The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.
It's much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies.
Amateurs go broke taking large losses, professionals go broke taking small profits.
I haven't seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren't. Many outstanding intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.
I take the point of view that missing an important trade is a much more serious error than making a bad trade.
Don't think about what the market's going to do; you have absolutely no control over that. Think about what you're going to do if it gets there.
People want to buy cheap and sell dear; this by itself makes them countertrend. But the notion of cheapness or dearness must be anchored to something. People tend to view the prices they’re used to as normal and prices removed from these levels as aberrant. This perpective leads people to trade counter to an emerging trend on the assumption that prices will eventually return to “normal”. Therein lies the path to disaster.
In many ways, large profits are even more insidious than large losses in terms of emotional destabilization. I think it's important not to be emotionally attached to large profits. I've certainly made some of my worst trades after long periods of winning. When you're on a big winning streak, there's a temptation to think that you're doing something special, which will allow you to continue to propel yourself upward. You start to think that you can afford to make shoddy decisions. You can imagine what happens next. As a general rule, losses make you strong and profits make you weak.
The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. They are also able to feel the pain of losing. If you don't feel the pain of a loss, then you're in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will burn off. There is no way to survive in the world without pain. Similarly, in the markets, if the losses don't hurt, your financial survival is tenuous.
Don't think about what the market's going to do; you have absolutely no control over that. Think about what you're going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there's nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.
I know of a few multimillionaires who started trading with inherited wealth. In each case, they lost it all because they didn't feel the pain when they were losing. In those formative first few years of trading, they felt they could afford to lose. You're much better off going into the market on a shoestring, feeling that you can't afford to lose. I'd rather bet on somebody starting out with a few thousand dollars than on somebody who came in with millions.
Investing is a negative game emotionally. If you're playing for the emotional satisfaction, you're bound to lose, because what feels good is often the wrong thing to do. When all the criteria are in balance, do the thing you least want to do.
Good systems tend to violate normal human tendencies.
If the losses don't hurt, your financial survival is tenuous.
The market likes to lull you into the false security of high success rate techniques, which often lose disastrously in the long run. The general idea is that what works most of the time is nearly the opposite of what works in the long run.
If a betting game among a certain number of participants I played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you'll gravitate toward the majority and inevitably lose.
One common adage...that is completely wrongheaded is: You can't go broke taking profits. That's precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits.
What feels good is often the wrong thing to do.
You can be very promiscuous in your research, but not in your trading.
Large profits are even more insidious than large losses in terms of emotional destabilization. I think it's important not to be emotionally attached to large profits. I've certainly made some of my worst investments after long periods of winning.
