Taking It On the Chin and Learning
Traders who want to be successful must believe that they are responsible for the outcomes of their trades – both losers and winners, says Bob Prechter. They particularly have to learn how to deal with losses, since losses are part of the trading terrain. You've got to be able to take it on the chin and get up to trade again. Here is his advice for the next two secrets of becoming a successful trader, from his own book, Prechter's Perspective.
Bob Prechter's Six Secrets of a Successful Trader
1. Find a method. 2. Be disciplined. 3. Get experience. 4. Accept responsibility. 5. Accommodate losses. 6. Accept huge gains.
Now that we've learned why getting experience is important, what is Requirement No. 4 for becoming a successful trader?
Bob Prechter: Accept responsibility. There are many evasions of responsibility that automatically disqualify millions of people from joining the ranks of successful speculators. For instance, to moan that "pools," "manipulators," "insiders," "they," "the big boys," "program trading" or Fed chairmen are to blame for one's losses is a common fault.
People who utter such convictions are doomed before they start trading. They have philosophically conceded that the market is random or "fixed." If they believe that, then there is no case to be made for trying to make money at it.
Take every gain and loss as your due, and you will retain control of your ultimate success to the extent that the market will allow.
And Requirement No. 5?
Bob Prechter: Accept losses. You need the mental fortitude to accept the fact that losses are part of the game. My observation, after 30 years in the business, is that most people's biggest obstacle to successful speculation is a failure even to recognize and accept this simple fact.
Expecting, or hoping for, perfection is a guarantee of failure. Speculation is akin to developing a batting average in baseball. It will never be 1.000, but the higher it is, the better you are. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit successfully 60% of the time! He strikes out often. But he still earns a seven-figure salary, because, although not perfect, he has approached the best that can be achieved.
You don't have to be perfect to win in the markets, either; you "merely" have to be better than almost everybody else, and that's hard enough. The amazing thing is that people accept this idea with respect to baseball without a second thought, but they don't accept it in investing. When they lose, they immediately question their ability or the value of their method or advisor, even though they may have a great percentage of success overall.
Are there specific techniques you use for coping with losses?
Bob Prechter: The coping part should come before the loss. If you take a position large enough to inflict serious financial damage upon yourself, you are a loser going out of the gate. You should determine an appropriate amount of risk in advance. It is important to be honest with yourself. Most people cope with losses by lying to others and sometimes even to themselves. If you can't be honest, you're probably not handling losses well.
Is this where money management comes in – handling the losing trades?
Bob Prechter: Yes. Practically speaking, you must include an objective money management system when formulating your trading method in the first place. There are many ways to do it. Some methods use stops. I prefer using analysis to change opinion. Leverage is also crucial to manage. You need to decide how much of your funds to place at risk. Most people commit too much each time to futures or options and eventually get killed. After all is said and done, learning to take and handle losses will be your greatest triumph.
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