I keep drifting off course. I have a plan (I think), yet I keep losing money, barely staying afloat, and I can’t figure out what guideposts to focus my efforts on as I steer my path. If these struggles resonate with you or have been a source of hardship along your trading journey, then hopefully, the following essay can offer some guidance as to how to go about crafting a successful strategy while approaching the art of trading more holistically from first principles.
Let us begin by imagining the development of a trading process similar to that of constructing a ship, one that we will then use to navigate potentially treacherous waters in search of islands of trading bounty. Suppose upon inception we fail to build our vessel according to sound mathematical—engineering—principles. In that case, it is liable to sink offshore regardless of the weather conditions we encounter or the path we have chosen. Additionally, we are unlikely to make a prosperous voyage(s) if we keep sabotaging our ship by punching holes into its hull, failing to repair the leaks that spring up, or by turning a blind eye to a needed adjustment of our sails as we struggle through rocky seas.
We can begin by imagining the development of a trading process similar to that of constructing a ship, one that we will then use to navigate potentially treacherous waters in search of islands of trading bounty.
Therefore, in my attempt to elucidate a viable construction method, I will focus on six core planks that reside under the rubric of two overarching categories: quantitative (mathematical) factors and qualitative (psychological) factors. These planks are intimately related to one another, interlaced as we might say, often influencing and supporting each other interchangeably. The qualitative planks, in particular, act to reinforce the scaffolding that is constructed out of the quantitative planks. Alternatively stated, the qualitative elements furnish a guiding force to the ship—the captain and the crew responsible for steering the actual course to safety (and the hoped-for riches).
So without further ado, let us summarize the central planks of construction here…
The quantitative or mathematical planks:
R-factor (reward-to-risk ratio or payout structure)
Win rate (or the frequency of loss)
Edge (the positive expectancy of a process over time)
The qualitative or psychological planks:
Information processing, risk tolerance & timeframe synchronicity
The CARD Principle: Conscientiousness, Awareness, Receptiveness & Discipline
Successful trading is not necessarily limited to these planks alone. But they do, in my opinion, encompass the primary levers of control available to a trader attempting to construct a process and chart a course towards success. They are the elements that we have the most significant ability to select, influence, and change—one cannot dictate the market weather after all—and that will make the most material impact upon our understanding of execution and our ability to drive the collective outcome of the trading process over time.
So if you are perpetually losing money or struggling to turn a profit, foundering on open seas or along the banks of nearby shores, it is very likely that there has been damage done to at least one of the foundational planks.
Admittedly, the quantitative factors are more objective and easier to track and control as sources of change than the qualitative or psychological ones. The latter, unfortunately, possess a tendency to only gradually leak into a trading process, often through the accumulation of habits; similar to minor cracks in a ship’s hull that might allow only insignificant amounts of water to seep in at first, but ultimately, if not repaired, become the source of the vessel’s demise.
So if you are perpetually losing money or struggling to turn a profit, foundering on open seas or along the banks of nearby shores, it is very likely that there has been damage done to at least one of the foundational planks (and most likely more than one). Or maybe your crew is suffering a bout of scurvy—doing crazy things—and in need of urgent treatment at the source. Regardless of the issues that you might struggle with, it will serve us well to delve a bit more deeply into each of the constituent planks, thereby allowing us to grasp better how they contribute to our attempt to build a formidable ship and fashion a hardened crew to navigate the trading seas.
The Quantitative Planks
R-factor (payout structure)
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
George Soros, Legendary Hedge Fund Manager
I think this plank is the most crucial quantitative factor that one can elect to control and use to nurture the development of a strategic vehicle. It is the bedrock foundation of the all-important market precept—the golden rule of trading—to “cut your losses quickly and let your winners run”. Strictly speaking, your R-factor (or payout structure) is the ratio of your reward-to-risk; alternatively stated, it’s the multiple you receive on your winners relative to the amount you part with when you lose on a trade (or a series of trades). If you are in the habit of risking $100 on every trade taken, reaping a profit of $300 on those same trades when correct, then you are operating with an R-factor of 3 (or 3:1 reward-to-risk ratio).
Adhering to a skewed payout structure is the bedrock foundation of the all important market precept to “cut your losses quickly and let your winners run”.
At the crux of the importance of the R-factor plank is that in any probabilistic endeavor, like trading, there is an element of randomness—variance or luck, both bad and good—that prevents one from having predictability around individual occurrences (i.e., each trade). That unpredictability means that it is inevitable that the trader will be wrong and at times suffer strings of consecutive losses. Consequently, a reasonable trader cannot expect to always be profitable on a trade even if the general assumption(s) prove sound. The setup could be perfect, the execution flawless, and yet the trade occurrence could fail to turn a profit simply because the largest asset manager in the world decided on a whim that they would start selling something that you just bought.
This randomness of outcome dispersion is further compounded by the imposition of a slate of costs—both fixed and variable—that skews an initial outcome towards a loss right at the entry point. Hence, it is exceedingly challenging to surmount such costs in any material fashion if your returns do not exceed your risk (over a series of occurrences) by at least 1R; and this becomes particularly so as one’s win rate declines below 50% (which is not uncommon in profitable trading strategies across a gamut of timeframes). Being gross profitable is rarely sufficient when operating costs (data/platform fixed costs etc.) and commissions/execution costs (typically a variable cost structure) can quickly turn such activity into net losses.
A trader can be break-even or even mildly profitable with little-to-no technical strategy given that they control their bankroll effectively.
However, if a trader utilizes a sufficiently skewed positive payout ratio — say an R-factor >3 — and then rigorously adheres to it, even random trading can almost guarantee at least a break-even result over the long run. Now to be clear, I am not saying that the trader will be wildly profitable; I am simply stating that over a large enough sample size, a random strategy with a fixed payout schematic of high enough multiple is unlikely to result in a consistently losing process. In other words, a trader can be break-even or even mildly profitable with little-to-no technical strategy given that they control their bankroll effectively [see Table 1 provided below]. A skewed payout structure, put differently, immediately confers an element of “edge” to a trader’s process [more on edge later].
The problem, however, is that few individuals in practice—at least from a discretionary viewpoint—can adhere to such random strategy skewed payout structures with the necessary rigor required over time. Being human and having an innate tendency towards loss aversion bias, we are frequently tempted to book our winners early if we begin to see potential profits eroding in a retracement, or hang onto our losers, hoping that they will eventually reverse. As such, I’m not advocating the continued implementation of a random strategy; I’m just using it to illustrate the importance of skewing your payout structure, ceteris paribus.
“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”
Jesse Livermore, Reminiscences of a Stock Operator by Edwin Lefèvre (1923)
And to be clear, it is R-factor over the entire process that we should be concerned with, NOT just on each trade. Some trades might capture a mere 0.5R, while others may reap a whopping +10R or more. In the end, it’s what the trader averages over a large series that matters—the process R-factor.
Almost all great traders and investors hold this concept of positively skewed payout structure dear to their hearts, and so should you!
So while there are many things in trading that one has little-to-no control over, like the outcome of individual occurrences or the volatility regime (pace of trade, etc.), you can choose to accept a minimum R-factor on every single trade you take (and by default, this will raise your system R-factor). This is entirely within the trader’s power of choice, and it has direct implications for the win rate that one will need to be successful. Almost all great traders and investors hold this concept of positively skewed payout structure dear to their hearts, and so should you!
Table 1: Expectancy at specific R-factor & Win rate (%) combinations—$100 at risk
Win rate (or the frequency of loss)
Win rate is the percentage of trades that you take that result in some positive gain, however small that might be. If you follow a trade management style of scaling-out of your positions, then your win rate is how often you take something positive out of your trades even if some of those scales lost money (the net result is what matters for our purposes).
One of the most common mistakes made by novice traders: a need for certainty that becomes coupled with loss aversion, which results in the curtailment of winners, thereby opening up space for any single loss to offset multiple recorded wins.
A glance at Table 1 above will reveal that having a high win rate (%) does NOT guarantee any kind of material profitability if each of those wins is small relative to the offsetting losses (take a look, for example, at the table around a 65-70% win rate with +0.5R). Conversely, having a low win rate does not rule out sufficient profitability if the average R-factor is high enough. This is one of the most common mistakes made by novice traders: a need for certainty that becomes coupled with loss aversion, which results in the curtailment of winners, thereby opening up space for any single loss (or select few losses) to offset multiple recorded wins. The trader ends up with backward math, as I like to say.
Thus we confront our first set of intersecting planks: win rate is intimately related to R-factor and is generally important not for the reason that most traders initially think that it is—namely the need to be correct. Instead, it is important for its mathematical and psychological implications; the former having to do with minimizing the risk of ruin; the latter with actually being able to execute and implement a particular chosen strategy over time consistently.
There’s often a strong inverse relationship between win rate and R-factor. Realistically speaking, it is challenging to adjust both levers in the same direction at the same time. Whenever you attempt to increase your R-factor, you are almost always opening yourself up to the greater risk of retracements and giving back some of those profits (or the entire win altogether), and hence high R-factor strategies are typically accompanied by lower win rates. Conversely, trying to increase your win rate usually means that you are sacrificing reach in your trades (i.e., booking winners early or quickly), and hence the trader following such a strategy—like scalping—is more liable to end up with lower R-factors.
“The long run is a misleading guide to current affairs. In the long run we are all dead.”
John Maynard Keynes, Economist (1883-1946)
As a general observation, lower win rates with higher R-factors tend to result in greater profitability for most traders. And from a conceptual angle, this makes sense because there is a known robust relationship between returns and risk in financial markets. There are also marginal cost implications that tend to drive down the profitability of higher-frequency trading. Additionally, the random nature of the market makes it difficult to capture extremely high win rates. However, with that being said, following a strategy with a win rate that is too low does increase the likelihood that the trader will eventually confront a string of losses that is simply too burdensome—both mathematically and psychologically—ultimately succumbing to the risk of ruin if one’s bankroll is too small. This is true even if the strategy would turn profitable in the long run. And not inconsequentially, the mental fortitude required to overcome strings of consecutive losses continually is a rare trait.
So ultimately, the trader is left trying to strike a delicate balance of accepting risk—which is what traders are paid for—and managing one’s own psychological state such as not to feel like a loser all the time.
So ultimately, the trader is left trying to strike a delicate balance of accepting risk—which is what traders are paid for—and managing one’s psychological state such as not to feel like a loser all the time. And each trader is different in this regard and needs to do a thorough assessment of their disposition. Admittedly this process takes some trial and error. Would you rather have the salve of booking wins more often—feeling right more frequently—yet pocketing less on each of those wins? Or would you rather conserve the peace of mind that you can lose many times over and yet still come out ahead because each of the wins you do record is worth a multitude of your losses? As a precept, you CANNOT choose the extremes of both, so spend some time trying to understand how you deal psychologically with losses and then attempt to adopt a strategy that accommodates those realities. And remember: all good trading is uncomfortable at times; it’s about finding a middle ground that works for you.
Edge (positive mathematical expectancy)
Since the concept of “edge” often means different things to different people, let us first define what we mean by the term. For our purposes, an edge is simply the concept of having a positive theoretical expectancy when executing a particular trade or group of trades over the long run. In other words, if you take the same trade or collective strategic actions over a sufficient sample size, you can expect, with a high probability, that your PnL is likely to come out positive. Additionally, there should be a sound theoretical reason for this, which bolsters confidence in a given strategy. But whether your edge comes from an exploited statistical anomaly, a psychological trait (like the temerity to buy when all others are fearful), a skewed payout, or some combination of such factors, the bottom line is that a trade process with edge shows positive profitability over time.
For our purposes, an edge is simply the concept of having a positive theoretical expectancy when executing a particular trade or group of trades over the long run.
Since trading is conducted within a probabilistic environment of dynamic uncertainty, no given instance or single occurrence can indicate anything about a given system’s profitability over the long run. And yet, over a large enough sample, an edge should reveal itself. This is why bet size matters: you need to survive long enough. Gambling houses are confident that they will come out ahead in their table games over time because they know that they possess a mathematical advantage—and gambling edges are usually much smaller, though less fleeting, than trading edges.
As traders, we should strive to put ourselves in a similar situation as the gambling houses. A trader should be capable of articulating why their trades, strategy, or style should make money over time, at least from a theoretical basis. If you cannot do this succinctly, then it’s very likely that you do NOT possess an edge. And remember, an edge can express itself as a combination of elements; it doesn’t need to be exclusively related to a backtest of some formulation. For example, it can result from a combination of a strategy with the psychological disposition to execute it consistently. In fact, utilizing a skewed payout structure in itself (as discussed above) can go a long way towards generating an edge for a trader.
Tools are not, by themselves, an edge.
Can a trader possess an edge just from a “technical” setup or statistical backtest of some market phenomena? If one overlays the appropriate reward-to-risk—there is no such thing as positive expectancy without regard to probabilities and returns relative to loss—and then executes that setup on every occurrence according to the initial quantitative test results, then yes. Ideally speaking, one should always have a quantitative basis to ground their expectations around their edge. However, the practical difficulty with relying only on market phenomena for edge is twofold: first, the trader has to execute on almost every occurrence; otherwise, the backtested (or forward-tested) results that are used as guidance become invalid; if your estimate of edge is based on a sample of 100 historical trades, then you can’t decide only to take 25 of the next 100 occurrences and expect to be profitable because you don’t know how those outcomes will distribute themselves—you could end up taking all 25 trades that result in losses! Furthermore, as in all things trading, past performance is not indicative of future results. There’s always the risk of curve-fitting your backtests or failing to consider execution-related issues of a particular strategy.
So we now have to ask ourselves what is not likely to be a source of edge? Using tools in isolation—like volume profiling or orderflow indicators—are very unlikely to be a source of edge. Neither is claiming a superior ability to “read the market” or follow the auction process. Elements such as these are not nearly specific enough, and countless other participants in the marketplace use such tools and try to do similar things. What makes one think they are unique in this regard or have some superior insight or ability vis-à-vis other traders—many with years more of experience and vastly greater resources? There’s simply no reason to expect that a trader using volume profiling, for example, should be profitable over time. Tools are not, by themselves, an edge.
Claiming a superior ability to “read the market” or follow the auction process is not itself an edge.
Psychology alone is also highly unlikely to provide an edge to a trader without a solid quantitative bedrock to stand on. One’s mental state is fickle, and self-assessments are notoriously biased. Just take the well-worn concept that "three-quarters of US drivers consider themselves better-than-average”—clearly, this cannot be so. The Dunning-Kruger effect documents this phenomenon for tasks that require some level of expertise, like trading.
It’s equally unlikely that if you engage in actions or try to do what the average participant in the market is doing that you will possess an edge. Emulating the average is just likely to result in average performance, at best. Similarly, competing in a game that is stacked against you or requires a superior cost advantage, infrastructure, or information channels—like market-making in the high-frequency trading era—is also unlikely to result in a sustainable edge for a trader that lacks access to such resources.
The combination of mathematical advantage, a theoretical rationale for a particular phenomenon occurring, along with the mental traits needed to carry out the trade over time, can be a powerful, multifaceted source of edge.
So what kind of approach might contain an edge for a non-institutional trader? One example of a process that might possess the seeds of an edge is something that includes a statistically validated technical market anomaly—say a double-bottom/top break statistic—that is then coupled with a skewed R-factor, all while maintaining the psychological temperament to take almost every occurrence that reveals itself. The combination of mathematical advantage (skewed payout structure along with statistical odds), a theoretical rationale for a particular phenomenon occurring (double-bottoms/tops are structurally weak and attract participating momentum for breaking them), along with the mental traits needed to carry out the trade management over time, can be a powerful, multifaceted source of edge.
“If you look around the table and you can’t tell who the sucker is, it’s you.”
Mark Van Doren, American writer, poet, and critic (1894-1972)
A trader should choose to participate in games that they believe—with high confidence—are ripe for achieving a sustainable mathematical advantage over time. And ideally, one should be able to articulate the source(s) of that advantage with utmost clarity. An inability to do so likely means that the trader is playing a losing game.
The Qualitative Planks
Information processing, risk tolerance, & timeframe synchronicity
Information processing styles. The way a trader prefers to absorb information, digest data, and then deliberate upon and arrive at conclusions or solutions is of vital importance to the style and timeframe that a trader adopts. These oft-overlooked—yet critical components to success—are tightly interlaced with the other qualitative planks, including consistency and the CARD principle.
This concept—aligning one’s mental disposition with trading timeframe realities—evades the attention of so many novice traders because it admittedly takes some experience with markets to grasp its importance fully. Analytical reasoning abilities and the enjoyment of constructing thoughtful thesis-driven models align more effectively with higher (or longer/slower) timeframe approaches than with split-second intraday approaches to the market. Information processing styles like these are also relevant to implementing strategic financial combinations—things like options or paired spread trading. Whereas intuitive modes of decision-making, short-term pattern recognition strengths, and the ability to rapidly let go of outcomes, couples more appropriately to shorter duration strategies, including intraday trading and scalping. Non-institutional traders specializing in shorter durations also tend to be more impatient and have lower risk tolerance (whether for psychological or capitalization reasons) than those trading in the higher timeframes.
Such resistance can become psychologically insurmountable for a trader, a Sisyphean task condemned to perpetual failure…
A trader with a history—think perhaps of educational or occupational concerns—of double-checking their work and remaining hellbent on perfection is more likely to have difficulty trading financial products or timeframes that necessitate quick, intuitive action in compressed time intervals under conditions of uncertainty. Such individuals are likely to struggle with pulling the trigger (i.e., hesitating to take the trade), harbor a greater tendency to second-guess the decisions they do make, and often feel somewhat incomplete or unsatisfied with their method. Conversely, a trader that thrives on action and prefers more linear intuitive modes of thinking will struggle to build a fundamentals-based case that incorporates underlying equity with an overlaid option hedging schematic that reveals its outcome only after an extended timeframe. One approach is not inherently better than another, just different, requiring a unique array of skills. The critical point is that there is a timeframe incompatibility or a lack of synchronicity with a preferred mode of action, thinking, and risk tolerance in the two instances above.
Such resistance can become psychologically insurmountable for a trader, a Sisyphean task condemned to perpetual failure. Hence, it is vital that one conduct an honest self-assessment of their capabilities and natural inclinations. It’s not that a trader cannot succeed within a given approach; simply that the path of least resistance towards developing a successful trading strategy is more likely to be aligned with those approaches that suit that trader’s temperament. And eliminating resistance is a much easier way to achieve success than fighting one’s natural inclinations (which is likely to be futile anyhow).
It’s not that a trader cannot succeed within a given approach; simply that the path of least resistance towards developing a successful trading strategy is more likely to be aligned with approaches that suit that trader’s temperament.
Therefore, a trader should take note of their past achievements, educational, occupational, or recreational experience to garner further insight into their traits and temperament. What kind of activities did you thrive at in the past? Do you enjoy putting together a robust, coherent thesis built upon an assortment of logical structures, or do you prefer making intuitive decisions—with the ever-present risk of being rash—and moving forward? In secondary school, were you one of the first students in your class to finish a test and then exit the room, or did you make sure that you stayed until the bell rang, cross-checking every answer, ensuring you were as thorough as possible? Are you a natural perfectionist, inclined to continually revise your work until it’s as good as you believe it can be (which it never is)? Are you methodical and deliberate—perhaps an accountant, doctor, engineer, or lawyer? Items like these might, at first glance, seem unrelated to trading, but they can reveal troves of information about our innate tendencies when it comes to absorbing and acting on given information. One goes against these predilections at their own peril.
Consistency is the basis of developing a feedback mechanism.
Perhaps one of the most underrated skills in all of trading is simply the ability to act consistently in all that one does. And not only in the actions that the trader takes—though that is of paramount importance—but also in the chart settings and layout that one uses, the tools one incorporates, and the market-moving items that the trader pays attention to. Maintaining consistency not only helps to foster greater levels of discipline while buttressing confidence, but it also allows for proper statistical record-keeping and journaling, both crucial keys to improving performance. In other words, consistency is the basis of developing a feedback mechanism. And since trading is a probabilistic endeavor, tracking and recording what is working and what’s not is essential. This includes keeping your trade management criteria—how you enter/exit on either side—relatively stable. Inconsistent actions lead to inconsistent results and vice versa.
“I always say you could publish rules in a newspaper and no one would follow them. The key is consistency and discipline.”
Richard Dennis, professional trader, “Prince of the Pit”, and Market Wizard
Admittedly the downside of being rigorously consistent is that it makes good trading boring. So while consistency is essential, we’re not advocating to be so rigid as to never incorporate new items, tools, or indicators into your process—simply to set the bar higher for doing so and to simplify what you are doing and looking at as part of your information diet. Our minds naturally tend to associate complexity with sophistication, but in trading, simplicity is often your friend, complexity the enemy.
Our minds have a natural tendency to associate complexity with sophistication, but in trading, simplicity is often your friend, complexity the enemy.
Finally, adhering to the concept of consistency also helps reduce or eliminate cognitive dissonance, which itself can heap uncertainty on top of an already unpredictable process. Staying consistent will offer the trader more opportunities to foster intuition and develop the muscle memory for pattern recognition in the markets.
The CARD Principle
“There is only hard work, late nights, early mornings, practice, rehearsal, repetition, study, sweat, blood, toil, frustration, and discipline. DISCIPLINE. THERE MUST BE DISCIPLINE.”
Jocko Willink, Navy Seal, Discipline Equals Freedom (2017)
The final plank, though of no less import than the prior five—and some might argue that it is the most critical plank—is primarily concerned with doing the work and learning from our mistakes. It is about having the discipline to follow through, challenge ourselves, and change in the face of hardship. As such, I have coined the acronym CARD—Conscientiousness, Awareness, Receptiveness, and Discipline—to encompass the key attributes of this qualitative plank. You want to play your cards right!
Conscientiousness. Crafting a strategy and planning for the trading session(s) ahead is not sufficient by itself for success—execution is also required—but it is undoubtedly a necessary task in almost any related endeavor. A trader has to develop a plan for executing and reacting to the contingencies that arise during their activities. Adequate preparation is essential for inspiring confidence. Trading emotionally is usually a recipe for disaster and loss of control.
Furthermore, conscientiousness in recording one’s statistical results and journaling their trials and tribulations is all part of building a thriving port of call from which to depart. Without good record-keeping, learning from our mistakes and adopting the needed change(s) becomes a futile task. Conscientiousness in preparation and review is part of being a true professional rather than an amateur.
“Excellence demands effort and planned, deliberate practice of increasing difficulty.”
K. Anders Ericsson, Swedish psychologist specializing in peak performance
Awareness. William James, a prominent American psychologist at the turn of the 20th Century, was one of the first to realize that a critical difference exists between our bodily response to an emotion [like fear] and our cognitive awareness of it—or our feelings.We typically experience the former within our bodies—a quickening heartbeat, sweaty palms, knots in our stomach—before we are consciously aware of the feelings elicited by such visceral responses. Hence, becoming better attuned to our bodily signals and understanding the consequences for our mental state is a critical skill to cultivate for composure in trading. We cannot initiate change in our behavior until we are aware that change itself is needed.
Here is where a meditation or mindfulness practice can help.Mindfulness can assist a trader in developing a greater level of awareness regarding their emotional state, and it can help with freeing up mental bandwidth to nip bad behavior in the bud or even to know when one is in the proper state of mind to be trading at all. However, keep in mind that meditation is not a panacea for all trading troubles; it’s not a magic skill that’s going to turn everything around for you. Plenty of great traders have succeeded over the years without any knowledge or regard for meditation, and vice versa. Awareness is crucial, but the discipline to change is another facet altogether.
“The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.”
Linda Raschke, professional trader and one of The New Market Wizards (2008)
And awareness pertains not only to your bodily state of mind but also to the market environment that you are attempting to navigate, particularly as it relates to your strategy or edge. Becoming aware of when a given environment is conducive to aggressive action on your part or for taking a backseat is critical to risk management.
Receptiveness. Incorporating and learning from one’s mistakes, being receptive to constructive feedback, and being open to change, are all essential contributors to growth in trading (and life). Receptiveness is one of the most challenging traits to nurture because nobody likes to be told that they are wrong or acted like an idiot. Trading, however, is not an occupation for the thin-skinned. Markets will humble you in due time. If you are unwilling to learn from your mistakes—to be conscientious in recording them—then your voyage is doomed before it has even left the docks. Cultivate mentors that you can learn from and that you trust to give you unvarnished opinions. Always assume that you can be wrong. Try to avoid modes of thinking prone to confirmation bias and seek out contrary evidence. Be receptive to change; it’s the road to growth.
“Invert. Always invert.”
Charlie Munger, famed investor and partner of Warren Buffett
Discipline. In the end, if you don’t have the discipline to develop and stick to a plan, alter the bad habits that you acquire, or execute your strategy, there is no amount of analysis or tools that will save you once adrift at sea. Trading is mainly about execution, and the failure to maintain the discipline to execute appropriately is the sign of an amateur. It is hard work to short-circuit or circumvent destructive mental patterns or halt self-sabotage, but necessary work. Discipline is the foundation of the CARD principle and the qualitative planks. One needs it to maintain conscientiousness, consistency, and receptiveness to change. Discipline is the way to freedom: freedom from the worry about individual outcomes—there is trust in the process; freedom from failure because the trader knows that they are giving it their all and willing to initiate change; and freedom from the toils of doing another occupation, one that is not trading, one without passion.
“Insanity is doing the same thing over and over again and expecting different results”.
Hopefully, this essay has helped flesh out some of the fundamental principles behind constructing and maintaining a successful trading vehicle. Your ship will not be impregnable, nor is it likely that you will sail continuously with the same crew. Troubles are bound to arise, repairs will be needed, and some crew members—if only the many competing interests of your own mind—will need to be replaced by others of more diligent habits. But always remember, as a trader you are embarking on a lifelong journey, not simply a trek to an idle destination. Be prepared for and welcome the many challenges that lie ahead. And never forget to pause briefly and revel in the majestic scenes of self-actualization that you achieve along your voyage.
“In a multiple-bet [trade] scenario, risk of ruin accumulates with the number of bets: each repeated play increases the risk, and persistent play ultimately yields the stochastic certainty of gambler's ruin.”
Americans are dangerously overconfident in their driving skills —but they're about to get a harsh reality check, Business Insider, January 25, 2018; https://bit.ly/39dGavf
“Unskilled and unaware of it: how difficulties in recognizing one's own incompetence lead to inflated self-assessments,” Journal of Personality and Social Psychology, Dec 1999; 77(6):1121-34. https://pubmed.ncbi.nlm.nih.gov/10626367/
I highly recommend reading Thinking, Fast and Slow (2011) by Daniel Kahneman, a Nobel Memorial Prize in Economic Sciences laureate (2002), to explore these concepts further.
The Disordered Mind (2018), by Eric Kandel, Nobel laureate in Physiology or Medicine (2000).
For those interested in learning more about mindfulness or how to begin developing a practice of mental awareness, I would suggest checking out either Headspace or Waking Up by Sam Harris. I have experience with both sites/apps and highly recommend each.
Love the way you string it all together. Really good stuff.
When are you coming back to CT?
Really Great Article ! Thank you Tendex