Thursday, November 08, 2007

When Good Traders Lose

Good traders lose money. They also go through slumps. I've seen it with people who have made millions for multiple years running. What makes them good traders is, in part, how they lose. Here are three qualities I've seen in good traders who go through rocky periods:

1) They're quick to identify when their ideas aren't working - They don't fight the market, and they don't become threatened or defensive. Rather, they quickly enter a mode where they look at what's working, what isn't, and what they can do about it. They accept that there will be periods when they see things well and periods when they don't.

2) They're quick to de-lever - They get smaller when they realize their trading isn't working. They avoid digging large holes for themselves, but they also don't stop trading. By trading smallest when they're having the most trouble and largest when they're seeing things clearly, they leverage their strengths.

3) They're patient in regaining their feel - They keep trading small until they have a good understanding and feel for what's going on. They don't press to catch up and make money; they ride out the storm and take minimum damage. Because they've been through this before, they know that their time will come--and that helps them sustain patience.

The traders who are most at risk are those that fight markets, trade larger or more often to recapture lost money, and can't stay out of the water when conditions are unfavorable. All traders lose money; it's how you trade when you're down that makes all the difference.


Ten Lessons I've Learned From Traders

Blueprint for an Uncompromised Life