Eckhardt lost his friendly bet with Dennis of course but his insight in to why most traders lose money and trading mistakes made by traders is some of the best insight I have ever read on Forex trading psychology and here, we will look at some quotes from him:
“I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren’t. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional make-up is more important”
We have gone over this point numerous times and the Turtle experiment actually proved it, despite the fact Eckhardt was sceptical that traders could be taught. Drawing on his own experiences as a mathematician, a trading CTA and his experience with the Turtles he, gives some great insight to how emotions can impact on a trader and make sure, he does less than a trader with random performance would do.
On Taking Trading Signals
“Either a trade is good enough to take, in which case it should be implemented at full size, or it’s not worth bothering with at all”
I see traders want to think about doing a trade, even though they have been looking at the chart over and over or they consult a friend for a second opinion or decide to take the trade but do a small lot size in case it goes wrong! I am a firm believer in – You look at a chart and don't think to much about the set up – you either like the chart formation and think it will make money or not in line with your trading strategy's edge.
“I take the point of view that missing an important trade is a much more serious error than making a bad trade.”
By a bad trade he means one which can lose but if you keep the loss small that’s ok all traders have bad or losing trades but so long as you have a stop loss and proper money management, its just another loss. An important trade is one which makes big profits and these are where traders, think to long about the trade, can't pull the trigger and miss their trading signal. Its the big trends you need to make the profits to cover the trades you were stopped out so you NEVER want to miss them.
It’s much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies.”
So what does a good system aim to do? We all probably know the answer to this which is to cut losing trading signals and minimize losses while at the same time, running winning trades to cover the losses and give the trader an overall profit. Its commonly accepted that this is the ONLY way to make money but the fact is most traders cannot do it because of their emotional make up which reinforces behavioural patterns which cause them to lose money. The next quotes summarizes this losing behaviour:
“The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.”
How many traders buy systems which claim more winners than losers? Most but of course the chances of winning more than 50% of your trading signals is small. This can be seen by looking at the worlds top traders where most only win less than half of their trades. The people who sell these systems know the public want to win all the time and feel good. These systems fail but when traders open accounts most of the time they will let losses run and cut profits. They run losses because they want the signal to become profitable again so they can feel good, rather than taking a small loss and feeling stupid. Of course there getting more losses than profits so when they have a profit, they take it in to feel good but the fact they can never run profits, means profits are smaller than losses and their account equity is soon lost.
Trading is not fun, as we have stated elsewhere on this site - its an emotional challenge, where you have to do the opposite of what you want to do a lot of the time.
“If you’re playing for emotional satisfaction, you’re bound to lose, because what feels good is often the wrong thing to do. Richard Dennis used to say, somewhat facetiously, “If it feels good, don’t do it.” In fact, one rule we taught the Turtles was: When all the criteria are in balance, do the thing you least want to do. You have to decide early on whether you’re playing for the fun or for the success. Whether you measure it in money or in some other way, to win at trading you have to be playing for the success.”
I like the world playing in the above quote which is want most traders do when they enter the market – there not serious about making money, they just want to feel comfortable and be with the crowd which is a sure fire way to lose.
“Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.”
Always think about the worst that can happen – if the best scenario unfolds which you wanted that's great but you have entered the trade its going your way and there is nothing else to do but this won't happen all the time. Most of the time, you will be dealing with trade set ups not going your way or having to decide – if you are going to take a trade, cancel an open order or cut a loss.
"One common adage...that is completely wrong-headed is: You can't go broke taking profits. That's precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits."
This is totally correct - the retail or small trader, tends to have poor risk control and let's his losses run the so called professional trader, tends to have good risk control but can never hold profits because they are always trying to trade frequently and make commission turnover rather than profits and if you don't believe this is true read Simon Lacks excellent book the “Hedge Fund Mirage”
Eckhardt takes the view that most traders in the market will perform worse than a random trader and this is because his basic human instinct works against him – he wants to do what makes him comfortable or feel good in the short term rather than doing what's right, in terms of making profits on his strategy. Natural human traits work against any trader and influence their behaviour to such a degree, that they give themselves no chance of making money on their trading accounts over the long term.
“You’re much better off going into the market on a shoestring, feeling that you can’t afford to lose. I’d rather bet on somebody starting out with a few thousand dollars than on somebody who cam in with millions.”
I like this quote and its true – you have to feel the value of money to want to look after it and make it grow. I think one of the problems many traders have is they trade funds which they don't care if they lose – well if you don't really care if you are going to lose money on your trading account, you will lose it pretty quickly. This I think is one of the problems traders have which is under stated – trading Forex and not caring is a terrible attitude to take when your aiming to make profits.
Emotions work against us, when were trading the market and most traders will know this but what I Like about Eckhart is - the examples he uses to get over the why emotions are so destructive in trading. If you haven't read it, make sure you check out his excellent interview in the The New Market Wizards with Jack Schwager.