Does Failure Motivate You?

I'm going to write the next few tips on topics that might press your buttons. They'll help you find your hotspots and help you discover how you sabotage yourself. I've been reading a wonderful little book by Jerry Stalking entitled, Laughing with God. In that book the following dilemma is brought up, and here I'm going to rewrite the conversation to make it pertinent to trading/investing.

God: Do you want to win without losing?

Trader: Of course.

God: If you win, you must lose as well. But you lied to me. You said that you'd like to just win. If that were the case, you'd win much more often. The possibility of failure motivates you much more than the possibility of success. Your whole culture, with few exceptions, is dependent upon failure or at least the fear of failure. If there were not the possibility of failure, you could not take any credit for success. You wouldn't feel so good about winning.

Think about it. How many times would you watch a football game if you knew the outcome? It is the uncertainty of the outcome that keeps your attention.

What if you always knew what was going to happen before it does? As a matter of fact, you already have that ability, but you do not use it because everything you presently call fun in your life would be lost. You would lose the uncertainty that you thrive on, feed on, and yet attempt to diminish.

The last statement may "get to" some of you. But what if it's true? Ed Seykota said in Market Wizards that people get what they want out of the market - excitement, punishment, and a justification for their emotions. I've certainly seen plenty of evidence to suggest that his observation is true. But the conversation gets even more interesting:

God: I am saying that you already can know the future. Remember that future and past are both illusions. The fact that you ignore this ability makes it more obvious that you do not want to know the future or that you love wanting to know the future while believing that you cannot know it.

There is no time - just present. You use the uncertainty (mock uncertainty) of the past and the uncertainty (mock uncertainty) of the future to keep yourself suspended in the illusion of time while calling the whole process life.

Just to make this conversation more meaningful, imagine that you are 100% accurate on every trade. You know every top and every bottom on every stock. You are never wrong about a trade. Suppose you just entered the market and made $10 billion in a year. Would you keep going if it were that easy? Would ten billion be enough? Would you honestly keep trading?

Perhaps your response is, "Sure I would! I'd get all the money in the world." Well, would that be interesting? I tend to doubt it. Trading is only interesting because of the possibility of losing. You are now in a position where you can buy anything; do anything, etc., because you will never lose money on a trade. Would you still trade? Why or why not?

Everything in this tip may be made up. Nothing may be true, but I'd like you to assume (act as if) it is true. Just pretend that it's true. When you do so, what happens to you inside? How do you feel about trading? Would you keep on trading? If so, how often? If not, why not? What does that tell you about yourself? Is it the uncertainty that keeps you in the game? Would you keep trading if you had all the money in the world? Why? What do your answers tell you about yourself?

I would encourage you to do this exercise and notice what comes up for you. How many trades would you take if you had no uncertainty in the outcome? What do your answers tell you about yourself?

A note for your consideration:

There are many books that claim that the text "came from God" and I simply don't know whether such books come from God or not, but if they give me new ideas to ponder then I find them very exciting. If it stretches your beliefs to think it came from God, then just assume that someone made it up. But at the same time imagine that it might be true. This one gave me a lot of new ideas, and if you open yourself enough to do the same, you might find the ideas quite expansive.

The Left Side of the Quadrant

These trading tips will help you get yourself in the best possible condition mentally to perform at a peak level. They are not necessarily new, but they are critically important. So whether you've heard them before or not, now is the time to employ them into your trading and your life. Both will improve as a result.

I probably did 15 seminars with Tom Basso (who was featured in The New Market Wizards by Jack Schwager) in the early 1990's. We also talked endlessly over meals and I interviewed Tom twice in my monthly newsletter (back issues are available at www.iitm.com) During that time, one statement that Tom always made was “I'm a businessman first and a trader second.” His businesslike approach was always the key to his success, and I'd like to explore that approach in detail in this month's tip.

Robert Kiyosaki and Sharon Lechter, in their book The CashFlow Quadrant® explore four types of people. These types are separated by their cash flow patterns. People on the left side of the quadrant, the employee and the self-employed person, work for money. People on the right side of the quadrant - the business owner and the investor - have money working for them. The four quadrants are quite fascinating because they also perfectly describe various types of traders. The most successful traders are going to be on the right side of the quadrant. However, this week I'm going to talk about the majority of traders, those on the left side of the quadrant. I'll save the right side until next week.

The Employee Trader works for the system. If you work at a job (which just happens to be trading) and get paid a salary for doing it, then you are an employee trader. Kiyosaki doesn't really define the word “system” in his book, despite using it extensively. However, he gives many examples of systems. For example, the Marine Corp has a system that allows soldiers to accomplish their objectives with a minimum loss of lives. Soldiers either follow the system or they die. Similarly, McDonald's Restaurants has many systems - for food delivery, for greeting the customer, for advertising, for cooking french fries so they taste the same at every branch, for processing hamburgers quickly, etc. Each franchise runs on hundreds of systems and it is why McDonald's is successful. Employees either follow the system or 1) the franchise folds or 2) the employee is fired. Thus, remember that employee traders work for systems - they don't necessarily understand the systems. I believe this to be a key to why they are not necessarily good traders.

Bank traders, corporate traders, some mutual fund managers and even people who have a job and just happen to trade on the side are good examples of employee traders. These people are motivated by security and good benefits. Thus, a top bank trader might make $50 million for the bank. However, he doesn't make that money. The bank makes the money. This trader simply takes a salary and probably gets a bonus for doing well.

Employee traders work at a job. They get paid through a salary, which is taxed before it is given to them. They work in order to get paid, which is their primary motivation. They would like to get paid more by doing better quality work, but their primary thinking is that if I do “X” I'll get paid. For them, the “security” of their salary and “benefits” are more important than the “money.”

I once considered working with the Forex traders of a large New York bank. The treasurer gave me a good idea of what I was in for when he made the following statement: “I don't want any of our traders making over 20%. If they make over 20%, they could lose over 20%. Furthermore, they'd want huge bonuses and then they'd be making more money than me.” Even though this man was a key person in the bank, he was still an employee and had an employee mentality.

I've generally noticed that the worst traders I work with are Employee Traders. They have the least idea about what trading is about and they generally make very poor traders. Furthermore, people who have an employee mentality and a full time job (i.e., they are into security and benefits), also make poor traders when they try to do it as an avocation. For example, most people consider stockbrokers to be traders. However, stockbrokers are really employees (to the extent that they receive a salary) who are paid to sell stocks. They are self-employed (see next category) to the extent that they depend on commissions.

When employee traders approach trading, they usually bring the employee mentality into play. They want to be told what stocks to buy or what the market is going to do. They are used to being told what to do and they abhor making mistakes. Bank trading rooms, for example, usually hold daily meetings in which the employees are told what they should be doing during the day. That's the employee mentality and it doesn't fit trading.

The Self-Employed Trader is the system. This type of trader is someone who has quit his/her job to be independent through trading. They do not like to have their income dependent upon others. Instead, they want to rely on their own hard work. They want to control the situation and do it on their own. Most of the traders I work with usually have this sort of mentality toward trading.

The self-employed trader is quite often a perfectionist. Everything has to be perfect - they'll settle for nothing less. Thus, they need a perfect trading system and are always searching for something better. They are also likely to be into discretionary trading because a mechanical system cannot do it as well as they can do it.

Most self-employed traders are usually off searching for ultimate control - finding a Holy Grail system that perfectly predicts market tops and bottoms. The results are usually very unsuccessful. When the self-employed trader is taught certain principles such as expectancy, trading for large R-multiples, and position sizing, they have a chance to become very successful.

The successful ones usually realize that they have limited capital and thus start to manage other people's money. However, when you start to do that, many other systems come into play besides the trading system. The self-employed trader usually insists on doing everything himself and thus runs into severe limitations of time, know-how, and frustration. The result is usually failure. Most people who attempt to be professional money managers approach it from the self-employed mentality.

The Right Side of the Quadrant

Last week I talked about the left side of Robert Kiyosaki's Cash Flow Quadrant and it relation to systems. This week I want to cover the more successful traders who always think in terms of having money work for them.

The Business-Owner Trader Owns the Systems. Let's look at the person who takes the next step - they treat their trading business as a group of systems. They make these systems as automatic as possible, and then they train other people to run them. You cannot be a perfectionist and develop automatic systems. However, you can develop such systems and free yourself.

Let me give you two examples. Business-owner mentality traders that I have met are total systems traders. Everything is computerized. Data comes in, computers process the data, and orders are automatically sent for execution. These traders are constantly looking for ways to make everything automatic. If a task is repetitive, then they will computerize it to eliminate the need for a human being. The result is that the business owner trader can leave the business in the hands of someone else and do other things. They know the systems will work because they have developed them. The systems might not be perfect. They might not make huge returns, but they work consistently within the parameters for which they were designed. Furthermore, such business owner traders also have systems in place for getting new funds, dealing with clients, managing the back office, and doing research on ongoing systems. When an employee leaves, they can train someone else to run the system that was handled by that employee.

There are several steps to becoming a business-owner trader. The first step is to be able to develop/or purchase all of the necessary systems to run the business. As an example, the business owner would know that position sizing is a key portion of a trading business and would have a system to account for that. They would also have systems in place to manage their research, their data, their back office accounting, and other people who are involved.

Once their systems are in place, the business-owner trader must find employees to run the systems. This requires good leadership skills. A business person would own the system and hire good people to run it. Thus, the business ends up generating money for the trader without requiring the trader's time. The business and its employees work for the trader.

The Investor Trader Invests in Systems. Traders become investors when they invest in systems that give them a good return on their capital without requiring any additional work. For example, if you read Warren Buffet's criteria for investing in a business (contained in my book, Trade Your Way to Financial Freedom), you'll find that a key criterion for him is investing in businesses with good systems that produce a high rate of return on the owner's equity. Once such things are found, no additional work is required. The money just rolls in from the investment. The trader/investor has money working for him.

If you wish to increase your success as a trader, then I would suggest that you begin to move to the business owner and investor side of trading. When you do, money will work for you. You won't be working for money.

What Are Your Excuses?

In the past I have made the suggestion that if you've been working on the Peak Performance Course and reading Trade Your Way to Financial Freedom, you probably have many ideas for how to improve your trading. There is probably no good reason not to spend a month (or six months) developing a good business plan and implementing many of these ideas. So what is stopping you

I suggested that you take some time and write down your excuses.

What did some of those excuses and justifications look like?

Perhaps like these:

• I just didn't have the time.
• If I do it, I'll probably miss something and just lose more money.
• This material isn't for me. When I bought it, I thought it was something simple that I could just use to transform myself. I didn't think there would be so much work involved.
• Dr. Tharp really doesn't understand me. If he did, this material would be easier.
• My life is going fine. I don't have any problems and I just don't need to deal with all of this stuff.
• I have too many distractions and I cannot focus.
• I'm right and Dr. Tharp just doesn't get it.
• I need to really study this stuff and I just can't seem to find the time.
• It would be much easier if my spouse understood this and how important it is.

When you make excuses of this nature, it is simply so that you can be right. You are basically saying that you like these beliefs because they are right. It doesn't make you happy. It doesn't make you successful. However, you do get to be right and if that is what's important to you, then so be it.

There is a better strategy by which to evaluate your beliefs: is it useful? Is it getting me what I want? Is it working? One of the basic presuppositions of NLP is that if something doesn't work, do something else. Almost anything else will get you different results.

If your trading isn't working, change what you are doing. If your trading system isn't working, change how you approach the system (your exits and your position sizing). If your life isn't working, then change how you approach your life. Ask yourself - whatever it is you are facing - "Is it working or is it not working?"

Life is a process. There is no success or failure - only feedback. You've been getting feedback about what you've been doing for a long time. Are you willing to change now? It's never too late. You're never too old. Today is always the first day of the rest of your life. So begin now.

Just imagine that you are responsible for everything that has happened to you up to now in your life. That's part of respond-ability that I've talked about so many times. And when you finally decide that you are responsible for your own life - for what has happened in the past - you will find that you get an immense rush of freedom. You can decide right now what you want, and you are in charge of making it happen.

Peak Performance Trading Tips

These trading tips will help you get yourself in the best possible condition mentally to perform at a peak level. They are not necessarily new, but they are critically important. So whether you've heard them before or not, now is the time to employ them into your trading and your life. Both will improve as a result.

Tip #24: Know When It Doesn't Work

When you have a system or an idea, you must also know when it doesn't work. This concept is just the logical extension of the last tip of giving up on a good idea because you think it doesn't work. When you've researched something well enough to know 1) you are not getting the performance you want and 2) the reason you are not getting that performance, then you've made an important step in knowing that something doesn't work. Usually, the knowledge of why something doesn't work will also give you important knowledge of what to pursue next.

For example, let's look at the idea of Maximum Adverse Excursion (i.e., the idea that losing trades don't go too far against us). This gives you an idea for limiting your stops, but when you try to apply it to your trading you may find some problems. Some profit increase does occur, but this may not be that significant for you compared to the complexity of the MAE addition. The reason that MAE doesn't work is because 1) some losing trades exit at the MAE when they would have exited at much less of a loss had more room been given by a larger stop and 2) some big R-multiple winners are cut off. Since re-entry isn't allowed, those big winners are never realized. These two reasons totally cancel the effect of increasing the potential R-multiple of those winning trades that are realized.

You might take this concept and decide that's all you want to do with it. It didn't work and you know why. That's fine.

On the other hand, you can also use the reasons for “failure” as logical stepping points for your next research idea. For example, I noticed that in the few cases where big R-multiples are cut off, a re-entry signal will almost always catch them. When you do trading research, and you determine why something didn't work, it will always give you a reason. This reason could point you to areas that could give you much more profitable results.

The "It Didn't Work" Mentality

One of the least productive things you can say in furthering your market research is "It didn't work." I frequently give my clients research assignments, telling them a great area in which they can do research. I might see them again four months later and find out that they are working on something entirely different. When I ask them about the research area in which I had directed them, the response is usually "It didn't work."

I dislike that response because it totally shuts off very productive research as if there is no potential in the area at all. A much better response would be "It didn't work because…"

This sort of response indicates why it didn't work and perhaps even suggests an alternative course of action.

Let me give you a few examples of how this mentality has been used to totally shut down very productive areas of study.

• One of my Super Trader clients came up with what I thought was a very productive profit-taking exit. The exit started out with a wide stop and kept the stop wide as long as the market was moving strongly. However, when the market started to level off or when the advance started to slow, the stop would get much tighter. The net result was that one seldom gave back much profit. Doesn't that sound excellent? I thought so, especially since his system always gave a reentry signal if the market started to move again. However, about nine months later this trader was into a drawdown. I asked how his stop was doing and he said he had abandoned it. When I asked why, his response was "It didn't work when I added position sizing." There was no explanation why, which might have resulted in an alternative solution. Instead, the choice was simply to say, "It didn't work." and move on.
• I had been working with another client in developing a good system. We had discussed high R-multiple trading and he had informed me that he had a setup that could be used in the context I was talking about. He reasoned that this setup would give him signals with profits about five times as big as he was risking. Furthermore, the signals made profits, he thought, about 40-50% of the time. I thought that the signal sounded great and suggested that he only take those signals for a while. In addition, he was to research the exact parameters on the signal and to send me a daily e-mail. What happened? He never took a single signal. Instead, he stopped sending me e-mails and told me that the signal didn't work. I asked him to send me data showing me why it didn't work. His response was that he'd get to it one day, but to leave him alone until he'd gotten around to it. After all, he said, I've already told you it didn't work. Once again, a potential great idea was killed by three little words—"It didn't work."

These are just two examples of dozens that I can think of and every one of them illustrates an important point: the way you think about something can totally change your relationship with an idea. Edison was said to have had 10,000 failures before he invented a working light bulb. He may have said, "It didn't work." after any one of them, but those words didn't stop him. Instead, he determined why the method didn't work and used that information to find another good idea. At no time did he abandon the idea permanently by saying, "It didn't work!"

Start Trading: Throw Those Excuses Out the Window

People make all kinds of excuses as to why they cannot get involved in investing or trading the financial markets. In this article, some of the most prominent are debunked.

"I don't have time"

Despite being one of the most frequently heard, this is probably the most pathetic excuse for not trading there is. Why? Because the availability of technology and information in the modern day means that we can operate in literally any time frame we want. Many people, when they hear "trading", think it means sitting in front of the computer all day. While that certainly is one form of trading, most of us do not have the schedule to allow us to dedicate hours each day to monitoring the markets. The good news is that we don't have to in order to trade effectively.

I will use myself as an example. My college coaching position has me frequently in the gym, in meetings, and on the road. What's more, I run a club program and a couple of businesses on the side. In 2004, even though there were long periods when I did not trade at all, and I probably only put on a dozen total positions all year, I was still able to make 200%+ in the stock market. If I can trade given my schedule, and have performance like that, anyone can.

"I don't have the money"

In the past, this was a pretty viable excuse for not trading. These days, though, one can trade with relatively little money. Transaction costs have dropped dramatically over the last decade and there are more trading options than ever before. There is one particular trading platform which allows an individual to put on trades of at little as $1 in value, and they have no minimum account size requirement.

Is it better to have more money? Absolutely. The more capital you have at your disposal, the better are your available options and the more actual money you can make in raw dollar terms.

Having more money is not always a good thing, though. For the inexperienced trader, it is better to have only a little money at risk. Why? It is the same as anything else. Just like anyone new to a skill make mistakes as they are learning, so do new traders. And just as a coach would not willingly throw a new player in to a championship game against experienced opponents, neither should those new to the markets to take on large trades and put significant portions of their assets at risk. It's common sense. Better to make the inevitable mistakes when there is relatively little at risk.

"It's too risky"

Trading is only as risky as you make it. If you take risky trades, then trading is risky. If you don't, then it isn't. There will always be the risk of losing money on a trade. That is completely unavoidable. But that could be said about all of life.

Driving is one of the most risky things in the modern world, but we still do it. We reduce the risk by obeying traffic rules, planning our route, wearing seatbelts, paying attention, and all that. Does that completely eliminate the risk that of ending up in an accident? No, it doesn't. Nor does it necessarily keep us out of traffic jams or from getting lost. We understand the risks, though, and weigh them against our need to get places in a timely fashion.

Trading is the same. We do it because it helps get us where we want to go, in this case financially. There are going to be hiccups along the way, but if we are focused and conscientious, we can minimize the risks, and potentially the damage an unfortunately turn inflicts, and remain on course.

"It's too complicated"

Technology and competition have combined to make trading so much easier than it has ever been before. All it takes is a couple of clicks and you can execute a trade, check your positions, get news, and anything else you need to do. The fact that you are reading this article says you have all the basic skills necessary to trade or invest.

Can trading be complex? Sure it can. There are those in the markets who use complicated software, mathematical algorithms, even artificial intelligence. None of that is necessary, though. Some of the best traders use little more than price quotes or a simple bar chart. How intricate you get is strictly a matter of personal preference, not necessity.