Hey Everyone! 👋
Over the last few weeks, we've looked at a couple of the best ways to improve your trading, including learning to adjust to market conditions, building a proper trading mindset, and more. Today, we thought it would be fun to do the opposite. Instead of trying to help the community build up solid, professional trading practices - let's try to design a losing trader from the ground up! What attributes/decisions will we have to encourage to get a losing result?
Theoretically, the market is just a game of probabilities. How can we guarantee that our trader will lose? As it turns out, there are a couple easy behaviors we can combine to ensure that a losing outcome is a foregone conclusion.
Number 1: They never define risk 🤷🏼♂️
In trading, people often say things about "Risk management", "Defining your risk" or "Defining your out", but it can sometimes be difficult to determine, as a new trader, what the heck people are talking about. Define my risk? How? What are you talking about? What does this actually mean?
Put simply, defining your risk is a process of figuring out *where* you are wrong on a trade/investment.
For active traders, it can be as simple as picking a recent low or high, and saying "If this price is hit, then I'm exiting the trade. The short term read I had on this asset is no longer valid. I don't think I know what's going to happen next." For someone who is more of a position trader, it can be as simple as saying "I don't want to lose more than 10% (or some percent) of my capital at any point when I am in this position. I think that I have selected my entry well enough that a 10% drop (or x%) would mean that, for some reason or another, my thesis is no longer valid."
From a cash management / portfolio management perspective, defining your risk has another dimension: How much of your total capital do you want to potentially lose in a worst case scenario? Should each trade risk 50% of your capital? 20%? 5%? 1%? How much of your total bankroll will you lose before you stop?
In order to ensure that we have a losing trader, it's important that they doesn't have a plan for position sizing, setting stop losses, or setting account stop losses. This way, they won't have any consistency and will inevitably take a few big losses that knock the out of the game forever.
Number 2: They use lots of leverage 🍋
When combined with Number 1, using lots of leverage is a great way to accelerate the process of losing money. Given that a strategy that wins 50% of the time will statistically face a 7 trade losing streak in the next 100 trades, sizing up and using leverage is a great way to ensure that when a rough patch strikes, you lose all your capital. Letting trades go past how much you expected to lose is a great way to speed this process, because with the addition of leverage, things only need to go against you 50%, 20%, 10%, etc, before you're wiped out. You can't risk to zero.
Considering that the most aggressive hedge funds in the world typically don't use an excess of 5-8x leverage, even in FX trading, we will need our losing trader to use at least 10-20x leverage in order to speed up their demise.
Number 3: They hop from strategy to strategy 🐰
Bruce lee once said, “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.”
In this example, sticking to one strategy, even if suboptimal, is the man who has practiced one kick many many times. The trader who strategy hops is the one who has tried almost every kick out there, but mastered none. In order to ensure that our trader is a losing trader, we need to ensure that they never develop any mastery and keep switching from strategy to strategy. We need to constantly dangle a new strategy, indicator, or trading style constantly in front of our trader. Thus, no matter what strategy the trader picks, they will lack the hours necessary to have anything but suboptimal trade execution, poor overall market sense, and a general lack of nuance & understanding.
Combined with number 1 and number 2, it's going to be nearly impossible for this trader to be profitable.
--
So there you have it; 3 ways to ensure that the trader will fail. Recognize any of them?
Our hope in writing this is not to discourage anyone from getting involved in the markets, but rather to continually shine a light on some of the bad habits we can get in when starting out. Avoiding rookie mistakes and bad practices that can stunt a career as a trader & create bad habits - no bueno! Let us know if you enjoyed, and we will continue to make more of these posts that go through some trading "best practices".
Have a great week!
-Team TradingView ❤️
Over the last few weeks, we've looked at a couple of the best ways to improve your trading, including learning to adjust to market conditions, building a proper trading mindset, and more. Today, we thought it would be fun to do the opposite. Instead of trying to help the community build up solid, professional trading practices - let's try to design a losing trader from the ground up! What attributes/decisions will we have to encourage to get a losing result?
Theoretically, the market is just a game of probabilities. How can we guarantee that our trader will lose? As it turns out, there are a couple easy behaviors we can combine to ensure that a losing outcome is a foregone conclusion.
Number 1: They never define risk 🤷🏼♂️
In trading, people often say things about "Risk management", "Defining your risk" or "Defining your out", but it can sometimes be difficult to determine, as a new trader, what the heck people are talking about. Define my risk? How? What are you talking about? What does this actually mean?
Put simply, defining your risk is a process of figuring out *where* you are wrong on a trade/investment.
For active traders, it can be as simple as picking a recent low or high, and saying "If this price is hit, then I'm exiting the trade. The short term read I had on this asset is no longer valid. I don't think I know what's going to happen next." For someone who is more of a position trader, it can be as simple as saying "I don't want to lose more than 10% (or some percent) of my capital at any point when I am in this position. I think that I have selected my entry well enough that a 10% drop (or x%) would mean that, for some reason or another, my thesis is no longer valid."
From a cash management / portfolio management perspective, defining your risk has another dimension: How much of your total capital do you want to potentially lose in a worst case scenario? Should each trade risk 50% of your capital? 20%? 5%? 1%? How much of your total bankroll will you lose before you stop?
In order to ensure that we have a losing trader, it's important that they doesn't have a plan for position sizing, setting stop losses, or setting account stop losses. This way, they won't have any consistency and will inevitably take a few big losses that knock the out of the game forever.
Number 2: They use lots of leverage 🍋
When combined with Number 1, using lots of leverage is a great way to accelerate the process of losing money. Given that a strategy that wins 50% of the time will statistically face a 7 trade losing streak in the next 100 trades, sizing up and using leverage is a great way to ensure that when a rough patch strikes, you lose all your capital. Letting trades go past how much you expected to lose is a great way to speed this process, because with the addition of leverage, things only need to go against you 50%, 20%, 10%, etc, before you're wiped out. You can't risk to zero.
Considering that the most aggressive hedge funds in the world typically don't use an excess of 5-8x leverage, even in FX trading, we will need our losing trader to use at least 10-20x leverage in order to speed up their demise.
Number 3: They hop from strategy to strategy 🐰
Bruce lee once said, “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.”
In this example, sticking to one strategy, even if suboptimal, is the man who has practiced one kick many many times. The trader who strategy hops is the one who has tried almost every kick out there, but mastered none. In order to ensure that our trader is a losing trader, we need to ensure that they never develop any mastery and keep switching from strategy to strategy. We need to constantly dangle a new strategy, indicator, or trading style constantly in front of our trader. Thus, no matter what strategy the trader picks, they will lack the hours necessary to have anything but suboptimal trade execution, poor overall market sense, and a general lack of nuance & understanding.
Combined with number 1 and number 2, it's going to be nearly impossible for this trader to be profitable.
--
So there you have it; 3 ways to ensure that the trader will fail. Recognize any of them?
Our hope in writing this is not to discourage anyone from getting involved in the markets, but rather to continually shine a light on some of the bad habits we can get in when starting out. Avoiding rookie mistakes and bad practices that can stunt a career as a trader & create bad habits - no bueno! Let us know if you enjoyed, and we will continue to make more of these posts that go through some trading "best practices".
Have a great week!
-Team TradingView ❤️
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Read more about the new tools and features we're building for you: www.tradingview.com/blog/en/
