For The Right Target In Trading
Walter T. Downs
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 one question:
"What is the difference between a winning trader and a
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 being successful.
OBSERVATION # 1
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
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 of survival.
OBSERVATION # 2
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 their own.
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 true genius.
OBSERVATION # 3
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
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.
OBSERVATION # 4
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 accordingly.
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.
OBSERVATION # 5
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".
OBSERVATION # 6
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
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".
OBSERVATION # 7
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 an addiction.
OBSERVATION # 8
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.
OBSERVATION # 9
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 guru.
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
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
SUMMARY 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 playgrounds.
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
Walter T. Downs. All Rights Reserved. Website: http://www.cistrader.com