Wednesday, December 02, 2009

Why Traders Keep Losing Money

"Imagine a mutual fund run by several money managers. Some of these managers are relatively astute and quite attentive to market data and patterns. Others tend to take their eye off the market ball and consistently lose money. The overall performance of the fund, averaging the returns of these managers, is mediocre, as the losses of the poorly performing managers cancel out the gains of the astute ones.

What would you do if you were the chief executive officer (CEO) of this fund?

Easy, you say. You would identify the successful managers and place all the money in their hands. You would either fire the unsuccessful ones or ensure that they couldn't make final decisions about the investment of funds.

Now imagine that, within yourself, there are actually several different traders, each of whom takes control of your account for a period of time each day. One or two of these traders are relatively astute; others are downright destructive. Your overall performance suffers as a result. As Chief Executive Observer of your own account, what should you do?

...If you harbor multiple traders within you--some careful, some impulsive, some successful, some losing--your first task is to avoid labeling these traders and instead take an Observing stance. You need to figure out why these lousy traders within you are trading! They evidently are not trading simply for the monetary reward; if that were the case, they would never overrule the successful traders within you. The chances are good that they are trading to achieve something other than a good return on equity: a sense of excitement, a feeling of self-esteem, or an imposed self-image.

You do not fail at trading because you are masochistic or because you love failure or feel you deserve defeat. Rather, you sabotage your trading because you have different facets to your personality, each with its own needs, each clamoring for access to the trading account. Your trading suffers because you are not always trading with the equity stake firmly in mind. In a strange way, a losing trade can be a success to that part of you that is, for example, looking for excitement--not profits--from the markets."

The Psychology of Trading, pp. 80-81.



simon gillis said...

I think it was Ed Seykota in the original "Market Wizards" book who astutely observed that "everyone gets what they want from the markets".In other words, the truly ambitious become rich, the adenaline junkies get excitement ,the lazy get amused etc.

JF Trader said...

Thanks Doc. Your blog is a daily part of my life.

eric said...

Amazing stuff. As a short term intra day trader, the unprofitable trader within me has hurt me all year long and even made me negative. Thank you for this article.

Brody Bond said...

I came across your blog by sheer luck tonight as I was doing research on proprietary firms offering me positions when I graduate at the end of next week. I want to personally thank you for your past posts which have helped me filter out the scams from the legit firms. Your blog is going to become a daily aspect to my life. With dearest thanks!