It’s not a free radical gambling ‘gene’ that keeps traders coming back for more when they’re continually losing at trading. More likely they’re; determined, focused and persistent individuals who sense that they’re incredibly close to enjoying the liberating feeling of trading success. They don’t want to stop when they instinctively know they’re inching closer day by day. But surely there has to come a point, as with many aspects of our life, when we say “enough is enough”? To be brutal no one would be encouraged to stay in an abusive relationship, so if trading markets, such as FX, is an abusive relationship and ‘hurting’, then why continue?
“It’s always darkest before the dawn” is an often used phrase that perfectly sums up the situation many traders find themselves in as they’re contemplating walking away from trading after failing to experience any success. There are many examples and historical anecdotes regarding famous traders who gave it that “one last try” and suddenly something clicked; they “saw the light” and decided to give trading one more go eventually leading to success.
Some compare it to being a boxer; having been floored by an opponent, but having the drive, determination and bravery to pick themselves up off the canvas, wipe down their gloves on their shorts and do battle one once. However, there’s also the image of the protective trainer in the corner who decides (for you) that your time is up, he throws the towel into the ring to call time on your contest and perhaps your career.
Rather than reducing trading to the emotions of the boxer, having the bravery to continue, is there a logical check list we could tick off before finally throwing in the towel on our trading? Is there a rational series of question we could ask ourselves and from that checklist and self-examination then make the decision to either stay in the game, or walk away?
In this article we’re going to list some appraisal and self-awareness questions that traders contemplating walking away may find useful before making their decision. When posing the questions we’ll also offer up some practical improvement advice and tips to assist you in your decision making. In our journey through this article we may inadvertently hit on a formula that successful traders appear to have as part of their DNA. However, the flip side is that many traders may feel that they’ve exhausted every opportunity and therefore decide to cash in their chips, rather than roll that dice one more time…
Can you handle the truth?
If fledgling traders actually took some time out at the onset, in order to conduct an honest appraisal of themselves before entering our trading world, they would perhaps never start trading. A quick snapshot, based on years of inter-acting with struggling traders, suggests the following characteristics;
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- The majority of folk don’t understand the level of commitment required at the outset
- The majority don’t have (and will never develop) the right mental and emotional attitude
- The majority of folk are simply not ‘smart’ enough, not to be confused with intelligence
- The majority of folk will never develop the necessary discipline required
- The majority will never, or can never, dedicate the necessary time to learn
- The majority of folk are in debt, never mind having enough risk capital initially to trade
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How much have you lost and how did you lose it?
This question relates back to basic money management techniques. It can’t be emphasised enough that traders should only trade what they can afford to lose without permanently damaging their, or their family’s wellbeing.
Let’s say you have €20,000 savings, then only commit to placing a maximum of 20% of your savings – €4,000, into a trading account and at the start commit only 0.5% of your account balance on each trade. Risk €20, with an expectancy of perhaps 1% return on your money. In this way you’ll be risking only 0.1% of your overall larger savings pot on each and very trade. An easy ‘sell’ to your conscious, your conscience and your partner, if they’re taking a keen interest in your trading. If you haven’t developed the self-discipline to adhere to a structure such as this, all set out in your trading plan, or if you believe that the advice is wrong, then perhaps you should consider your future in trading.
Do you continually violate your trading plan?
“Plan the trades and trade the plan”. It couldn’t be clearer could it? You spend time listing the critical success factors in your trading plan, you then ignore them as you’re busily engaged with the market and too excitable to stay within the trading parameters and guidelines you’ve built into your plan. If you know the plan is right, but you can’t help yourself from violating it, then again perhaps it’s time to ask yourself some searching questions as to your future in this business.
How many accounts have you ‘blown’?
We’re not talking demo accounts here, we’re talking live ‘real money’ accounts that you’ve blown up and whether or not they’ve severely impacted your life outside of trading. In theory no one should blow up an account, if you keep risking 0.5% of your account balance then the reduction on each and every trade should (in theory) see you stay in the game for an infinite period. But even if you start trading micro lots then naturally there will come a time when you simply can’t place a bet due to your broker’s margin requirements.
Blowing an account up is not necessarily terminal to your trading ambitions as you may have catered for this eventuality in your trading plan. But you must have placed a limit on your loss before you stop trading and thoroughly examine where you’re going wrong. Once again, referring to our 0.5% risk on very trade example, if you’ve lost 20% of that account, €800, you’ve only lost 4% of your original savings. Whilst it’s an irritation and inconvenience it surely can’t be life changing.
However, if you cannot control your losses by way of adhering to the kind of parameters just laid out, then once again some quiet reflection needs to take place regarding your overall suitability to trading.
How many ‘systems’ have I tried and how have I analysed them?
In asking this question we’re not looking to see if traders have tried countless methods before giving up, we’re looking for a pattern of behaviour and to establish if a pattern of ‘self-destruction’ had built up. The majority of trading methods work, ‘systems’ with a coin toss rate of 50:50 will work if the gains are larger than the losses. However, if you’re a trader flitting from strategy to strategy, who fails to make a plan for how long you’ll persevere with a system, then you’re, once again, operating outside of trading plan parameters which should be bullet proof. At the outset you should either limit a number of trades, a maximum loss and or a time scale, for experimenting with a new system. If you’re unwilling to do this then once again some quiet reflection as to your suitability for trading needs to take place.
When you’re entering uncharted territory make sure you have a few navigation tools
There is no formal education and no selection process involved in our industry. There are thousands of pitfalls and empty promises, with no real warning of any of them. Arrogance, egocentricity, greed, and stupidity will assure that there are never any shortage of those who come into this business thinking they can live a dream and somehow buck the trend by achieving financial freedom where so many others have tried and failed before them.
We forget that we’re hunting for scraps versus institutional traders who have every tool at their disposal. They’re methodical, it is they who control the markets. They have connections and arguably inside information allowing them to ‘front run’ a market quicker than you can click a buy or sell order on your platform and many rely on the churn us retail traders surrender up to them day after day.
TIME
We’re ending with the single word “time” in bold because it’s a highly significant factor that arguably over-rules many of the other issues already highlighted. Here’s a thing, new businesses fail, they fail en masse. They fail for a variety of reasons; poor marketing, poor research, lack of cash and cash-flow issues and they quite simply run out of time. Now in our profession that’s a luxury we can afford…
You are running a small business as a trader, and the longer you can survive, the better chance you have of succeeding. You’ll take in more information, experience more market exposure and your levels of trader/market intelligence will increase. Being out of the market is in fact a position so going back to demo trading; when you’ve experienced your drawdown limit, is in fact the act and behaviour of a professional.
Feedback
We’ve covered some of the main questions regarding trader suitability and delivered what we believe solutions to the most common problems. We’d love to have your input on other critical questions, as to how traders should question their suitability and how they can overcome the barriers to stay in the game long enough to give themselves a fighting chance of making a success of trading.
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