for the Right Target in Trading
by Walter T. Downs
When trading goes right, it can be a great feeling. When
trading goes wrong it can be a nightmare. Fortunes are
made in a matter of weeks and lost in a matter of minutes.
This pattern repeats itself as each new generation of
traders hit the market. They hurl themselves out of the
night like insane insects against some sort of karmic
bug-light; all thought and all existence extinguished
in one final cosmic "zzzzzzt". Obviously, for
a trader to be successful he must acknowledge this pattern
and then break it. This can be accomplished by asking
the right questions and finding the correct answers by
rational observation and logical conclusion.
This article will attempt to address
"What is the difference between
a winning trader and a losing trader?"
What follows are eleven observations and conclusions
that I use in my own trading to help keep me on the right
track. You can put these ideas into table form, and use
them as a template to determine the probability of a trader
The greatest number of losing traders is found in the
short-term and intraday ranks. This has less to do with
the time frame and more to do with the fact that many
of these traders lack proper preparation and a well thought-out
game plan. By trading in the time frame most unforgiving
of even minute error and most vulnerable to floor manipulation
and general costs of trading, losses due to lack of knowledge
and lack of preparedness are exponential. These traders
are often undercapitalized as well. Winning traders often
trade in mid-term to long-term time frames. Often they
carry greater initial levels of equity as well.
Trading in mid-term and long-term time frames offers
greater probability of success from a statistical point
of view. The same can be said for level of capitalization.
The greater the initial equity, the greater the probability
Losing traders often use complex systems or methodologies
or rely entirely on outside recommendations from gurus
or black boxes. Winning traders often use very simple
techniques. Invariably they use either a highly modified
version of an existing technique or else they have invented
This seems to fit in with the mistaken belief that "complex"
is synonymous with "better". Such is not necessarily
the case. Logically one could argue that simplistic market
approaches tend to be more practical and less prone to
false interpretation. In truth, even the terms "simple"
or "complex" have no relevance. All that really
matters is what makes money and what doesn't. From the
observations, we might also conclude that maintaining
a major stake in the trading process via our own thoughts
and analyses is important to being successful as a trader.
This may also explain why a trader who possesses no other
qualities than patience and persistence often outperforms
those with advanced education, superior intellect or even
Losing traders often rely heavily on computer-generated
systems and indicators. They do not take the time to study
the mathematical construction of such tools nor do they
consider variable usage other than the most popular interpretation.
Winning traders often take advantage of the use of computers
because of their speed in analyzing large amounts of data
and many markets. However, they also tend to be accomplished
chartists who are quite happy to sit down with a paper
chart, a pencil, protractor and calculator. Very often
you will find that they have taken the time to learn the
actual mathematical construction of averages and oscillators
and can construct them manually if need be. They have
taken the time to understand the mechanics of market machinery
right down to the last nut and bolt.
If you want to be successful at anything, you need to
have a strong understanding of the tools involved. Using
a hammer to drive a nut in to a threaded hole might work,
but it isn't pretty or practical.
Losing traders spend a great deal of time forecasting
where the market will be tomorrow. Winning traders spend
most of their time thinking about how traders will react
to what the market is doing now, and they plan their strategy
Success of a trade is much more likely to occur if a
trader can predict what type of crowd reaction a particular
market event will incur. Being able to respond to irrational
buying or selling with a rational and well thought out
plan of attack will always increase your probability of
success. It can also be concluded that being a successful
trader is easier than being a successful analyst since
analysts must in effect forecast ultimate outcome and
project ultimate profit. If one were to ask a successful
trader where he thought a particular market was going
to be tomorrow, the most likely response would be a shrug
of the shoulders and a simple comment that he would follow
the market wherever it wanted to go. By the time we have
reached the end of our observations and conclusions, what
may have seemed like a rather inane response may be reconsidered
as a very prescient view of the market.
Losing traders focus on winning trades and high percentages
of winners. Winning traders focus on losing trades, solid
returns and good risk to reward ratios.
The observation implies that it is much more important
to focus on overall risk versus overall profit, rather
than "wins" or "losses". The successful
trader focuses on possible money gained versus possible
money lost, and cares little about the mental highs and
lows associated with being "right" or "wrong".
Losing traders often fail to acknowledge and control
their emotive processes during a trade. Winning traders
acknowledge their emotions and then examine the market.
If the state of the market has not changed, the emotion
is ignored. If the state of the market has changed, the
emotion has relevance and the trade is exited.
If a trader enters or exits a trade based purely on emotion
then his market approach is neither practical nor rational.
Strangely, much damage can also be done if the trader
ignores his emotions. In extreme cases this can cause
physical illness due to psychological stress. In addition,
valuable subconscious trading skills that the trader possesses
but has no conscious awareness of may be lost. It is best
to acknowledge each emotion as it is experienced and to
view the market at these points to see if the original
reasons we took the trade are still present. Further proof
that this conclusion may have validity can be seen in
even highly systematic traders exiting a trade for no
apparent reason, and pegging a profitable move almost
to the tick. Commonly, this is referred to as being "lucky"
or being "in the zone".
Losing traders care a great deal about being right. They
love the adrenaline and endorphin rushes that trading
can produce. They must be in touch with the markets almost
twenty-four hours a day. A friend of mine once joked that
a new trader won't enter a room unless there is a quote
machine in it. Winning traders recognize the emotions
but do not let it become a governing factor in the trading
process. They may go days without looking at a quote screen.
To them, trading is a business. They don't care about
being right. They focus on what makes money and what doesn't.
They enjoy the intellectual challenge of finding the best
odds in the game. If those odds aren't present they don't
It is important to stay in synch with the markets, but
it is also important to have a life outside of trading.
It is a rare individual who can do anything to excess
without suffering some form of psychological or physical
degradation. Successful traders keep active enough to
stay sharp but also realize that it is a business not
When a losing trader has a bad trade he goes out and
buys a new book or system, and then he starts over again
from scratch. When winning traders have a bad trade they
spend time figuring out what happened and then they adjust
their current methodology to account for this possibility
next time. They do not switch to new systems or methodologies
lightly, and only do so when the market has made it very
clear that the old approach is no longer valid. In fact,
the best traders often use methodologies that are endemic
to basic market structure and will therefore always be
a part of the markets they trade. Thus the possibility
of the market changing form to the extent that the approach
becomes useless, is very small.
The most successful traders have a methodology or system
that they use in a very consistent manner. Often, this
revolves around one or two techniques and market approaches
that have proven profitable for them in the past. Even
a bad plan that is used consistently will fair better
than jumping from system to system. This observation implies
that stylistic foundations of a trader's market approach
must be in place before consistent profitability can occur.
Losing traders focus on "big-name" traders
who made a killing, and they try to emulate the trader's
technique. Winning traders monitor new techniques that
come on the trading scene, but remain unaffected unless
some part of that technique is valuable to them within
the framework of their current market approach. They often
spend much more time looking at how the market seeks and
destroys other traders or how traders destroy themselves.
They then trade with the market or against other traders
as these situations arise.
Once again, we can note that the individuality of a trader
and his comfort level and knowledge regarding his system
are far more important than the latest doodad or Market
Losing traders often fail to include many factors in
the overall trading process that affects the probabilities
of overall profit. Winning traders understand that winning
in the markets means "cash flow". More cash
must come in than goes out, and anything that effects
this should be considered. Thus a winning trader is just
as thrilled with a new way to reduce his data-feed costs
or commissions as he is with a new trading system.
ANYTHING that affects bottom line profitability should
be considered as a viable area of study to improve performance.
Losing traders often take themselves quite seriously
and seldom find humor in market analysis or the trading
environment. Successful traders are often the funniest
and most imaginative people you will ever meet. They take
joy in trading and are the first to laugh or relate a
funny story. They take trading seriously, but they are
always the first to laugh at themselves.
Its no wonder that one of the first things psychiatrists
test for when treating a patient is whether or not the
patient has any sense of humor about his affliction. The
more serious the tone of the individual, the more likely
that insanity has set in.
OF CONCLUSIONS AND OBSERVATIONS
Both winning and losing traders consider trading a game.
However, winning traders take the game not as a diversion
but as a vocation which they practice with an intensity
and dedication that rivals the work ethic of a professional
athlete. Since the athletic metaphor seems appropriate,
I will sum up on that note.
If trading were a game like basketball perhaps novice
traders would realize more readily that what appears as
effortless ease of the professional trader in sinking
three-point shots is in fact the product of endless hours
spent shooting hoops in deserted back yards and empty
As in sports, the governing factors are internal and
external. We deal with the market and ourselves. Both
are like weapons and they can be used proactively or destructively.
Each and every trade should be taken with professional
care and planning
In order to bring these observations home in an even
more compelling form, lets add an element of ultimate
risk to life and limb and say that our "sport"
is more like target practice with a handgun. While it
is certainly important to hit the target, it is more important
to make sure the gun isn't pointed directly at ourselves
when we pull the trigger.
Minute differences in how we take aim in the markets
can have amazing impact on the final outcome. The difference
is clear: One method is accurate target practice. The
other is Russian Roulette.
Copyright@1999 Walter T. Downs All
Rights Reserved. Distribution is allowed with due credit
to the author.