For a while I've been wanting to go through this site and just post a series of short form items that go for the jugular, if you know what I mean. So here is my first attempt at that…
I've talked (over an hour and a half each time) to countless traders over the years now. I'm not sure of the exact number, but it is well over a hundred. These are people from all walks of life, different ages, and located in many many countries. They are individuals, hedge fund PMs, prop traders, commercial hedgers, you name it.
I enjoy doing it, and always have. But admittedly, many of these conversations will go to waste when it comes to getting the contents of them out there to the general public. I don't record them for reasons of privacy, but I do take notes.
While I realize it it hardly a positive starting point for discussion, I want to talk about the two main reasons I see for failure in this business. They have nothing to do with trading “strategy”. This is just a message of self-awareness above all (in any endeavor).
Simply stated, it's poor execution management driven by a slew of misunderstandings and emotion. I've written a lot about fear/protection, fight or flight, and many other things which are arguably among the worst sins you can commit as a trader, but are a foundational part of our physiological build, for good reason. There is nothing “wrong” with you when it comes to your fear of losing inordinate amounts of money. I would say that's a damn natural thing to be afraid of.
Equity curves are about as honest and basic as it gets.
These two “equity curves” I posted on Twitter, X, whatever it is, are frankly the main reasons for failure in this business:And in case you're wondering which one is more prevalent, I would say hands down the one to the right: “death by a thousand papercuts”.
Other businesses don't have the worry we have as traders and investors when it comes to the ability to wipe out a portfolio (or a huge percentage of it). If mostly taken care of, most run of the mill tangible investment assets will always have some form of value. But both frequent and infrequent errors in investing can have some pretty catastrophic results. Diversity, in this case, means allocation a very small % of your total value to active trading. So this would only be one very small piece of a much larger pie. But of course we know that's not always the case.
And when it's not (and sometimes, when it is) people find themselves of biting off more than they can chew. Leverage increases, fear of substantial loss rises.
So of course, this is mostly a message of risk management.
I'm always getting ideas from the people I talk to, and here are three approaches I've seen to address this over time:
The picky eater: Trade frequency was greatly decreased. The trader became aware that he thrived in certain environments (early session trending, price + executions in line) and failing miserably in all the others. Days would go by where he would not trade. These other adverse environments (at least for him) were largely avoided, although it took a great deal of work to ensure he was only taking action when it counted.
Small positions, gradual entry: Trader was finding himself frequently entering too early, and closing the position for a loss. He would break the trade up into much smaller positions (he converted to micros for this), but in a predefined range (fixed, rarely adjusted for volatility), ensuring the entire position size was added, regardless of the circumstance. I've seen this method quite a few times over the years, and almost all the time for very large positions going on for long short equity portfolios.
Stacked stops, hard limit: One and done position size, but with stacked stop losses (eg 5 lots, 3-5 stops at varying intervals) but a fixed profit target. Obviously, your risk needs to be very clearly defined here, calculated, and unwavering.
As far as risk goes, you can flat out do just about anything as long as you're adhering to basic RR principles. It simply does not matter. But if your math is defunct in terms of your success rate / calculated outcome, your curve will simply not improve much). And sadly, there is no way around this. It's why the bulk of conversations I have with people generally have more to do with execution vs. any “strategy” or method of entering a trade. In other words, the methods behind how a trade is entered is far less exhausting vs. once it is underway. That's when the real work begins.
Any market is what it is. It does not care about you, nor should it. They are just markets. People buying and selling stuff. Whether or not you choose to insert yourself into those transactions is your choice.
But bottom line, self awareness above all, and I just wanted to highlight this as I've seen it (too many) times now.
Setting your performance up under your own microscope of scrutiny is perhaps one of the most valuable things you can do. In professional environments, it's required. To some degree, we all commit the same “mistakes” (although I would argue it is just humans being humans). Set some time aside and force your exits. Force your profit. Reevaluate. There are countless ways to do this as you all know how. When we are “forced” to do something positive, the results are usually equally so.