Four Diseases of Dead Traders

By: Laurence A. Conners and Blake E Hayward

The following is an excerpt from Connors’ and Hayward’s Investment Secrets of a Hedge Fund Manager

HOPE 

There are two times traders use hope, and both times it means they are doing something wrong. 

When a trader enters a position and hopes it moves in his or her favor, he or she obviously does not have a winning trading plan.  A winning trading plan is one in which the historical odds of profitability are in your favor.  One does not need hope for this.  The edge is already on your side.  For example, when one correctly trades undeniables on stock sector indexes, the odds historically state the trade should be profitable more than 70 percent of the time.  Hope is not needed, only proper trade execution.  Hope is only needed when one enters a trade based on a tip or a gut feeling or some oscillator reading that has never been quantified.

The second time hope comes into play is when a trade is entered and it immediately becomes a loss.  Instead of having a predetermined money management plan (a stop), the trader becomes paralyzed (we call this the Bambi syndrome) and hopes the loss does not become bigger.  This paralysis can last as little as a few minutes to as long as many weeks.  Unfortunately, because of the paralysis, the loss can eventually become very large, and the trader gets hurt.

Finally on the rare occasions that hope works, the damage done will be worse.  The trader has applied negative behavior (hope, lack of money management, and so on) and is positively reinforced (profit).  This will only make it harder in the future for the trader to become successful.

THE-I-WANT-TO-BE-LIKE-BABE-RUTH-WHEN-I-GROW-UP-SYNDROME

Every trader wants to hit a home run and be a hero among his friends.  Everyone loves to hear the stories of the guy who bought soybeans at six cents and liquidated them a few weeks later at 11 cents.  In reality, it doesn't quite work that way.  For every home run one trader hits, another 50 potential home-run hitters are striking out.  Instead of locking into a profit with stops, the home-run hitter is pyramiding his positions.  Most times though, his strategy backfires, and his profits are turned into large losses.

The majority of successful traders hit lots of singles, a few doubles and triples, and an occasional home run.  If you had a choice, would you rather bat .400 hitting lots of singles or bat .200, hit a few home runs, and strike out a lot?

THE PLAYING-WITH-THE-HOUSE'S-MONEY-SYNDROME

After a string of profitable trades, many traders take the attitude that they can "shoot the works" because they are "playing with the house's money."  This is reckless trading and a loser's strategy.  When the traders get this urge, they should go out and buy some lottery tickets because the results will be the same – a loss.  If their attitude were that they were playing with their children's education money, the urge to go for broke would be less likely.

THE FRIEDRICH-NIETZSCHE SYNDROME

Most men are raised to believe that pain is synonymous with manhood and strength.  In sports, "sucking it up" is encouraged.  As sports participants, we accept this principle.  As traders, we don't.  Losses cause pain.  The larger the loss, the more the pain.  The more pain one has the more money one is losing.  Friedrich Nietzsche's sentiment, “that which does not kill me makes me stronger," may be true in some aspects of life, but is quite untrue when it comes to trading.