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3 THE REASONS YOU WILL FAIL AS A TRADER
(The most important thread I have ever written?)
Read through this critically. It's very possible that you are living in a delusion. That you don't have a grasp on how the markets work, or how to perform consistently as a trader.
1. YOU EXPECT TO OUT PERFORM THE GREATEST TRADERS TO EVER LIVE.
📊If we were to profile some of the top contenders for the greatest traders to ever live, you might find names like
Paul Tudor Jones - (Net Worth $8.1 Billion) Who averaged nearly 20% in annualized returns for 25 years straight.
"If I have positions going against me, I get right out; if they are going for me, I keep them. Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in." - Paul Tudor Jones
Or Maybe
Stanley Druckenmiller - (Net worth $6.2 Billion) Who's average annual returns were about 30% over 30 years.
"If you're early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time. It's not even close." -Stanley Druckenmiller
And without a doubt, the following name would make the list.
Jim Simon's - (Net Worth - $30.7 Billion) Who's Medallion Fund averaged an astounding 66.1% average annual return since 1988.
"Success in investing is not about being right all the time. It’s about minimizing losses and maximizing gains." - Jim Simon's
Not only are the trader's above considered some of the greatest to ever live, they are also some of the wealthiest men alive. But you must be asking yourself, "how is it possible they are considered the greatest, with such Meager returns as 20%, 30%, or even 66% a year. I have seen beginners 100x (10,000%) their account in a month. Surely one should aim to ATLEAST 10x (1,000%) their trading balance each year?"
Goals of 1,000% a year are pure fiction. Does that mean that people don't achieve it? Of course not. There are millions of people trading and exposed to the market, there will always be outlier stories of people winning the lottery. Your next thought might be, "that may be true, but my favorite trader claims to average about 100% per week, that seems reasonable to me. That is only a 2x?"
You clearly haven't done the math.
Lets imagine they start with a $1,000 trading balance.
Where are they after a month?
Week 4 -$5,333.33
maybe that seems reasonable to you? after 3 months?
Week 12 - $150,703
What about the half-year mark.
Week 26- $23,014,013
Wow, $1,000 into $23 MIllion in just half a year. But why stop now? How does the trader averaging 100% a week finish off the year?
Week 52 - $529,644,827, 385.65
Elon Musk move over, this trader has grown that account to $529 Trillion from $1,000 in just 1 year.
The point is, there is a reason THE greatest traders average returns seem meager in comparison to the average Crypto Twitter results. They are realistic. Your goals as a trader must be rooted in reality. Your goals should not be based on 1-off statistical anomalies.
- I will mention, that you will find day traders who have track records that outperformed the money managers mentioned above. For the simple reason, that of course, trading a smaller personal account offers much more mobility then deploying Multi Billions in capital.
I can tell you this. If you can develop the skills to consistently pull anywhere between 20-100% a year from the markets, with minimal drawdown, you will have endless opportunities for capital allocation, and you will be wealthy. Don't forget the value is in the skill to achieve such results consistently, don't worry about your current available capital. Concern yourself with developing the your skill as a trader. The capital will come.
2. YOU DON'T UNDERSTAND PROBABILITIES AND ARE BAD AT BASIC MATH.
🧮- Trading is a game of math. Mostly basic math. Every decision we make in the markets has to be considered in a larger set of decisions. Lets take some basic numbers. You have figured out your win-rate hovers around 50%. But you have conquered some of the basic math of trading, and know that you make 3 times more when you win, then you lose when you lose.
So what is your chance of losing the next trade? 50%?. The math doesn't seem so hard does it? But now lets apply that number to a larger set of trades.
Let's say you are pretty active trader. You take on average 2 trades a day. That is 730 trades a year.
What are the odds of losing 5 trades in a row that year? 100%. That means if you risk 10% of your account per trade, there is a 100% chance you will lose half your account that year.
The odds odds of losing 7 trades that year? 95%. That means you have a 95% chance of losing 70% of your account that year.
Do you understand now why "risk management" is such an important component of trading. It's in the math. When you understand probabilities you realize that we don't use it to protect us against the unlikely event of losing streaks. We use it to protect ourselves against the CERTAINTY of them.
3. YOU DON'T UNDERSTAND THAT DEVELOPING EMOTIONAL AND PSYCOLOGICAL DISCIPLINE IS JUST AS IMPORTANT AS EVERYTHING ELSE.
As important as math, and systematic decision making is in trading. Your ability to control your emotions and how they are influencing your decisions (either subconsciously, or consciously) is arguably more important then anything else. It doesn't matter how much you understand about technical analysis, risk management, asymmetric risk reward, etc, if the guiding force behind your decisions are emotional impulses. Exposure to the markets will elicit extremely strong emotions in most people. When heightened, these emotions could be described as euphoria and terror. Euphoria inhibits your ability to perceive risk. You could be in a state of euphoria without even knowing it, only to for everything to come crashing down, and when you reflect on the decisions you made in that state, you can't even explain what drove you to make any of them. On the other side, terror. Terror leaves you unable to act, unable to perceive opportunity.
Mark Douglas describes these ideas very elegantly. He believe that a trader most operate in a care-free state at all times. He believes understanding the probabilistic nature of the market is the key to operating in this state. It's my belief that you must remove all pretense of expectation from a trade before you take, while your in, until you close it.
When I take a trade, I try to achieve a balanced state of expectation. I don't know if it will win, or lose. I simply okay with either outcome.
I think any trader would benefit greatly from overcoming these 3 issues.
- Having reasonable goals
- Understanding the probabilistic nature of the market
- Using that knowledge to center yourself, and control emotional impulses
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