Monday, August 17, 2009

The Truth About Trading - Part II

Part II
How Amateurs Approach the Market.
edited by Carl Futia
(original source unknown)

This post is for people who are struggling with their trading, not being profitable and finding themselves working extremely hard to no effect.

I found very interesting a recent post 'Who uses stop losses?' and the various replies about how stops are necessary, professional, business-like, etc. That post and the ensuing comments confirmed what I already knew: the retail trading crowd thinks and acts like a flock of sheep.

Books and information about trading all say the same things. They emphasize money management, tell you that it is stupid to average down, tell you to use stop losses, risk 1% of your account, and other common propaganda.

The interesting thing is that people who talk about the value of stops, money management, etc. appear to have gotten their ideas from a book. This include the authors of those same books! It is a never ending process, a constant recycling of bad ideas. I think that those who write trading books that explain how to trade aren't particularly good traders themselves. Why?

I think you must embrace uncertainty to succeed as a trader. Those who write books, teach seminars and so forth are just trying to find a way to make money with certainty because they can't trust their own trading to do it or because they cannot live with the ambiguity and uncertainty of constant involvement with the market.

These ideologies that trading books offer are accepted as trading wisdom in the community of amateur traders. I was fed all this when I was learning to trade.

But I got lucky. A very successful trader told me early on in my career that 95% of traders fail. Therefore, to succeed he said that you have to do the opposite of what they do, you have to think outside of the box. I've always tried to think in a unique and different way from other traders and I believe this is in large part responsible for my success.

All across the internet and in all books about trading you will find the following assertions:

  • High probability setups + Discipline = Success
  • Always use stop loss orders. Have a specific risk-reward ratio in mind. Know exactly what you will risk in every trade
  • It is stupid to have a risk-reward ratio of less than 1:1
  • It is stupid to aim for very high win percentages
  • The entry price is the most important detail.
Almost all amateur traders buy into this ideology. Why? These rules produce the illusion of certainty in the market place. You know your risk and that's it. There is no chance of becoming emotional because you failed to use a stop and therefore busted out you brokerage account. You don't have to worry about having to explain to your husband, wife, or friends that you are not as big an idiot as you seem to be, that trading is still something worth doing.

But in the market certainty doesn't exist. Any rule that produces the illusion of certainty just makes it easier to fail as a trader.

Admittedly I went through a phase of having a set risk-reward ratio (1:2) and risking 1% of my account, thus calculating my position size must be (x). My stop loss was frequently hit. I was going nowhere fast.

I printed off all the trades I ever did and analyzed them in detail, trying to find what went wrong. I came to some conclusions.

1. I'm buying high, I'm buying on a higher close, buying in a late signaled uptrend rather than buying on falling price.

2. Price is volatile. My stop is getting hit. I can't forecast price fluctuations with enough precision to be able to place a 5 pip stop loss.

I concluded that using a stop loss represented my effort to predict the market's short run fluctuations, to treat the market as if its movements were certain. But I couldn't do it.
I tried to move away from this idea and explore how I could trade without a stop loss.

During this learning process the fact 95% lose was a uppermost in my mind. Whatever traders who were losers wrote I would turn on its head and try to do the opposite. This was my way of thinking outside the box. And I believe that you shouldn't follow the flock.

I began to see trading as an art instead of as pure calculation. It is less about certain maths and more about movement.

It's about watching the market dance, letting it move up and down without placing too much significance on any particular jiggle.

I decided that I just wanted to take a piece of these constant fluctuations and not try to predict them.

I concluded that trading is not about having a certain risk-reward, not about applying the same risk to every opportunity, not about exiting at a pre-determined level. It is about making adjustments as the market produces new information, as it moves move around on your mental map of its behavior.

It's extremely hard to make money from the common wisdom you find in trading books. But if you look past such "wisdom" you can see trading doesn't have to be so complicated and time-consuming.  

Volatility can produce profits for you without you having to be a prophet! All the prop firm traders I know who are successful understand and base their methods on this insight. All the successes I have had in trading arise from this observation.

Professional traders win by applying their own judgment and experience to judge the market's position on their personal market maps and then letting the market's natural volatility work for them. They don't waste their time back testing strategies.

So how can you change your current quest to trade for a living?

1. Read my previous post about how to learn to trade, I seriously think if traders learn to read the markets, they will be successful. Read the market, take in the new information is gives you each hour and each day.

2. Try to escape from common wisdom and general public beliefs. Start thinking outside the box, Start looking into volatility, high win percents and try get past your human fears and uneasiness with ambiguity. Don't use hard stops.

3. Average down and pyramid with risk management.

4. Enter when price is falling.... In an uptrend.

I strongly believe averaging down if done as a planned strategy and not as an effort to deal with a loss is an easy way to profit... That is from personal experience and it is expressed in my account balance.

Thanks for reading.

Glad to help.


Ken said...

Thanks for bringing this article out front. Embrace ambiguity and think independently inside your own box is my take away message.

Johan Nilsson said...

For how long has this guy been profitable? Very few gurus have beaten a buy'n hold strategy with reinvested dividends for a 25-year period.

If you have learned to read the market in 4 months you have only seen a fraction of the market that you say you master.

Adsense said...

hey carl
was a good post overall , there though 2 types of stops one being price and the other being time .
also one needs to read the market in both the short term as well as the long term . depending on the time frame we trade from we can be wrong and profitable as well as right and take losses . in the end
disaplin is the key which implies
we all have to manage our money or the market will manage it for us .
hope and hype will not bail us out
i still favor lower prices over the coming weeks if not months
weather this becomes a sideways choppy market or a defined downtrend . im not blind though and the market if it proves me wrong i will adopt to what ever
comes. at the moment im expecting
a move back towards 800-816 spx
which is right in the area of the iisland bottom in early april .

Me vs. Wall St said...


I've always felt the discounting effect strips efficacy from any technical indicator or mechanical setup just as it does with news. The better approach is to identify overall current market themes and devise a strategy to trade within them.

These psychology related posts, though few and far between, are greatly appreciated when shared.

Thank you.

dcatlowpj said...

Carl, I can see why you agree with this: in the past week, we have seen you enter long when the market is short-trending downward, averaged in and broke even, and in a couple of cases came out ahead. I absolutely disagree: IDENTIFY the overall trend quickly, and trade on pull-backs...way better results. Read Al Brooks.

Carl Futia said...


Could you tell me where Al Brooks publishes his trades?

MC said...

I have to admit I took the time to read Gladiator X (?) post and it didn't turn to be a waste of time for the simple reason that I reaffirmed to myself that there is nothing completely wrong nor right in the market place as in life and nature. It all depends from which perspective you are looking at things. If your approach works for you, fine but you seem to scramble from one argument to the other with little consistency from prop trading professionals to volatility, backtesting, trading simulators and so on. The only advice that I can give to any trader is to look with a critical eye at anything that is thrown at you for free ! Cheers. MC.

TradingNuggets said...


Interesting articles by Gladiator X

but not exactly how he defines "Read the Market". I mean that fairly vague.

Read the market on a short time frame or longer time frame?

Learn candles stick, support and resist. Pivots Pts. IE Technical indicators to "read the Market"?

or is talking about something totally diffrent?

Wish Gladiator would expand this thought of "learn to Rad the Market"


extrader said...


Very nice for you to share this with us. You asked Dcat where Al Brooks publishes his trades? Where does Gladiator X publish his trades and would like to see his trades that made his account go from 5K to 300K in one year... Also, he doesnt really tell you his strategy, other than read the markets!


MrBigHit said...

I've just recently started trading, and you've summed up my stop loss issues predominantly and my predicaments with cliche'd advice from the textbooks.

These insights are really helpful thanks.

Surly said...

Part 1 is good advice, part 2 is a bit of a cop-out. Google "Rob Hoffman blowup" if you want a good example of where averaging down can take you. I say part 2 is a cop-out because I think its a cop-out to just average down infinitely until the market bounces enough to get you out BE or with a small (relative to your ACTUAL risk) profit. The fact is, if you're having to average your entry by pyramiding against the market, you've already made a mistake and you're too prideful to admit it. This type of strategy can lead to 5 years as a profitable trader followed by a series of blow-ups so spectacular that you lose it all.

Not to say that you should never add when a trade has moved against you - this can be valid. But the type of pyramiding and "taking advantage of volatility" the author is talking about is something different than adding at a better price.