- 2000: Volume 9, No. 2 Failing Your Way to Success

Would you choose to do the most difficult things in the most difficult ways, while failing at every step in order to succeed?

Now, before you say, "No, why in the world would I do that?" I want you to realize that most people who become professional traders make the choice to fail their way to success. Of course, they do not make this choice knowingly, but the end result of their decisions is to take this path.

It is generally understood that the way to succeed in professions other than trading requires advanced education and degrees, plus years of training and personal development. This is not so with trading. Unfortunately, people can enter the profession of trading without this type of preparation, but they cannot succeed over time without it.

Doing it all Wrong

Several years ago, I conducted a phone consultation with a young trader named Phil. With his trust fund in hand, a knack for getting top grades without having to work hard, and a love of excitement, Phil had decided to enter the world of trading and make a killing in the markets. After all, he had read about all of the money that top traders were making. With his advantages and high intelligence, he assumed that he would be successful in a short time.

Unfortunately, during that short time, he had his first loss, proving that the markets were not fair. Still, he had expected a few losses, so he continued to trade without any hard preparation and he continued to lose. As the losses mounted and became more serious, he began to suffer the usual emotional reactions to loss: fear, insecurity, hesitancy, and inconsistency. Since Phil had not spent years in developing a system, he was lost at sea as to what he was doing and why. Instead of being easy, trading had become difficult, arcane, and painful.

Phil decided to get coaching without paying for the service and called me to see if I could fix the problem. When queried about his preparation for trading, Phil brushed off the subject lightly, as though it had little relevance to his situation. Months later, he called again and was willing to listen but still unwilling to take the right action. Since Phil had never had to work hard before, he was dismayed at the level of commitment that successful trading would require of him. Not only would he need to study the markets, read everything in sight, attend seminars, and develop and test a working system, he would also have to work on his psychology. Phil was listening but once again, he was listening between the lines to see how he could beat the system. Here are some of the steps he took on the easy way to failing at trading:

The Hot Tip-Phil did not want to put in the required time and effort while developing his own system. Instead, he used his brainpower to come up with what he thought was an excellent idea. Why not find someone who would provide him with the right information? He started frequenting the local watering holes where traders went after hours. He became the acquaintance of several traders, found out which trader was generally regarded as the best of the lot, and focused his attention on him. The trader that Phil selected was named Jim and soon, Jim was feeding Phil hot tips over beer and pretzel sticks. This system worked very well for three months. Then, while using one of Jim's tips, Phil lost a significant amount of money. Feeling bruised, shaken, and betrayed, Phil waited for Jim at the watering hole that night to find out what had happened. To his dismay, he discovered that Jim had escaped with only a minor scrape. As Phil pressed to find out why he had lost and Jim had not, Phil crossed the line of their friendship. An angry Jim told him to do his own homework and stop using him. It was the end of their friendship and the end of Phil's free hot tips.

The Magic Guru-Then, Phil decided that he would resort to his old, standby strategy: if he could not get success for free, he would pay for it. He started with a trip to the local book warehouse that had a wall of books on every subject. As he looked through the books, he found a famous book on trading by a guru whose name even Phil had heard. For the first time, Phil was seriously reading and learning about trading. In his excitement and newfound passion for trading, this book became Phil's bible. He learned everything he could from the book and came to the point of breaking even. Unfortunately, over time, he began to see that the book had failed him at certain points and that he was not able to put into practice all that the book instructed him to do. Once again, he lost heavily.

At this point, Phil thought that perhaps he needed more current advice. Checking around, he found a newsletter that was regarded as the best one around. It provided weekly advice and strategies, market updates, and current research. This expensive newsletter was highly sophisticated and technical; in fact, it was too much for Phil to comprehend with his limited exposure to the math and concepts involved. To utilize the valuable information from this service, he would have to devote himself to studying technical trading and the challenging math that underpins it. Although Phil had done reasonably well at math in school, he had no interest in submitting again to its demands.

The Magic System-Phil resorted to paying for success once again. He decided that he needed to buy a proven system. To his credit, Phil did some fairly extensive research and purchased one of the most expensive and best-regarded systems available. What Phil wanted was a mechanical system that anyone could follow. The problem was that Phil was not just anyone and when it came down to following the rules of the system even when he thought he saw a loss or an opportunity developing, he could not follow the system. Soon, he was breaking every rule of the system and ignoring all of the signals. The result: heavy drawdowns.

It was at this point that Phil called again. Over a year and a half had passed since I had heard from him, and he was sounding less confident of himself. In fact, he was getting ready to leave trading if this last round of strategies did not pay off.

The Magic Therapy-When everything else failed, Phil decided to come to a Trading on Target Seminar, still without commitment on his mind. He was once again attempting to find an outside source to solve his basic trading problems. What he found at the seminar from listening to the other attendees and the material presented was that all along, he was trying to take a short-cut while only making his path longer. He decided on private consultation. When I took Phil on as a client, it was before I had the rule that a trader had to have a system or methodology that he believed would work. The only thing between Phil and his success was his own psychological sabotage.

As we began to look at Phil's personal strategies, attitudes, and beliefs, it became clear that he had stacked the deck against himself. His patterns of behavior were filled with a daily regime of self-destructive acts. He abused his health by living on junk food, getting too little exercise and sleep, and consuming too much alcohol and drugs. When he was not engaged in trading, he filled his spare time with long hours on the couch watching television or cruising the local clubs with friends attempting to pick up women. He belonged to no organizations, churches, or clubs. He had no family and no strong friendships to support him.

All of Phil's life choices were based on a set of beliefs and attitudes that were anathema to success. He believed that life was a game where you simply found the fastest and easiest strategy to win. Having won easily in every game he had played as a young man, Phil was accustomed to winning and came to believe that he deserved to win by virtue of his natural superiority. If he found that he was losing, he did not hesitate to cheat or stack the deck in his favor since it was clearly unfair for him to lose. Once he had experienced losses in the markets, he was angered and wanted revenge. Phil knew now that if he were to succeed, he would have to go back to square one and start with a plan.

Dedicated Losers

Phil's trading odyssey is by no means a unique one. Many traders employ similar strategies. If they perceive trading as a game, and not as a profession, they will attempt to play at it as opposed to working at it. Once a trader has established a mental picture of "how things are," he will unconsciously look for evidence that supports his picture of reality or create circumstances that reinforce that picture.

If a trader has established a pattern of failing his way to success as the way to approach trading, he will be unable to see that his approach is wrong. He may work harder to show himself that he is on the right track rather than admit that he may be wrong. I have seen traders who were deeply committed to a self-destructive, failing strategy do extremely well over the short-term because they put so much energy into their approach that it created its own wake. Eventually, however, like a soufflŽ that expands on air, the system will collapse on itself, blowing the trader right off of the field.

More of these failing strategies are:

• Trading is a game, so I'll play it like one. This was one of Phil's losing beliefs. Trading is a serious profession that makes its money from people who don't see it as one.
• Trading provides on-the-job training, so I don't need to go into it completely prepared. By the time you have learned the important lessons from the on-the-job training, you are out of the business.
• I can leverage a small amount of capital into a fortune, so I don't need to be well-capitalized. Under capitalization is the single most common reason for a trader to wash out early in the game. Far too many new traders start out with nest eggs that are rapidly consumed by the vultures.
• I can buy my way to success. Phil was actually a piker in this game compared to some of the super-financed traders I have met. If too many traders go into trading under capitalized, there are also a number of traders who are over-capitalized. They spend small fortunes attempting to buy success. Yes, it is important to have solid capital behind you, but money cannot replace commitment, research, mastery, self-discipline, emotional mastery, and time.
• I do not need to practice self-discipline in my money management or in my life because I have brilliance and/or a great system and/or unlimited resources. The term "self-discipline" conjures up images of pain, loss, or sacrifice to many people who are unable or unwilling to deal with those feelings. People who have not practiced self-discipline in their former lives will not come by it easily in their trading lives. But, no trader succeeds over time without a great deal of self-discipline.
• I can borrow the money and pay it back in no time. Traders who borrow the money from their children's college funds, from in-laws, from friends, or from home equity are trading with the same odds as playing roulette in Las Vegas, because they were working with "scared money." When in a drawdown, visualizations of loved ones losing the benefit of money accumulated for their future needs, will keep you in a drawdown state of mind, where sabotage is king.
• I can trade from anyplace. Trading in an environment that is not conducive to trading is another shortcut that is a sure way of failing to succeed. A trader's home may have a secure and comfortable room that is completely separate from any of the demands of the home and still not allow a trader to trade from home. However, when his trading is not going well, the temptation to visit the TV room or the kitchen or play with the children can be overwhelming. These temptations can be overwhelming even if things are not going badly. In the meantime, the rest of the world will not honor your working time if you are even a tiny bit available to interruptions.
• I don't need to test my system. I know it works. The time required to adequately test a system seems like a waste of time for a trader who has already invested a great deal of time developing it. By the time a trader has finally completed his research and developed his system, he is likely to believe it is infallible or at least a winning system. The only problem is that his unconscious knows the difference. Conflict will arise as a result, and make it difficult to take action.
• This psychology business is nonsense. I'm fine. This may be one of the most common failing strategies. After spending years creating the capital necessary to trade, doing research and developing and testing a system, the average committed trader is often not interested in looking within himself for the answers to his future success. This response is especially true with mechanical traders who assume that they will respond like machines when their system gives them a trading signal. I have sat in trading rooms with traders who believed this to be true and watched them quietly convulsing inside. Unfortunately, we are still human and we are wired in our brains to react emotionally to stimuli. These reactions have evolved over millions of years in order to protect us. We will do what is necessary to protect ourselves from the pain of loss, only to create more loss in the process.
• My goal is simple: Make a lot of money. What is wrong with this strategy? It's only a part of the answer. Yes, a trader needs to go into trading with the idea of making money. But, he needs to have a good relationship with money in the past in order to have a good one in the future. In addition, it cannot be the only goal, because a trader must enjoy the process of trading or he will create a lot of exciting and interesting ways to lose money.

How To Get Off the Failing Path?

It is impossible to change the direction a diesel train, loaded with 75 cars of cargo, plunging down the tracks at 90 miles an hour. However, it only takes one broken rail pin to derail the train and destroy the entire shipment. Turning a trader to a constructive, success path that will lead to long-term success after he has been on a misguided path without transformation of perception is equally impossible. But, destroying his trading career can be as easy as derailing that train. Like they tell new and frightened attendees at their first AA meeting, the first step to success is admitting that you have a problem and that you need help. Taking that first step for traders often comes only after a series of painful losses or maybe not at all.

Instead of waiting for your career to be permanently derailed, I have a few suggestions that can help you switch tracks without crashing. The first and most important step is for you to re-evaluate your business plan. What? You have none? Well, that does not surprise me. Traders who have completed a comprehensive business plan are, by definition, on the right track. But, they are in the great minority. A good business plan for trading requires you to confront all of the issues discussed in this article and many more.

A good business plan for trading requires you to approach trading as the business that it is. You have to understand your goals and develop the constructive strategy that will allow you to reach them. For example, you will have to establish the right trading environment, develop the right kind of capital and personal resources, work on your self-discipline and examine your psychology to make certain that it will support your goals. A good business plan must be followed, periodically updated and reviewed. It will require you to associate with people who are trained in business practices, such as accountants, bankers, lawyers, and suppliers of services. And it will require you to create achievable goals along the way with timetables for completion.

A good business plan will be able to show you if you are in trouble and need help. Then, you will have a reason to call for help and a means of measuring your progress. A good business plan will prepare you for every contingency so that you will know every action to take.

Oh, by the way, after I got Phil to work on his trading business plan, he had a trading epiphany. He suddenly got it! Trading was a business and a profession all wrapped up in one. It wasn't a game any more and Phil made the commitment to do what it took to succeed. Funny thing, by following his plan, life and trading became a lot easier than working to take the easy path of failing his way to success. All of this was several years ago and Phil now is a well-established trader. He's married with a second child on the way.

Conclusion

Failing your way to success is a common, but painful way to travel, especially when traders reach the dead end at full speed. Often, the most immediately successful trading strategies are losing strategies over time. For traders who have not made the full commitment to trading as a profession and have not done the planning required for long-term success, the choices will make sense at the time. They will look easy, simple, and quick and they will seldom be the right ones. The way off of this path is doing what you should have done in the very beginning: take the time to create a complete trading business plan and succeed your way to success, instead.