you have $10,000, you may not risk more than $200. If your account is small, limit yourself to trading less expensive markets, or mini-contracts. If you see an attractive trade but your stop would have to be placed where more than 2 percent of equity would be at risk—pass that trade. Avoid risking more than 2 percent on a trade the way a recovering alcoholic avoids bars. If you are not sure how much to risk, err on the side of caution.
If you blame excess commissions on a broker and slippage on a floor trader, you give up control of your trading life. Try to reduce both, but take responsibility for them. If you lose even a dollar more than your businessman's risk, including commissions and slippage, you are a loser.
Do you keep good trading records? Poor record-keeping is a sure sign of a gambler and a loser. Good businessmen keep good records. Your trading records must show the date and price of every entry and exit, slippage, commissions, stops, all adjustments of stops, reasons for entering, objectives for
exiting, maximum paper profit, maximum paper loss after a stop was hit, and any other necessary data.
If you bail out of a trade within your businessman's risk, it is normal business. There is no bargaining, no waiting for another tick, no hoping for a change. Losing a dollar more than your established businessman's risk is like getting drunk, getting into a brawl, getting sick to your stomach on your way home, and waking up in the gutter with a headache. You would never want that to happen.
A Meeting for One
When you go to an AA meeting, you will see people who have not had a drink in years stand up and say: "Hello, my name is so-and-so, and I am an alcoholic." Why do they call themselves alcoholics after years of sobriety? Because if they think they have beaten alcoholism, they will start drinking again. If a person stops thinking he is an alcoholic, he is free to take a drink, then another, and will probably end up in the gutter again. A person who wants to stay sober must remember that he is an alcoholic for the rest of his life.
Traders would benefit from our own self-help organization — I'd call it Losers Anonymous. Why not Traders Anonymous? Because a harsh name helps to focus attention on our self-destructive tendencies. After all, Alcoholics Anonymous do not call themselves Drinkers Anonymous. As long as you call yourself a loser, you focus on avoiding losses.
Several traders have argued against what they thought was the "negative thinking" of Losers Anonymous. A retired woman from Texas, a highly successful trader, described her approach to me. She is very religious and thinks it would not please the Lord for her to lose money. She cuts her losses very fast because of that. I thought that our methods were similar. The goal is to cut losses due to some objective, external rule.
Trading within a businessman's risk is like living without alcohol. A trader has to admit that he is a loser, just as a drunk has to admit that he is an alcoholic. Then he can begin his journey to recovery.
This is why every morning before trading I sit in front of the quote screen in my office and say: "Good morning, my name is Alex, and I am a loser. I have it in me to do serious financial damage to my account." This is like an AA meeting—it keeps my mind focused on the first principles. Even if I take
thousands of dollars out of the market today, tomorrow I will say: "Good morning, my name is Alex and I am a loser."
A friend of mine joked: "When I sit in front of my quote machine in the morning, I say, 'My name is John, and I'm gonna rip your throat out.'" His thinking generates tension. "Losers Anonymous" thinking generates serenity. A trader who feels serene and relaxed can focus on looking for the best and safest trades. A trader who is tense is like a driver who freezes at the wheel. When a sober man and a drunk enter a race, you know who is more likely to win. A drunk may win once in a while thanks to luck, but the sober man is the one to bet on. You want to be the sober man in the race.
