Tuesday, 9 March 2010

The Number 1 Reason Why Traders Lose + Hang Seng

I was on board flying to Oz when I was writing this post. I flew London to Hong Kong and connected to a flight to Sydney. I can highly recommend Cathay Pacific if anyone ever decides to do this marathon flight, about 24 hours airport to airport.

I got to chatting with the guy sitting next next to me and the talk reached the fact that I was a trader. He was an older guy than I was, very intelligent and well informed. He asked me a question: "why do most people lose money trading?"

We went through all the usual answers including emotional, psychological and other similar things. None of the reasons we concluded were due to people not being able to learn the mechanics of trading nor was it because they couldn't find setups.

After a few hours of this we concluded that the reason boiled down to three reasons:

1. Losing the money on a stopped out trade mattered to the trader
2. The trader did not have a detailed trading plan that took care of whatever happened during the trading day,and 
3. If the trader did have a proper trading plan, he did not follow it because of the fear of loss in point 1.

I mentioned this right at the beginning of this blog when I suggested that traders start out trading the very minimum size until they achieved CP (consistent profitability).

So, the reason that traders lose money boils down to the old negotiating saying:"He who cares most, loses."

This is what a trader has to beat to be CP. Kiki did it by developing her "muscle memory" on SIM so everything became a reaction to the obvious - setup by setup. Kiki went live on a setup as  soon as she was CP on that setup. This provided positive reinforcement of bringing in earnings as she got the next setup ready.

I know I have posted on this subject before but it seems to me that this is what makes the difference between achieving CP or not.

So how do you cope if you are down to your last $25,000 or less, and need to feed your family from your trading?

Firstly, you have back-tested your trading plan up the kazoo so you REALLY BELIEVE!!!!

Secondly, you SIM trade until you don't have to think to put on a trade. You see and you do. The seeing involves processing all the information at the close of each bar and coming to a conclusion without any hesitation. If you need to think and consider then you have not done enough SIM.

Thirdly, you have the stats of your methodology from SIM so know what to expect in live trading.

Now make sure you really BELIEVE and trade what you see, as focused and unemotionally as you did in SIM.

Today's trades in the Hang Seng Futures, "the road runner". This market is all "beep beep" and "zoom". So I trade it all in and all out. Today's trading was quite subdued compared to what I saw before. This market has become very interesting as it is impacted by both the U.S. and China and I haven't worked out how. But trading it by order flow means I don't really have to understand it, just trade it. There is one complicating factor with this market - it stops for lunch and then restarts again. Taking a position over lunch carries extra risk. By the way, as I haven't traded this market for a long time, I traded just a one lot today. I'll increase my size tomorrow to something more meaningful and if I don't make too many mistakes I'll post P&L after that.

Click to enlarge


  1. Trade 3 was against you for more then a few hours, is there a reason why you didn't scratch the trade, when entering a trade do you have an expectation for how long it should take to develop?

  2. El,

    Another gem from you. It seemed like you were writing about me! My number one problem is your conclusion 1. After a failed trade I can not proceed further. And after a winning trade, I hesitate to take the next trade for fear of losing gains from the prior trade. I am/was not a big fan of sim trading as I heard it does not really help in real trading. But I hear you repeat the importance of sim trading and muscle memory, so I will give it a good try this time. Thanks.

  3. EL, appreciate all you doing....

    I need help from Tradestation users or from anyone who knows.

    I imported and trying to use VB in Tradestation and it does not want to work with range bars. It gives me straight line at 1.

    Please help...


  4. Hi
    I think in few your setups basic is find trapped traders that close your positions and make momentum in opposite direction and give minimum first profit, of course in harmony with CCI ,ema and SR levels.

  5. No more MOM dots? (Drummond Geometry) I couldn't see the usefulness of them anyway as you were using range bars.

  6. And all along I thought traders fail because they don't have an edge. Is it really that easy to find an edge or are we kidding ourselves here?

  7. I could not understand what made you think to take the 3rd trade so early. I know I am looking at hindsight. In my opinion it would have been a risk free trade if you could have waited till the 6:33 candle to confirm the downward move.

    Are you still using WCCI 45, 6 setting for Hang Seng ? Is it traded on CME ?

  8. Anon 13:52, Unless I lose focus I only exit if the original readson for entering a trade is gone.
    Cory, I had technical problem with MomDots in Hang Seng and don't havr time yet to fix it. MomDots are very useful.
    Anon 21:38, setups are a dime a dozen. Hi Win Rate setups are rare but findable by many traders. But 90% still lose so it can't be just setups.
    Parag, I'm not fussed by losing trades as they happen and I'd rather be in and not miss the trade. 45/6 CCIs are written in stone. Hang Seng is traded on Hong Kong Futures Exchange

  9. Driven,

    I answered your question in the comments on Friday March 5. See the last comment.

    Mike L

  10. Tom - Thanks for these comments. Success in trading comes from "caring less"? Counter-intuitive, it seems.