I wanted to follow on from yesterdays post and give a more extreme real world example of how thinking in terms of the need to be right is completely wrong but typical of the vast majority of traders. I went back and reviewed some results from the Dow from 2014 – this year stuck in my mind for some reason and looking at the results I remember why. For most of the year it sucked. I graphed the R multiples from the completed trades below.
During most of 2014 this approach couldn’t buy a winning trade, there were two pronounced clusters of losses and the wins it did score were underwhelming until December.
The last trade was a 5.27 R winner and made the system profitable for that year despite only having a hit rate of 30%. If you are in the middle of this it is not easy to cope with, having a diversified system does help but it does still make you wary of taking the next trade. But it always seems to be the next trade that you dont take that turns things around. My guess is that if you looked at the individual breakdown of trades for very successful traders then this would be more common than you think.
The sort of psychology of the typical trader was well expressed in the paper An Analysis Of The Profiles And Motivations Of Habitual Commodity Speculators by W.B. Canoles, S.R. Thompson, S.H. Irwin, and V.G. France
He wins more frequently than he loses (over 51% of the time) but is an overall net loser in dollar terms. In spite of recurring trading losses, he has never made any substantial change in his basic trading style. To this trader, whether he won or lost on a particular trade is more important than the size of the win or loss. Thus he consistently cuts his profits short while letting his losses run. He also worries more about missing a move in the market by being on the sidelines than about losing by being on the wrong side of a market move; i.e., being in the action is more important than the financial consequences. Participating brokers confirmed that for the majority of the speculators studied, the primary motivation for continuous trading is the recreational utility derived largely from having a market position.
I have added my own emphasis, the basic ill informed trader has in my view two primary motivations. Winning as a means of stroking their ego as opposed to making money and perceiving that they are in the action or having fun. This corresponds quite well with Thoreau’s summation that all men lead lives of quiet desperation.