Thursday, March 30, 2006

A Dozen Reflections on Life and Markets

A Dozen Reflections on Life and Markets

Brett N. Steenbarger, Ph.D.
Note: When I returned from vacation, I found that this article, written about two years ago, had been downloaded over 60,000 times in three days. Such are the viral ways of the Web. A followup reflections article will appear on the Trading Markets site tomorrow.


I've never seen a trader succeed whose explicit or implicit goal was to not lose. The trader who trades to not lose is like the person who lives to avoid death: both become spiritual hypochondriacs.

No union was ever destroyed by a failure of romance. It is the loss of respect, not love, which ends a relationship.

Love, once present, never dies. It must be killed.

Sometimes we select markets--and trading styles--much as we choose romantic partners: by their ability to validate our deepest-held images of ourselves. Our choices generally succeed, for better or for worse.

Many a trader fears boredom more than loss, thereby experiencing the two in sequence.

Goodness of character is measured in loyalty to others; greatness of character is measured in loyalty to principle.

A measure of the soul: the degree to which the surpassing achievements of others evoke inspiration rather than envy.

If you listen to the words, you'll understand the brains of the speaker. If you listen to the tone, you'll understand his heart.

Show me what a man loathes, and I will show you what he cannot accept in himself.

Two traders: one increases size after a loss; the other gets smaller. Both continue to lose.

One encounters losing traders as often as one encounters losing golfers--and for much the same reason.

The absence of self-acceptance too often masquerades as the desire for self-improvement.


procol said...

"I've never seen a trader succeed whose explicit or implicit goal was to not lose. The trader who trades to not lose is like the person who lives to avoid death: both become spiritual hypochondriacs."

That may well be true, But then , who would be left to be the pallbearers , if everyone was so bold.

In any case , trading not to lose is , at best , more effort than it's worth.

Brett Steenbarger, Ph.D. said...


I don't think the alternatives are trading to not lose vs. imprudent boldness. Rather, the alternative is to trade or not to trade. One should trade when there is a demonstrable edge in one's favor: then it's trading to win. If one lacks that edge and (rightly) fears losing, the rational choice is to refrain from trading. The pallbearers enter the picture when there's a need to trade that exceeds the limits of one's demonstrable edge. Such "boldness" also manifests itself in improper sizing of trades and poor trade management. It has nothing to do with trading to win--and everything to do with the need for stimulation.

Trading to not lose is certainly more effort than it's worth and also expensive. Unlike the "bold" trader, the fearful trader exits positions prematurely, fails to enter trades with good edges, and undersizes positions.

Most trading problems boil down to deficient self-control and resulting impulsivity. The impulse for excitement and the impulse to avoid harm are flip sides of the same coin--and not infrequently alternate within the same trader. Both take the trader away from the prudent trading to win.

Thanks for your observations!


thenoz said...

Concerning traders whose goal is not to lose, it reminds me of another saying.

"It is not necessary to change. Survival is not mandatory." - W. Edwards Deming

I am the weekly bull

Brett Steenbarger, Ph.D. said...

Thanks for your note and your interesting blog. Deming also said, “Learning is not compulsory... neither is survival.” It's reminiscent of something Ayn Rand used to talk about: how humans are the only beings whose means of survival--reason--is not automatic. A creature who spent all its time evading capture would never obtain its own food. A person who avoids the pain of loss also misses out on opportunity. There is a world of difference between avoiding a negative and achieving a positive.


procol said...

Thanks for your response. I certainly do agree with your observations.

I've always had a problem, not with self control, but with demanding an edge so enormous that the opportunities are few and far between.

The hard part is accepting smaller 'edges' and with that, more losing trades, but much greater net profit.

Having to do that in real time is a bit like taking castor oil. You know it's good for you but you still wince.

Brett Steenbarger, Ph.D. said...


That's a great observation. Perfectionism is a real obstacle to performance in a field where uncertainty is always present. My way of getting around that problem, FWIW, is by position sizing each trade reasonably enough that no one can hurt me too badly. Think of your trade ideas as a portfolio of positions and allocating modest sums to each item in your portfolio. Too often traders approach single positions in an all-or-none way. As you can see with the historical analyses, each analysis (edge) can be viewed as a separate position in the personal portfolio, diversifying risk--esp. when those positions are uncorrelated.


Damien said...

Perfect pithy reflections.



Tahoe said...

Great post Dr. Brett. My trading mentor said to me early on in my journey - "A house full of gratitude has no place for fear to hide". Losing, and trading to not lose has a negative connotation. And in trading there are only events that come and go. The trader needs to recognize that the "loss" is at most another lesson, but merely another event that came and went.

bruce said...

I agree that it is wrong to trade "not to lose".

How do we explain the huge amount of ultrasuccessfull people who claim that they were succesfull because of a "fear of failure"?

It's one of the great questions in my mind.