Losers Average Losers, Averaging Down, and Grinding it Out

Discussion in 'The 'On Professionalism' Thread Series' started by jack, Aug 25, 2013.

  1. jack

    jack Administrator Staff Member

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    This is the eighth installment of the On Professionalism thread series.

    The previous installment thread can be found here:
    Support and Guidance for Tribal Minds - Part 2

    The index and first installment can be found here:
    On Professionalism



    Losers average losers:

    Repeat that to yourself. Losers average losers!

    This is Paul Tudor Jones, he's one of my idols, he keeps a sign above his desk to remind him about averaging losers:

    [​IMG]

    There is only one scenario where you should average into a position, and that's when your total risk is well below what your max acceptable risk AND you've planned it out beforehand that you will be averaging in... other than that, just take the loss and move on. You need to build a good habit of taking losses (notice I keep harping on this? IT'S CRITICAL!)

    Averaging in is the opposite of taking a loss, it just allows the market to hurt you more, and after adding more size every tick against you is more painful.

    Worse yet, if price turns around and goes your way after averaging in, sure you'll have avoided the loss, but the bad habit of averaging will be strengthened (you must break it.) Plus, for every 5 times averaging a loser saves your trade, it just takes once for it to fail to knock your account down considerably.

    Averaging in to avoid losses has been tossed around by the investment community as "dollar cost averaging" for quite some time now... but you are NOT an investor, you are a trader, leave the dollar cost averaging for an index investor who will systematically put the same amount of money into tracking the index every month for the next 30 years until they retire. Averaging a loser is not, and will never be, a tool in your toolbox as a professional trader.

    If you find it hard to stop averaging in the heat of the moment (knowing what to do and doing it are two different things after all, especially when you're stressed out in a bad trade,) go back to the meditation installment of this thread series and spend time thinking about what causes your loss aversion and why cutting a loss is so hard for you. What pain are you avoiding? What greater pain has it caused?


    Grind it out:

    As I mentioned before, what matters is your equity curve over many trades, not the results of an individual trade on its own.

    You're going to have to expose yourself to the markets quite a bit, even if it's only an hour a day, you must put the screen time while you learn. There's a theory behind becoming an expert in any given talent or subject: 10,000 hours spent practicing. Now, I don't think you need to put in 10k hours before you become consistent and profitable, but expect to devote enough time into developing yourself and your trading craft before you can expect to depend on your trading income.

    Or, in other words, don't expect to be an overnight success. Putting that kind of pressure on yourself won't help.

    Plus, we need to establish consistent talent over just riding out some luck streak. Anyone can have a great year trading, I know people who've returned 800+% on their accounts over the year (and some within a month,) but not all of them keep it 3-5 years out. We're focusing on trading with a professional mindset, not trying to be a one hit wonder, this is your trading "career" after all...and like any career it takes time to build up and become an example in your field.

    It's like in music, you want to be the band that makes 10+ platinum albums and lives off the royalties of their hard work, not the fluke overproduced band that has one hit and fades quickly into memory.

    So, if you ever find yourself in a trade where a failure means tomorrow you wake up and start looking for another job, then just get out of the position, no matter how painful it is, and be thankful that tomorrow you're still a trader.

    There is a plaque on the wall above a door at the CME that reads: "If you wannsta be here for the good times, ya gottsa be here all the time."

    [​IMG]

    Think about that. (Image credits to my man Ben from TradersAudio, he's in the reflection.)



    The next installment in the On Professionalism thread series can be found here:

    Decision Tree Trade Management
     

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