Bad Luck

People who like to complain about their bad luck are often experts in looking for trouble and snatching defeat from the jaws of victory. A friend in the construction business used to have a driver who dreamed of buying his own truck and working for himself. He saved money for years and finally paid cash for a huge brand-new truck. He quit his job, got gloriously drunk, and at the end of the day rolled his uninsured truck down an embankment—it was totaled, and the driver came back asking for his old job. Tragedy? Drama? Or fear of freedom and an unconscious wish for a safe job with a steady paycheck? Why do intelligent people with a track record of success keep losing money on one harebrained trade after another, stumbling from calamity to catastrophe? Ignorance? Bad luck? Or a hidden desire to fail? Many people have a self-destructive streak. My experience as a psychiatrist has convinced me that most people who complain about severe problems are in fact sabotaging themselves. I cannot change a patient’s external reality, but whenever I cure one of self-sabotage, he quickly resolves his external problems.
Self-destructiveness is such a pervasive human trait because civilization is built on controlling aggression. As we grow up, we are trained to control aggression against others—behave, do not push, be nice. Our aggression has to go somewhere, and many turn it against themselves, the only unprotected target. We turn our anger inward and learn to sabotage ourselves. Little wonder so many of us grow up fearful, inhibited, and shy.
Society has several defenses against the extremes of self-sabotage. The police will talk a potential suicide down from the roof, and the medical board will take the scalpel away from an accident-prone surgeon, but no one will stop a self-defeating trader. He can run amok in the financial markets, inflicting wounds on himself, while brokers and other traders gladly take his money. Financial markets lack protective controls against self-sabotage. Are you sabotaging yourself? The only way to find out is to keep good records, especially a Trader’s Journal and an equity curve, shown later in this book. The angle of your equity curve is an objective indicator of your behavior. If it slopes up, with few downticks, you’re doing well. If it points down, it shows you’re not in gear with the markets and possibly in a self-sabotage mode. When you observe that, reduce the size of your trades and spend more time with your Trader’s Journal figuring out what you’re doing.
You need to become a self-aware trader. Keep good records, learn from past mistakes, and do better in the future. Traders who lose money tend to feel ashamed. A bad loss feels like a nasty comment—most people just want to cover up, walk away, and never be seen again. Hiding doesn’t solve anything. Use the pain of a loss to turn yourself into a disciplined winner.

Losers Anonymous

Years ago I had an insight that changed my trading life forever. Back in those days my equity used to swing up and down like a yo-yo. I knew enough about markets to profit from many trades but couldn’t hold on to my gains and grow equity. The insight that eventually got me off the roller coaster came from a chance visit to a meeting of Alcoholics Anonymous. One late afternoon I accompanied a friend to an AA meeting at a local YMCA. Suddenly, the meeting gripped me. I felt as if the people in the room were talking about my trading!All I had to do was substitute the word loss for the word alcohol. People at the AA meeting talked about how alcohol controlled their lives, and my trading in those days was driven by losses—fearing them and trying to trade my way out. My emotions followed a jagged equity curve—elation at the highs and cold clammy fear at the lows, with fingers trembling above the speed dial button.
Back in those days I had a busy psychiatric practice and saw my share of alcoholics. I began to notice similarities between them and losing traders. Losers approached markets the way alcoholics walked into bars. They entered with pleasant expectations, but left with mean headaches, hangovers, and loss of control. Drinking and trading lure people across the line from pleasure to self-destructiveness. Alcoholics and losers live with their eyes closed—both are in the grip of an addiction. Every alcoholic I saw in my office wanted to argue about his diagnosis. To avoid wasting time, I used to suggest a simple test. I’d tell alcoholics to keep on drinking as usual for the next week, but write down every drink, and bring that record to our next appointment.

Losers vs Winners

Not a single alcoholic could keep that diary for more than a few days because looking in a mirror reduced the pleasure of impulsive behavior. Today when I tell losing traders to keep a diary of their trades, many become annoyed. Good records are a sign of self-awareness and discipline. Poor or absent records are a sign of impulsive trading. Show me a trader with good records, and I’ll show you a good trader.
Alcoholics and losers do not think about the past or the future, and focus only on the present—the sensation of alcohol pouring down the gullet or the market pulsing on the screen. An active alcoholic is in denial; he doesn’t want to know about the depth of his abyss, the severity of his problem, or the harm he is causing himself and others. The only thing that can pierce an alcoholic’s denial is the pain of hitting what AA calls “rock bottom.” It is each individual’s private version of hell—a life-threatening illness, a rejection by family, a job loss, or another catastrophic event. The unbearable pain of hitting rock bottom punctures the alcoholic’s denial and forces him to face a stark choice: he can self-destruct or turn his life around.
AA is a nonprofit voluntary organization whose only purpose is to help alcoholics stay sober. It doesn’t ask for donations, advertise, lobby, or take part in any public actions. It has no paid therapists; members help each other at meetings led by long-term members. AA has a system of sponsorships whereby older members sponsor and support newer ones. An alcoholic who joins AA goes through what is called a 12-Step program. Each step is a stage of personal growth and recovery. The method is so effective that people recovering from other addictive behaviors have begun to use it. The first step is the most important for traders. It looks easy, but is extremely hard to take. Many alcoholics can’t take it, drop out of AA, and go on to destroy their lives. The first step consists of standing up at a meeting, facing a room full of recovering alcoholics, and admitting that alcohol is stronger than you. This is hard because if alcohol is stronger than you, you cannot touch it again. Once you take the first step, you are committed to a struggle for sobriety.
Alcohol is such a powerful drug that AA recommends planning to live without it one day at a time. A recovering alcoholic does not plan to be sober a year or five years from now. He has a simpler goal—go to bed sober tonight. Eventually those days of sobriety add up to years. The entire system of AA meetings and sponsorships is geared toward the goal of sobriety one day at a time. AA aims to change not only the behavior but the personality in order
to reinforce sobriety. AA members call some people “sober drunks.” It sounds like a contradiction in terms. If a person is sober, how can he be a drunk? Sobriety alone is not enough. A person who has not changed his thinking is just one step away from sliding back into drinking under stress or out of boredom. An alcoholic has to change his way of being and feeling to recover from alcoholism.
I never had a problem with alcohol, but my psychiatric experience had taught me to respect AA for its success with alcoholics. It was not a popular view. Each patient who went to AA reduced the profession’s income, but that never bothered me. After my first AA meeting I realized that if millions of alcoholics could recover by following the program, then traders could stop losing, regain balance, and become winners by applying the principles of AA.
How can we translate the lessons of AA into the language of trading? A losing trader is in denial. His equity is shrinking, but he continues to jump into trades without analyzing what is going wrong. He keeps switching between markets the way an alcoholic switches between whiskey and cheap wine. An amateur whose mind isn’t strong enough to accept a small loss will eventually take the mother of all losses. A gaping hole in a trading account hurts self-esteem. A single huge loss or a series of bad losses smash a trader against his rock bottom. Most beginners collapse and wash out. The lifetime of an average speculator is measured in months, not years.
Those who survive fall into two groups. Some return to their old ways, just like alcoholics crawl into a bar after surviving a bout of delirium. They toss more money into their accounts and become customers of vendors who sell magical trading systems. They continue to gamble, only now their hands shake from anxiety and fear when they try to pull the trigger.
A minority of traders that hit rock bottom decide to change. Recovery is a slow and solitary process. Charles Mackay, the author of one of the best books on crowd psychology, wrote almost two centuries ago that men go mad in crowds, but come to their senses slowly, and one by one. I wish we had an organization for recovering traders, the way recovering alcoholics have AA. We don’t because trading is so competitive. Members of AA strive for sobriety together, but a meeting of recovering traders could easily be poisoned by envy and showing off. Markets are such cutthroat places that we don’t form mutual support groups or find sponsors. Some opportunists hold themselves out as traders’ coaches, but most make me shudder at their sharkiness. If we had a traders’ organization, I’d call it Losers Anonymous (LA). The name is blunt, but that’s fine. After all, Alcoholics Anonymous does not call itself Drinkers Anonymous. A harsh name helps traders face their impulsivity and selfsabotage.

Businessman’s Risk vs. Loss

Risk vs Loos

Years ago, when I began my recovery from losing, each morning I held what I called a Losers Anonymous meeting for one. I’d come into the office, turn on my quote screen, and while it was warming up I’d say, “Good morning, my name is Alex, and I am a loser. I have it in me to do serious damage to my account. I’ve done it before. My only goal for today is to go home without a loss.” When the screen was up, I’d begin trading, following the plan written down the night before while the markets were closed. I can immediately hear an objection—what do you mean, go home without a loss? It is impossible to make money every day. What happens if you buy something, and it goes straight down—in other words, you’ve bought the top tick of the day? What if you sell something short and it immediately rallies?
We must draw a clear line between a loss and a businessman’s risk. A businessman’s risk is a small dip in equity. A loss goes through that limit. As a trader, I am in the business of trading and must take normal business risks, but I cannot afford losses. Imagine you’re not trading but running a fruit and vegetable stand. You take a risk each time you buy a crate of tomatoes. If your customers do not buy them, that crate will rot on you. That’s a normal business risk—you expect to sell most of your inventory, but some fruit and vegetables will spoil. As long as you buy carefully, keeping the unsold spoiled fruit to a small percentage of your daily volume, your business stays profitable.

Risk vs Loos

Imagine that a wholesaler brings a tractor-trailer full of exotic fruit to your stand and tries to sell you the entire load. He says that you can earn more in the next two days than you made in the previous six months. It sounds great—but what if your customers don’t buy that exotic fruit? A rotting tractor-trailer load can hurt your business and endanger its survival. It’s no longer a businessman’s risk—it’s a loss. Money management rules draw a straight line between a businessman’s risk and a loss, as you will see later in this book.
Some traders have argued that my AA approach is too negative. A young woman in Singapore told me she believed in positive thinking and thought of herself as a winner. She could afford to be positive because discipline was imposed on her from the outside, by the manager of the bank for which she traded. Another winner who argued with me was a lady from Texas in her seventies, a wildly successful trader of stock index futures. She was very religious and viewed herself as a steward of money. Each morning she got up early and prayed long and hard. Then she drove to the office and traded the living daylights out of the S&P. The minute a trade went against her, she’d cut and run—because the money belonged to the Lord and wasn’t hers to lose. She kept her losses small and accumulated profits. I thought that our approaches had a lot in common. Both of us had principles outside the market preventing us from losing money. Markets are the most permissive places in the world. You may do any-thing you like, as long as you have enough equity to put on a trade.
It’s easy to get caught in the excitement, which is why you need rules. I rely on the principles of AA, another trader relies on her religious feelings, and you may choose something else. Just make sure you have a set of principles that clearly tells you what you may or may not do in the markets.

Sober in Battle

Most traders open accounts with money earned in business or the professions. Many bring a personal track record of success and expect to do well in the markets. If we can run a hotel, perform eye surgery, or try cases in court, we can surely find our way between the high, the low, and the close!But the markets, which seem so simple at first, keep humbling us.

Sober In Battle

Little blood gets spilled in trading, but the money, the lifeblood of the markets, has a major impact on the quality and the length of our lives. Recently, a friend who writes a stock market advisory showed me a stack of letters from his subscribers. The one that caught my eye came from a man who made enough money trading to pay for a kidney transplant. It saved his life, but I thought of what happened to legions of others who also had big needs but traded poorly and lost money. Trading is a battle. When you pick up your weapon and put your life on the line, would you rather be drunk or sober? You have to prepare yourself, choose your fight, go in when you are ready, and quit after you’ve done what you’ve planned. A man who is cool and sober calmly picks his fights. He enters and leaves when he chooses and not when some bully throws him a challenge. A disciplined player chooses his own game out of hundreds available. He doesn’t have to chase every rabbit like a dog with its tongue hanging out—he lays an ambush for his game and lets it come to him. Most amateurs won’t admit they are trading for entertainment. A common cover story is that they’re in the markets to make money. In reality, most traders get tremendous thrills tossing money at half-baked ideas. Trading financial markets is more respectable than betting on ponies, but the kicks are just as good. I tell my horse-playing friends to imagine going to a race where you can place bets after the horses are out of the gate and take your money off the table before the race ends. Trading is a fantastic game, but its temptations are very intense.

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