n blue ink, and asked what colour that image was.
A lot of them called out “Red!”
I showed them yellow written in red ink. Some called out “Red!” but I heard
far more shouts of “Yellow!”
We repeated this process with a series of colour names written in ink of a
different colour. Over time, the audience responses became more
consistently accurate. Through a humorous exercise I established that our
eyes and minds do not necessarily work in a coordinated manner. Our brain,
seeing the word red, wants us to say “red” – even when the answer to the
question is “blue”. It is as if we consciously need to stop the brain from
jumping to conclusions.
This is an important trait in trading, because we often see things that are
literally not there.
Charts do not work as well in real time as after the fact. Unfortunately, you
have to believe and act.
If you struggle with that after a few failed trades, then that is your brain
trying to protect you against pain. You will begin to second guess your
signals, and you will sabotage your own best interests. I have been there. I
have done it. And I have the cure.
GOOD TRADING GOES AGAINST
HUMAN NATURE
When I make speeches about trading, in person or on YouTube, I often talk
about the concepts of value and price. What is something worth?
I think my old car is worth £10,000. The car dealer feels it is worth £8,000.
Who do you think is going to win that argument, if I am keen to sell?
What something is worth is an emotional, biased statement. Price, on the
other hand, is where buyers and sellers meet. It doesn’t make much sense to
say that something is worth more.
You can anticipate that something will be worth more or less in the future. I
mean, that is the essence of the mechanics of my job. Psychology aside, I
buy in the hope that whatever I buy will rise in price.
Heraclitus, the pre-Socratic Greek philosopher, said: “No man ever steps in
the same river twice, for it’s not the same river and he’s not the same man.”
That is important to bear in mind as a speculator, because the market
changes constantly.
Mankind has an ambivalent attitude to change. We want change, because
otherwise our lives become mundane and boring; but if the change is thrust
upon us, rather than driven by motivation and enthusiasm, then we tend to
resent it.
The first time I became aware of the importance of mindset in trading was
upon reading a book about the trading life of an anonymous trader called
Phantom of the Pit. It is a free book. You can find it with my own notes on
www.tradertom.com – in the resource section.
In the book the mystery trader argues that behaviour modification is the
single most important concept in trading. The ability to change one’s mind
without causing a mental disequilibrium is the single most important ability
for a trader.
Running a live Telegram trading channel means I am constantly asked
questions – the majority of them from inexperienced traders. One persistent
question I get asked is: “Why are you trading against the trend?”
When I get asked such a question, I smile, because it is both a naïve and
innocent question. It is naïve because any trader can be accused of trading
against the trend.
It simply depends on the time frame you are looking at. If you are a five-
minute candle trader, you don’t care that the trend on the weekly chart is
down. You care about the trend of the five-minute chart.
Another reason why it is naïve is because the whole construct of technical
analysis is fraught with contradictions.
Think about it.
You are asked to follow the trend; but what happens when you sell a double
top? You are betting against the trend. The same can be argued for a double
bottom. You are buying a market that is moving down.
THIRTY YEARS OF DATA
I am a day trader. My speciality is stock indices such as the Dow Jones
Index. I looked at the statistics of closing prices in the index over the last 30
years. That equates to roughly 7,500 trading days. I wanted to know how
often the Dow Index closed higher for the day and how often it closed
lower for the day compared to the previous day’s closing price.
I had an idea that, since the Dow Index over the last 30 years had risen from
3,300 to nearly 36,000, you could expect more positive closing prices than
negative closing prices. I was wrong in that assumption.
Over the last 30 years only 50.4% of all closing prices were higher than the
previous day’s closing price. This means the distribution of plus days and
minus days in the Dow Index is evenly distributed.
The ramifications of this statistic is that day traders like me can’t rely too
much on the trend on the higher time frame, because virtually anything can
happen down on the five-minute chart.
The challenge traders face can be summed up very easily, in a Heraclitus-
style explanation. When we shop for a pint of milk, we know that milk is a
uniform product. It doesn’t matter where on God’s green earth you shop for
a pint of milk. Milk is milk.
Hence, if milk costs twice as much in one supermarket as opposed to
another supermarket, you can again rightly conclude that a pint of milk is
expensive in one supermarket, and it is cheap in the other supermarket.
However, a share, or a currency, or a share index, is like a river. It is in
constant transformation. The transformation is the result of the interaction
of traders and investors.
Their action is the result of their opinions about the future. You may agree
with their opinions, or you may disagree; but to say that the majority are
wrong is counterproductive to efficient money-making in the markets.
There are many part-time traders who are incredibly successful in their
other careers but struggle when it comes to trading. What we have to do to
succeed in the world of trading is significantly different to what we have to
do to succeed in the world outside of it.
For example, if you go into a supermarket to buy dinner, and you see that
there is a special offer on chicken, you will be inclined to take advantage


rt-time traders who are incredibly successful in their
other careers but struggle when it comes to trading. What we have to do to
succeed in the world of trading is significantly different to what we have to
do to succeed in the world outside of it.
For example, if you go into a supermarket to buy dinner, and you see that
there is a special offer on chicken, you will be inclined to take advantage of
this offer. If chicken is offered at half price, then you might be thinking that
this is a great price, and you will want to buy some supply for the freezer.
Our human nature is such that we love a bargain. We love to seek out good
offers and take advantage of them. It fills us with a sense of joy to know we
have bought something which is cheap.
Just yesterday I went shopping and there was an aisle with discounted
items. Everything was half price or less. I bought soap and washing liquid
and detergent for the next 12 months.
As I filled the trolley, I laughed to myself, mostly because I knew that I
would go on to write a chapter about this very behaviour. It felt great to
save 70% on stuff I knew I would buy anyway at some point during the
year.
Let’s face it, we can save a lot of money if we shop contrary to the trend.
If at all possible, I tend to buy my winter jackets when there is a heatwave
outside. That is when the shops want to get rid of these items, to make
space for the summer clothes.
Conversely, I love to buy my summer clothing when there is six feet of
snow outside. I know it is not normal to do that, and maybe that is why I
like doing it. I love a bargain. I don’t think I am alone in loving to buy
cheap.
As I said earlier, the world of trading is diametrically opposed to the world
outside trading. The traits I display as a human being outside my world of
trading don’t serve me well in the world of trading. This is not just me I am
talking about. This is people in general.
Our minds struggle to separate the world of trading from the world of
general consumer behaviour. Let’s look at the differences.
SUPERMARKET BARGAIN
When I see something in the supermarket that is cheaper than it was before,
or that gives me a discount for buying more than one item, I am attracted to
buying it. My action is driven by a subconscious drive towards pleasure.
My action is that of a rational consumer who will seek out the cheapest
products. The supermarket knows this, and they will tailor their offering to
maximise my spending.
My behaviour is driven towards maximising my pleasure – within my
budget constraint. When I do so, it gives me a sensation of well-being.
FINANCIAL MARKET BARGAIN
When I see the FTSE Index falling in price during the day, my mind
associates falling prices with value and becoming cheap.
If I act on the impulse, one of two things will happen:
1. My feeling of value is confirmed. The market begins to rise.
2. My feeling of value is not confirmed. The market continues to fall.
My argument is perhaps provocative, but no matter what happens next, I
will end up losing – even if I win on the trade.
If I buy with no good reason other than my mind sending me an impulse to
say the market is cheap, I will lose if the market continues lower. And why
would the market not continue lower? That is the premise of technical
analysis. Trends persist. The market suffers from inertia, meaning that
whatever it is doing now, the odds are above 50% it will continue to do.
If I buy, and the market begins to rise, I will eventually lose anyway,
because I have now taught my mind that it is okay to stick my hand out and
catch the proverbial falling knife.
I have created a pattern in my mind that associates buying falling asset
prices with pleasure, because I had success with it at some point.
As a side note: when I began taking trading very seriously, I would review
my trades when the day was over. I would print out the chart and plot my
trades onto it. I realised that some eight out of ten trades were impulse
trades. I began to become much more conscious of my trades. As I
proceeded down that path, I became more and more profitable. The fewer
impulse trades I had, the more money I made, and the more satisfaction I
derived from my job.
SELF-ANALYSIS
Through analysis of my trading behaviour – meticulously logging my trades
on a chart after the trading day was over – I came to the realisation that I
was a prolific value trader. I would repeatedly short rising markets. I would
repeatedly buy falling markets.
It helps me to remind myself daily that when I am buying, someone else is
shorting or getting out of a long position. A significant factor to my trading
success, going from being a losing trader to a winning trader, was the
realisation that there are no bargains in the financial markets.
SUPERMARKET SUBSTITUTES
When I am shopping for something in the supermarket, and I discover a
product has gone up in price, or a product that used to be on offer is no
longer on offer, my mind will associate this with pain. My mind will direct
me towards a substitute. This is perfectly rational human behaviour.
My sister and I laugh about this phenomenon. She lives in Germany and
frequently travels with the airline EasyJet from Berlin. She puts it so
eloquently, when she says, “I will get up in the middle of the night for a 5
am flight, if it means I can save myself €25.”
I think many of us can recognise this trait.
FINANCIAL MARKET SUBSTITUTES
If something has gone up in price in the financial markets, then it means
there is demand for it. It may seem expensive, but it merely reflects the
equilibrium point between buyers and sellers.
I struggled with this for years. I argued it was expensive, and this faulty
view was compounded by the technical indicators I was using.
Indicators like stochastics would suggest a market was overbought or
oversold. Those are other words for cheap and expensive. It is for this
reason I am no longer trading with any kind of technical indicators. My
charts are 100% naked.
The perverseness of

eBooks\Tom Hougaard - Best Loser Wins.pdf


ellers.
I struggled with this for years. I argued it was expensive, and this faulty
view was compounded by the technical indicators I was using.
Indicators like stochastics would suggest a market was overbought or
oversold. Those are other words for cheap and expensive. It is for this
reason I am no longer trading with any kind of technical indicators. My
charts are 100% naked.
The perverseness of the financial markets is that it generally makes sense to
buy something because it is more expensive today than it was yesterday.
DEALING WITH ADVERSITY
When I experience difficult situations in my life, I will be patient and work
on resolving them. Through my work and my resolve, I hope I will be able
to solve the problem. I may even use force on the issue or use my authority
to solve the problem.
No amount of hard work, resolve or prayer will turn a bad trading position
into a good position. Either the market agrees with you or it doesn’t. It
doesn’t matter how rich you are; how big and powerful you are. If the
market disagrees, it disagrees.
The market can only hurt you if you let it hurt you. The market will rally.
The market will fall. Whether you are on board or not, making money or
not, is inconsequential to the market. It knows nothing about you.
When you make money, you make money because you are aligned with the
market. The market itself is nothing more than the combined force of all the
market players. They, like you, are looking to make money from trading.
Unfortunately, we can’t all make money. I came to realise, after years of
suffering, that I had to change my relationship – not with the market, but
with how I reacted to what the market did.
Much of that process was undoing my life values and beliefs when it came
to the trading world. In the normal world, when I don’t get my will, I will
work hard at convincing the other party to see things my way. I am very
persuasive, and I usually get things how I want them.
While that may be a trait that helped me in the real world, it is a trait that
was detrimental to my trading performance. The market doesn’t care about
your position. It doesn’t care if you are long or short or on the side lines.
The market has no feelings about you or your position.
The essence of my argument is that many of the traits we display as
perfectly normal people don’t serve us well in the world of trading.
I think all the successful traders I know have gone through a transformation
process. Some were gradual. Others talk about a specific situation which
acted as a catapult to success.
Some became so disgusted with themselves, they decided that they were
going to either follow the rules or quit trading altogether.
THE INNOCENCE OF OBJECTIVE
OBSERVATION
A very good friend of mine, Dr David Paul, describes his own
transformation in the following story.
I have a PhD in mechanical engineering. I have worked for De Beers. I invented a mining drill
which made me a fortune. I have had my own mining company. So, it is fair to say that I came
into the markets with a lot of confidence, and a lot of money at my disposal.
I started investing money in the 1980s. It was easy to make money in the stock market then.
All you had to do was buy shares and then sit and wait. While I waited, I started doing
programming on the early computers. I eventually created my own share selection software. It
was incredibly sophisticated software for its time.
On this particular day in question the software called for the market to rise very strongly. So,
at the open of trading I phoned my broker and placed a very large buy order.
And sure enough, the market did what my software had said it would do. It started moving
higher. I was naturally happy that the analysis was correct and that I was making money. I held
on because the software predicted the rise would continue, only much more strongly.
A short while later, however, the market began to drop. I was naturally a little surprised but
knew that it must be just a temporary aberration and a good chance to buy a little more before
the market really took off. So, I did. I bought some more. And yet the market continued to
drop. And drop. And drop.
I began to get a little worried, so I phoned my broker and all my trading friends to see if there
was any reason for this deviation. They too were at a loss to explain why the market was
down. Their analysis had suggested the market would rally strongly. All the newsletters
suggested that we were in the middle of a major wave three in Elliott Wave Analysis terms,
and everything pointed to higher prices.
I felt somewhat better having spoken to my friends and my broker about the situation, and I
was sure that this was just an aberration, so I decided to buy a little bit more at these cheaper
price levels. The market bounced for a while, and I felt pretty good about having bought some
more at what I thought would be the lows of the day.
The market then began to head lower again, and I began to get really concerned, even a little
scared. It was quite a big position I had accumulated.
Just then my wife walked into my office to ask what I wanted for dinner that night. She must
have sensed that I was distracted or in discomfort, and she walked over to my desk and looked
at the trading screen. “Is anything the matter, dear?” she asked. She can be so sweet.
“No, my love, just working. My software says this market should go up.” I pointed at the
screen. “The software has never been wrong, and I have spoken to the brokers and to my
friends, and they all say that this market should be going up, but it is going down.”
She looked at the screen with the market and said, “Is this the market you are trading in?”
“Yes,” I said. “I really don’t understand why it keeps moving lower. I am sure it will move up
very soon.”
“But it is not moving up right now, is it?” she said.
I got a little impatient with her, and I said, “No dear, but what you don’t understand is that the
software and the Elliott Wave Count are in agreement


looked at the screen with the market and said, “Is this the market you are trading in?”
“Yes,” I said. “I really don’t understand why it keeps moving lower. I am sure it will move up
very soon.”
“But it is not moving up right now, is it?” she said.
I got a little impatient with her, and I said, “No dear, but what you don’t understand is that the
software and the Elliott Wave Count are in agreement, and the market absolutely has to go
up.”
“Oh well, you are right, I don’t know anything about this software or the Elliott thing, but it
just doesn’t seem to be going up right now, does it?”
I distinctly remember taking a deep breath. I said to the woman I love but who had now begun
to irritate me, “No dear, but just as soon as this passes, it will start to go up. It absolutely has
to. I think this is just an AB=CD formation. The software says so. The broker says so. My
trading friends say so. The Elliott Count says so. There is no way that all these people and my
software could be wrong.”
“Ok, I am sorry, you are right; I don’t understand your software or the Elliott thing or what the
broker is talking about. All I see is that this market right now is going down, isn’t it?”
I stopped staring at the screen for a second, and I looked up at my wife. “Could you please
repeat what you just said?”
She looked at me puzzled, and said, “Well, I am just saying that right now, right at this
moment, right here right now, this market is moving down, isn’t it?”
And then it hit me like a thunderbolt. I wasn’t trading the market. I was trading my opinion. I
began to laugh, because I felt for the first time that I knew what had to be done to make money
in the market. I understood that the very thing I was trying to avoid was the very thing that was
killing me right now. I was trying to avoid losing trades at all cost, and now I was in a trade
that was losing me – only because I refused to listen to what the market was trying to tell me.
I realised in that moment that I had to learn to lose in order to win. It was as simple as that. I
wasn’t trading the market. I was reinforcing my ego through the market.
I picked up the phone, called my broker and sold out all my long positions. Furthermore, I sold
a large number of contracts short as well. And sure enough, the market continued – down and
down and down.
My trading life changed that day. I no longer paid so much attention to expert theories, and I
stopped guessing where the market was going. I started trading the markets. It was a
revelation. I started making lots of money. I realised that some of the stuff I had read was
outright wrong and detrimental to my trading.
For example, we have all read the axiom of ‘buy low and sell high’. I changed that to ‘sell low
and cover lower’ and ‘buy high and sell higher’.
SURRENDER
When I asked David to sum up his experience, he said to me:
Look at your own life. You love to surf. You wait for the waves, and
you paddle into their energy flow, and you ride the wave. How is that
any different to what we do as traders?
When you are out there, sitting outside the impact zone, waiting to
paddle in, you don’t paddle when there are no waves. You are patient.
When the right size wave builds ups, you get ready. You are one with
the sea. You roll with its flow. You surrender.
To succeed in the markets, we must surrender. Every single individual on
planet Earth has a great deal of time, money and value tied up in what we
know, and it is unthinkable to even consider surrendering all this perceived
knowledge.
The purpose of my trading and your trading is not to be proven right and
bolster our egos. Our job is to make money. If that means we come to the
market with an opinion, and we are proven right, so be it.
If it means we have to change our opinion because the market dictates it, so
be it. A more spiritual person than I would perhaps express this as “empty
your mind and let the market guide you”.
THERE IS A LOT LESS TO TRADING
THAN MEETS THE EYE
The fact is that our complicated human minds have a great deal of trouble
processing information that is simple. Unless it is complex to the tenth
degree, our minds tend to pass it over. We think that something simple can’t
be profitable.
What is your aim? The simple answer should be to make money. In the past
I was so preoccupied with what should happen. But to make money we
must be focused on what is happening right here, right now.
When I started writing this book, I wanted to keep it practical. I had no
interest in trying to pass myself off as a trader therapist or a psychologist,
because I am not. I wanted it to show the true nature of what trading is,
written by someone who has skin in the game, and who has both scars and
medals to show for it.
If the last few pages have been a little too theoretical for your liking, I
would like to describe a real-life case study – one that was captured on
video (my way of telling you that this is an authentic story) by Round the
Clock Trader in July 2019.
I want to explain what I mean by going into the market with an open mind
and an empty cup. I bought an index after a double bottom. Everything
looked pretty good. I was long from 12,808 and I had bought again at
12,818. Then it happened: the index plummeted. My five-minute chart
showed three major lows (I call these get out bars, when I am trading
against their direction, or add to bars, when I am on the right side of them).
I was wrong being long.
I got out of my long position and reversed my position to short, relatively
early on in the downward spiral of the index. There were some 500 traders
attending the event, and what pleased me most about the outcomes was not
that I lost on my first trade, or that I won my money back soon after. What
pleased me most was that I did not stubbornly hold on to a losing trade, and
that I had the mental freedom to move from being long the market to now
being short the market.
When I started trading, there was no chance in hell I would have done what
I did there. I


he event, and what pleased me most about the outcomes was not
that I lost on my first trade, or that I won my money back soon after. What
pleased me most was that I did not stubbornly hold on to a losing trade, and
that I had the mental freedom to move from being long the market to now
being short the market.
When I started trading, there was no chance in hell I would have done what
I did there. I would have held on and held on to that losing position. “I
know I am right,” I would have said; except I wasn’t, and I wasn’t making
money.
The most critical point came when my new short position showed a profit
which was equal to what I had lost on the long position. My mind
desperately wanted me to bring balance to its emotions. What better way to
do that than to offset the loss from the first trade? Well, in the words of my
greatest trading hero, Charlie DiFrancesca, “Good trading means
combatting the emotions that make us human.” Let’s take a look at how we
can do that.
FIGHTING MY HUMANNESS
WHAT IS NORMAL behaviour amongst retail traders? We know that 80–90% of all
retail traders engage in the same self-destructive behavioural pattern.
We know that some 90% of traders do not make money consistently trading
CFDs or spread betting or in futures markets. It is probably also fair to
assume that those 80–90% of traders are intelligent, ambitious, self-
motivated human beings, who like to create their own luck and forge their
own way in life.
I have never met anyone who started trading because they thought it was
the same as playing the lottery. Virtually every person I have ever met who
was interested in trading and who wanted to learn more about trading has
been a self-starter, entrepreneur, or student at an institution of further
education.
Therefore, it’s a fallacy to say trading attracts the wrong kind of people. It
attracts the right kind of people. It attracts those who have a chance of
succeeding at it.
I think it attracts the kind of people who are not fooled by the get-rich-quick
schemes. I doubt many traders buy lottery tickets, purely on account of the
odds being rubbish, and traders understanding that all too well.
Nevertheless, something is wrong.
Something is wrong when 90% of people fail. In the following table I have
identified a handful of behavioural patterns that I think are detrimental to
traders. The most frequently observed behaviour is the inability to take a
loss.
What is the reason for not taking a loss? I argue there is one reason we tell
ourselves, and then there is another, real reason. The real reason is always
the same.
Action Conscious Reason Subconscious Reason
1.I am letting my loss runI am hoping Avoid pain
2.I am letting my loss runIndicator/Fib/etc., says soAvoid pain
3.I am taking my profits You can’t go broke taking a
profit
Avoid pain
4.I am winning, so I am
reducing my stake
I want to take it easy nowAvoid pain
5.I am losing, so I am increasing
my stake
I am trying to get back to
where I was
Get rid of pain
6.I made my points for today, so
I stop
I am afraid to lose what I madeAvoid pain
7.I am trading without real
conviction
I am bored/scared of missing
out
Avoid pain of boredom or pain of
missing out
Hope features high on the list of reasons. As the saying goes, hope dies last.
Our minds seem ill equipped to engage in risk management. Our minds
have one primary objective: to protect us against perceived or real pain.
During the process of running an open position that is producing a loss, our
subconscious mind is telling our conscious mind to keep the position open.
It will mask this message as well as it can, in order to protect the ego, which
is more fragile than the state of your trading account.
If this sounds too airy-fairy, on account of the use of words like ego and
subconscious, let’s explore the same argument using a different language.
AVOIDING PAIN
As long as a losing position is open, there is hope that the position will turn
positive. The moment you close the position, and you crystallise the loss,
the pain of the loss becomes real.
I accept there are many permutations to the situation of handling a losing
trade. Some will argue that the very act of closing a losing trade is the point
when you can stop agonising over the open loss and open yourself up to
other trade options. I personally agree with this argument. When I have a
losing position and I no longer believe in it, the worst I can do to myself
and my psyche is to begin to hope. I don’t feel free in my thinking and in
my market perspective when an open losing position is beaming at me on
my open position monitor. When I close the position, I feel free again, and I
am opening myself up to taking in market information from an
opportunistic frame of mind.
However, my primary argument is that the reason we are hoping has little to
do with hope itself and everything to do with avoiding pain.
How many times did I see clients sit on losing positions for ages? I saw
them deposit more money every time their losing position received a
margin call. A margin call is when the broker demands more money to keep
your position open. They just didn’t want to take the loss.
To compound my confusion, how many times did I see the position come
good again, and the client close the position as soon as it did? I saw it
frequently. They didn’t hold on to the position because they believed in the
position. They held on to the position because they could not stand being
wrong.
The moment they were relieved of their pain of the losing position, they got
out – for nothing. They were so relieved to have avoided the pain of being
wrong that they completely ignored the fact that the market was now
actually agreeing with them.
They weren’t trading the financial market. They were trading their
emotions, responding to how they felt. When they felt relief that the
position had come good again, they now associated a tremendous amount of
pain with the thought of having to relive this anxiety once more.
As a result of thi


of being
wrong that they completely ignored the fact that the market was now
actually agreeing with them.
They weren’t trading the financial market. They were trading their
emotions, responding to how they felt. When they felt relief that the
position had come good again, they now associated a tremendous amount of
pain with the thought of having to relive this anxiety once more.
As a result of this association, they closed the position. They felt relieved at
the thought of not having to go through this anxiety again.
If you are taking your profits early under the excuse that ‘you can’t go
broke taking a profit’, you are reacting to your mind warning you against
future pain.
If you are on a winning streak, and you reduce your stake size, you are
essentially anticipating the pain of losing some of your gains. You are now
rationalising your way to avoid the pain, even though nothing painful has
actually happened.
I want to reiterate the last paragraph. If you are in doubt whether you are
trading from an opportunistic frame of mind or a fear-based frame of mind,
then answer this simple question: when you are winning, are you increasing
your trading size or decreasing your trading size?
You see, the vast majority of traders will decrease their trading size when
things are going well, because they are afraid their winning streak will
eventually run out. The flip side to that coin is that they might even increase
their trading size during a trading slump, so they can win back the lost
money.
As Greg De Riba, an S&P 500 pit trader of superior quality, said in the
movie Floored: “99% still don’t get it – when they win, they start betting
less. Bet more!”
Perceived pain or real pain matters not to the subconscious. It will be
treated with the same response and the same emotions.
When the pain is real, i.e., real pain has manifested itself in body and mind
because of a trading loss, there is no end to the lengths our ego will go to in
its efforts to make the money back. This is the primary driver behind the
argument of ‘when wrong, double up’.
During a losing streak we tell ourselves that we are ever so close to winning
again, so the natural conclusion must be to double up in order to regain
what has been lost.
The real (subconscious) reason for doubling up on a losing trade is to
attempt to get rid of the pain. Now we are not trying to avoid pain; we are
dealing with existing pain, and we are trying to get back to that state of
equilibrium where we were pain free.
ACT WITHOUT FEAR
You learn a lot from observing millions of trades. If you want to stand a
genuine chance of making money as a trader from the financial markets, I
believe with every string of DNA within me, with every fibre in my body,
that you need to change the way you think about fear and pain and hope.
William Blake said that “He who desires, but acts not, breeds pestilence”. I
have worked tirelessly towards being able to act without fear and hesitation.
The true measure of your growth as a human being is not what you know,
but rather what you do with the things you know.
What do I mean by that?
Have you ever seen a chart pattern, and your first impulse was to buy or sell
short, but then – without warning – the very next thought was one of fear?
It was a thought you had no control over. It just exploded into the forefront
of your mind.
I have experienced that at times in my career. When it happens, I know I
need to reset somehow. Maybe I need to meditate. Maybe I need to sleep.
Maybe I need to eat or go for a walk. I know that something is blocking me,
and I need to resolve it.
My free creative mind instructed me to do something, but my fear instinct
immediately cautioned me not to follow through, because I might lose.
It doesn’t really matter whether you were right not to trade, or whether the
position would have lost you money or made you money. Those are
afterthoughts (rationalisations or justifications). We can file those under
anecdotal evidence, or evidence that has no merit. We all have an uncle who
smoked until he was 90 with no negative effects – anecdotal evidence – but
that does not justify the argument for smoking.
If my free mind argues for a position, and my fear mind argues about the
consequences of failing on that trade, then I am essentially arguing with
myself. The posh term for this phenomenon is cognitive dissonance.
My trades need to flow from a point of freedom of expression. Trades
conducted from a perspective of fear or greed will not lead to good decision
making.
My advice: stop trading and start contemplating. What is going on? When I
experience cognitive dissonance, it is for one or both of the following
reasons:
1. I have trading fatigue (or physical fatigue – ever heard the saying
‘fatigue makes cowards of us all’?).
2. I haven’t done my preparation well enough.
HOW DOES SHE DANCE?
Have you ever seen a market that was in freefall, and you were reluctant to
sell short because you were afraid you might lose? My basic aim with this
book is not to rid you of these fears. Fear will always be part of our lives.
My aim is to make you understand why you feel that fear and how to
process it, so you can take the trade.
I accept that I am a human ruled by emotions. I understand that I can’t
escape emotions, and nor should I try to escape them. Rather I want to help
you understand your fear, why it is there, and how to become friends with
it.
Earlier in the book I wrote about Philippe Petit, the man who walked across
a wire suspended between the Twin Towers. He is afraid of spiders. Yes, it
sounds silly, doesn’t it? His approach to dealing with fear is worth
repeating.
He would do everything in his power to understand the nature of his fear of
spiders. He would study spiders. He would learn everything there was to
know about spiders. Through his study he would come to appreciate the
nature of his fear.
How does that translate into the world of trading? Let’s take a practical
example. I am trading the FTSE 100 Index.


roach to dealing with fear is worth
repeating.
He would do everything in his power to understand the nature of his fear of
spiders. He would study spiders. He would learn everything there was to
know about spiders. Through his study he would come to appreciate the
nature of his fear.
How does that translate into the world of trading? Let’s take a practical
example. I am trading the FTSE 100 Index. My stake size is around £300 a
point for a starter position. Now I have to find the best entry points and the
best exit points.
But what do I do if I am afraid? What do I do if I am scared to place my
trades because I am not sure what the market is capable of doing?
The greater understanding you have of your opponent, the better you are
able to understand what she is doing. I use the word opponent here, but
really, the market, she is my friend. I want to dance with her. But I am
afraid of making a fool of myself. So, I study her moves.
I haven’t seen other traders do what I do, so I argue this is a novel way of
analysing the markets. Whether it is a new approach or not doesn’t matter.
What matters is that I get a sense of what my dancing partner is capable of
doing. What can I expect from her price behaviour? Is it erratic? Is it
smooth?
Observe the chart in Figure 9.
Figure 9
Source: eSignal (esignal.com)
We are all chart experts after the fact. However, studying past pricing
behaviour gives me a strong indication of what I can expect for the trading
day. You may see a market that initially rallies, makes a double top, and
then declines.
Let me show you the chart in Figure 9 from another vantage point – see
Figure 10.
Figure 10
Source: eSignal (esignal.com)
As part of my quest to trade without fear, I break down the chart into its
smallest components. I see the first wave up is 24 points. I see the
retracement is 9 points down. I see an attempt to make new highs, but it
only rallies 6 points. I see a deeper retracement of 12 points. I see an 8-
point rally, a 3-point retracement and another 11-point rally.
The retracements lower are between 9 and 12 points, with the exception
of one move of 17 points. You may argue that this is great (said with
sarcasm), if you had known about it before the trading session started. Well,
you did. Let me show you the day before, in Figure 11.
Figure 11
Source: eSignal (esignal.com)
The retracements lower are between 7 and 12 points, with the exception
of one move that was 14 points.
My approach to a non-fearful trading style is a combination of emotional
discipline, mental warm-up, and knowledge of what the market can do.
While these two trading days are different in outcome, their behaviour is
not altogether different.
I would go into the trading day armed with the following knowledge:
1. Deep retracements and outright moves tend to be around 10 points.
2. Small retracements against a strong trend are around 3–7 points.
Knowing this, combined with an understanding of basic price patterns, I can
develop an entry strategy aimed at risking as little as possible. For example,
on the previous chart, after the market has pushed higher for a move of +11,
I wait to buy a retracement. I know that most retracements are around 7 to
12 points, with the last three of them being 8, 7 and 10.
So now I am looking to buy. Say I buy at the point where the market has
retraced −7 points; I may be fearful that the market will move against me.
My knowledge of the immediate past suggests that the market is unlikely to
move more than −12 points in a retracement. I therefore place my stop-loss
at an appropriate distance away, based on the past behaviour.
The discipline to wait for the right entry, combined with the knowledge of
past price behaviour, will set you apart from the majority of traders. They
are unlikely to have done the same level of preparation.
Through your preparation (and I admit, I speak for myself now), you are
working through the issues your fear mind can throw at you. Your fear mind
might say “What if I lose?” If it does, the answer is that if the market moves
beyond −12 points your position is probably wrong, and your stop-loss will
handle your exit.
When I lend a helping hand to struggling traders via my Telegram channel,
the first thing I ask them is do they write down their trades? By that I don’t
mean write the particular trade entry on a piece of paper. I mean, do they
plot their trade entries on a chart once the trading day is over?
I have included a couple of examples from my own trading diary to serve as
a visual reference guide. See Figures 12 and 13. I use these to warm up in
the morning ahead of the trading day. I have selected random files from my
old trading days, and I will relive those moments, both the terrible ones – to
get me fired up on how not to trade today – as well at the good ones for
inspiration.
Figure 12
Figure 13
By observing my past behaviour, I am able to reinforce my good points
while being mindful of my weak points. I will observe the disastrous
consequences of my hasty trading decisions and my impulses. I will
observe trades where I didn’t let my profits run. I will in essence torment
myself by looking at my bad trades because I know this will act as a
positive catalyst.
Incidentally, I am not the only one who works like that. I read that Michael
Jordan and Cristiano Ronaldo thrive on negative talk about them and their
performance. They take that on board, and it acts as fuel to propel them to
greater achievements. Unfortunately, no one writes about Tom Hougaard
and his trading, so I recreate the situation by putting myself through my
past bad trades.
NOT ALONE
The disastrous, impulsive patterns I saw most frequently on the trading
floor fell into two categories:
1. Clients executed a long position in markets that they thought looked
cheap. More often than not they bought into established downtrends.
2. Clients executed a short position in markets that they felt had rallied
by too much. To them it looked as if the market couldn’t m


bad trades.
NOT ALONE
The disastrous, impulsive patterns I saw most frequently on the trading
floor fell into two categories:
1. Clients executed a long position in markets that they thought looked
cheap. More often than not they bought into established downtrends.
2. Clients executed a short position in markets that they felt had rallied
by too much. To them it looked as if the market couldn’t move any
higher.
I don’t blame you if you think I am making this up. Surely, traders can’t be
engaged in this kind of behaviour in an enlightened era like the one we live
in, where information flows so freely?
To prove my point, I went to the IG Client Sentiment Report from 26
October 2021. IG Markets is a broker that has been around for some time.
Their client base is global, and as such their sentiment report represents the
trade positions of a large segment of the retail trading community.
Before I show you the sentiment report for stock indices, I want to tell you
that as I type this, on the day of the sentiment report, stock indices all over
the world made fresh new all-time highs. The FTSE 100 Index in the UK
traded at levels not seen for years. In the US the Dow Index traded at levels
never seen before.
So, you would imagine that if my observations were inaccurate, the bias on
the sentiment report would call for people being bullish the market.
You would be wrong. Sadly, I was right about traders’ behaviour. 71.39% of
all Dow Index positions were short positions – on a day when the Dow
made fresh new all-time highs. Things were not much better for the DAX
Index or the FTSE Index.
Symbol Net-Long (%)Net-Short (%)
Germany 30
37.04 62.96
FTSE 100
30.60 69.40
US 500
39.85 60.15
Wall Street
28.61 71.39
This is why the 90% lose. We don’t see the market for what it is. We see it
as we are. A chart is only as illuminating as our ability to keep out
preconceived ideas of the direction of the market.
We are not losing money over time because we don’t know enough about
technical analysis or the markets as a whole. We lose money because we
refuse to accept what is right in front of us.
My basic premise is that people:
1. think the wrong way before they get into a trade, and
2. think the wrong way when they are in a trade.
It reminds me of the late Mark Douglas, a phenomenal light in the trading
industry and an inspiration to thousands of people, when he said that good
traders “think differently from everyone else” at the start of his book
Trading in the Zone.
I have coined my own phrase. I argue that people are fearful when they
should be hopeful, and they are hopeful when they should be fearful. I
would like to illustrate that by use of an example.
Imagine you have bought German DAX Index at 15,510 and the market is
now trading up at 15,525. Instead of thinking that the market may be on a
tear – and may go on to offer you many more points – you begin to fear that
the points you have already earned will be taken away from you.
Hence my saying: you should be hopeful in a situation like this, but instead
you are fearful. You are afraid that the points will be taken away from you.
You are not thinking about how many points this position may end up
making you. Your focus is on fear rather than opportunity.
The opposite holds true when you are in a losing position. You are now
hoping that the market will turn around. Your sole objective is to get rid of
your pain, and instead of being afraid that you’re going to lose even more,
you now hope that you can reach a position in which you will lose less.
Every tick in your favour is celebrated. Every tick against you is ignored.
If you want to trade well, you need to turn this on its head. You need to
teach your brain to be hopeful (about profits) when it is wrongly fearful
(about losing the profits). You need to teach your brain to be fearful (about
losses) when it is mistakenly hopeful (about the position turning positive).
It starts with being mindful of this behaviour. Perhaps a conversation with a
student of mine can further clarify what I am talking about.
CONVERSATION WITH A STUDENT
In the following conversation, my student and I are discussing a long
position I have running in Sterling Dollar.
Student: It feels like gambling.
Tom: Please explain.
Student: Well, I have 40 pips in profit, but you will not let me take the profit.
Tom: I won’t stop you from taking the profit, but if you ask for my opinion, you should let the
position run. You might want to consider the following scenarios, and then ask yourself how
you would feel in each case:
1. Run position and you get stopped out for nothing.
2. Run position and it explodes higher.
3. Close position and it explodes higher.
4. Close position and it reverses.
Student: I think it is best to close the position and secure the profits, rather than risk that the
market will take the profits away from me.
Tom: How would you then feel if the market exploded higher – in your favour?
Student: I would be disappointed, but I could always jump back in again.
Tom: If you jumped back in, you would have to pay commission again or at least the spread,
and you would have missed the explosive move. The only way you would profit from the
explosive move is if you were already in the move.
Student: Yes, but at least I would be playing for momentum to continue.
Tom: That is true, but you are already in a position where the momentum is on your side.
Student: I guess I just don’t want to see my profits disappear.
And there you have it – in a nutshell. People are hopeful when they are
losing money. They are fearful when they are making money. I believe this
is how the 90% think. It is the reason why – in a study of 25,000 traders –
they won more often than they lost, but they lost 66% more on their average
loss than they gained on their average win.
When the trader is confronted with a loss, they hope it will turn around. The
operative word here is hope. When they are confronted with a profitable
position, they are afraid the profi


ey. I believe this
is how the 90% think. It is the reason why – in a study of 25,000 traders –
they won more often than they lost, but they lost 66% more on their average
loss than they gained on their average win.
When the trader is confronted with a loss, they hope it will turn around. The
operative word here is hope. When they are confronted with a profitable
position, they are afraid the profit will disappear. The operative word in this
scenario is fear.
My student naïvely thought he could jump back in again, but he would
undoubtedly have had to do so at a worse price than the exit price of his
profitable position.
So, the trader holds onto the position until a point at which the pain finally
becomes too much, then closes the position. Unfortunately, this threshold
tends to be further down the road than the threshold of hope.
This is what you need to focus on.
This is what you need to work on constantly to change your pattern. I will
not state whether it will be easy to do or difficult to do. It just is. There is no
point in going any further in speculation if you can’t get yourself to do what
you must do, even though it feels uncomfortable.
You must be aware that in trading we tend to chase hope a lot further down
the road of misery than we are prepared to follow the road of opportunity. It
is just the way we are put together. You must be aware of this and have a
plan for combatting your natural behaviour.
However, I must warn you. Your mind is like a muscle. This is not a one-off
quick fix any more than doing 100 push-ups once will make you look like
Captain America for the rest of your life.
Atrophy is not just something that happens to bodies. It also affects our
minds. You need to strengthen that mind of yours through repetition. I
present my own training regime at the end of the book, although I am
actually describing it piece by piece as we move through the book.
THE NOT-SO-NORMAL BEHAVIOUR
What is not-so-normal behaviour? Well, firstly, I am all too aware of the
shortcomings most people display when they are trading: running a loss,
cutting short the profitable positions, over-trading, trading for excitement
and entertainment.
But this is already known to most – if not all – people, so the not-so-normal
behaviour goes somewhat beyond that. It is very rare that we ask ourselves
why we do what we do. Why do I trade when I do? Why do I take profits
when I do?
I think it’s time to bring in the words of a relatively unknown trader (but
one who was hugely respected by his peers). He was a pit trader at the
Chicago Board of Trade (CBOT), and his name was Charlie DiFrancesca,
also known as ‘Charlie D’.
MY HERO
Charlie DiFrancesca arrived at the floor of the CBOT with a dream and a
small account. He had a background in competitive college football –
American style – but otherwise there was nothing about this guy that would
indicate he would go on to become the biggest trader in the US Treasury
bond pit in Chicago.
He had a rough start. He barely traded in the first six months on the floor.
He just stood there and observed. Then one afternoon something clicked,
and he traded up a storm for two hours, making himself $5,000. From then
onwards there was no stopping Charlie D. He became a legend in the
trading pit until his untimely death.
In William D. Falloon’s biography of Charlie D., the great trader says:
The time you know you’ve become a good trader is that first day you
were able to win by holding and adding to a winning position. There
are many people here (in the trading pit) that have traded for a long
time, and who have never added to a winner.
Adding to winning trades is an absolute key trait of the successful trader. It
reinforces correct behaviour. It serves as an antidote to the temptation of
wanting to take profit. When I am in a profitable position, I have trained my
mind to ask, “How can I make my position bigger?” rather than dwelling on
the idea of taking profits.
Charlie D. goes on to talk about his own mentor, Everett Klipp, who taught
him about correct trading:
Unfortunately, it’s only human nature to want to cut your winning
trades. Say I am long at 6, and the market goes 7 bid, our mind
instantly thinks get me out with a profit. That’s human nature. It is also
human nature to ride the losses. I am stuck. I won’t close. I will wait.
ADDING EPIPHANY
In 2007 I met a person who was going to radically change my way of
trading. It all came about by chance. I had come back from a lunch break
and a colleague of mine returned from a meeting with an educational
company. This educational company taught technical analysis and they
were pitching their products to my colleague, who happened to be the head
of marketing.
What you need to know about my colleague is that he was the most
obnoxious East End London guy you could possibly imagine. He was brash,
obnoxious (I know, I said that twice), and arrogant, and no one could tell
him anything he didn’t already know.
Yet somehow this educational company had gotten his attention. He spoke
glowingly about a gentleman called Dr David Paul, who had taken him
through some basic technical analysis.
He showed me the technical analysis, and it was basic. Yet there was
something about the course material, which I had been given a copy of, that
told me that I needed to engage in a conversation with this gentleman.
It turned out that Dr David Paul had a two-day trading course coming up in
Johannesburg. So a few days later I booked myself onto a flight. It was one
of the only times I have ever participated in formal training on the topic of
technical analysis.
I have mentioned him before, but I’ll describe him a little more now. There
is something incredibly humble about Dr David Paul, despite everything he
has accomplished. He has a PhD in mechanical engineering. He used his
immense abilities to invent a drill for miners in South Africa. This was no
ordinary drill. It was the kind that sucks gas out of the ground as it drills,
and thus saves l


nalysis.
I have mentioned him before, but I’ll describe him a little more now. There
is something incredibly humble about Dr David Paul, despite everything he
has accomplished. He has a PhD in mechanical engineering. He used his
immense abilities to invent a drill for miners in South Africa. This was no
ordinary drill. It was the kind that sucks gas out of the ground as it drills,
and thus saves lives by more or less eradicating the occurrence of
explosions.
David Paul spent much of his time investing and trading. He made himself
a wealthy man. On the second day of the course David said something that
would change my perspective on trading.
He said something along the lines of this: “When you are in a winning
position, instead of thinking where to get out, why don’t you think about
where to get in more?”
He basically told me to turn everything upside down. Most traders with a
profit will begin to contemplate where to take half the profit. Next, they will
begin to contemplate where to take the next half of the profit.
David argued that this was what the 90% would do. He didn’t use those
exact words, but he did argue that if you want to make money trading, you
need to do that which the majority finds difficult to do. The first time you
try it, you may fall flat on your face. That is to be expected, but the next
time it might be a little easier, and the next time a little easier again.
DO WHAT IS HARD
David was essentially arguing that when you are in a winning position you
should put pressure on your position. The argument for doing so was
something he himself had observed when the market really began to trend.
I have tried to put a different spin on his words. When you want what you
want more than you fear what you want, you will have it. You want profits
in your trading. You probably have a good instinct about trading. You
probably also realise by now that it is your thinking that causes your
problems, rather than your knowledge about the financial markets.
If the 90% of traders are engaged with taking half profits and letting the
other half run, maybe the right thing to do is to double up on your position,
or perhaps conservatively add a little to the position, when everyone else is
taking half the profits. At least this is what I read between the lines, as I sat
in that hotel conference room in Johannesburg.
When the workshop was over I walked across the street and locked myself
into my hotel room. I sat down and waited. The Dow Index was trending. I
waited for a retracement. Then I waited for a five-minute bar to close above
the high of the prior five-minute bar.
Then I bought. Ten minutes later I added to my first position. Twenty
minutes later I closed at a double top. It was the most satisfying trading
moment in my life. A whole new world had opened up to me.
Depending on your experience level, you may or may not be able to answer
this question: why is it easier to add to a losing position than a winning
position? I have wondered about that myself many times.
You decide that you want to buy the DAX at 12,325. The market then
moves down to 12,315 and you are tempted to add to the position.
Why?
Why is it easier to add to a losing position than to a winning position?
Well, for starters, you would have loved to have bought at 12,315 rather
than 12,325 because you would have gotten a better entry price. Therefore,
buying again at 12,315 makes sense from an economics point of view. That
is plain simple logic.
There is a chance that you have a stop-loss in mind, and there is a chance
that you have a target in mind. Now you have an opportunity to have the
same stop-loss as before, but you have 10 points less risk, and you have
more profit potential.
You have also created a better average price, so the market has to move
fewer points in your favour before you are at breakeven.
Simple and logical – something our minds love.
However, you will now also have added to your position exposure, and the
market has told you that you are wrong, at least right now. It was easy to do
the wrong thing because we attach a value to the market. When the market
gives an opportunity to increase the value of our trade, it will seem
compelling to us.
So why is it difficult to add to a winning trade?
If I bought at 12,325, and the market is moving in my favour, I am relieved.
Now other emotions will enter the consciousness. There will be greed. You
want to make more. There will be fear. You want to protect what you have
made.
When the market reaches 12,345, you will be thinking that if you buy more
now, you have increased your average price to 12,335. It means that the
market will only have to move 10 points against you before your position
will be at breakeven, rather than in profit.
The key point here is: what is your mind dwelling on?
When we add to a losing position, we decide to dwell on the potential for
bigger profits. We decide not to dwell on the fact that the market is telling
us we are wrong. We decide not to dwell on the fact we have just doubled
our risk.
When we add to a winning position, we decide to dwell on the fact that the
market may take our profits away, because we have now decreased our
average price. We decide not to dwell on the fact that the market is
corroborating with us.
Put simply, the market disagrees with us, but we have faith that the market
is wrong, and we add to a losing position; or the market agrees with us by
showing a profit, but we doubt the market is right, so we don’t add to our
winning position.
It doesn’t quite make sense, does it? And yet, this is what the majority of
traders are doing all the time. Adding to a winning position can be
uncomfortable to begin with. No one is saying you have to double up on
your trading size the first time you add to a winning position. You could add
just a little bit.
ADDING STRATEGIES
There are two ways you can add to your winning trades. You can use a
same-size principle, by which you keep adding the same size. Say you buy
ten lots to


are doing all the time. Adding to a winning position can be
uncomfortable to begin with. No one is saying you have to double up on
your trading size the first time you add to a winning position. You could add
just a little bit.
ADDING STRATEGIES
There are two ways you can add to your winning trades. You can use a
same-size principle, by which you keep adding the same size. Say you buy
ten lots to begin with, and then you add ten more lots at a higher price, and
so on.
That is a risky way of trading. Instead you could use a second principle, by
which your first position is the biggest position, and subsequent positions
are smaller. So your first position might be ten lots, but the subsequent
positions might be five lots.
When I trade, I pretty much always use the same-size principle, but I urge
you to use the second principle until you are comfortable with adding to
winning trades.
BUILDING NEW PATHWAYS
The purpose of adding to winning trades is at its heart an attempt to fight
your normal human behaviour. In the beginning it is not about adding to
your profitability. That will come later. The purpose is to stop you from
taking half profits.
By adding to the winning trade, by thinking, “How can I make more when I
am right?” rather than thinking, “Where should I take profit?” you are
building a new way of thinking about trading.
Do you remember what Mark Douglas said in the opening lines of Trading
in the Zone? In trading, consistent winners “think differently from everyone
else”. When you start to think, “Where can I add to my winning trades?”
you are beginning to think differently. From then onwards, it becomes a
matter of habit. You have built a new neurological pathway in your mind, or
at least taken meaningful steps in the right direction.
CONTROLLING RISK
How do you control risk when you add to winning trades? This is a question
I am often asked. The answer is the same whether you are adding to a
winning or a losing trade: you place a stop-loss.
Some who receive this answer will say, “But if I get stopped out on an add-
on on a profitable trade, then I will have lost profits from the original trade
as well.”
Yes, that is true; but isn’t it better to get stopped out of a trade where you
have some profits to cushion your loss, rather than having added to a losing
trade, where you are now feeling the full force of the loss? At least when
you add to a winning trade, the market is currently agreeing with you.
I have just bought the Dow at 26,629. My stop-loss is 26,590. The Dow has
already rallied from a base of 26,569, so I might be a little late to the party,
but that doesn’t bother me.
Many a good trade has been missed by those arriving too late to the party.
As long as I have a stop-loss in place, I am fine to join a momentum move,
even one that has been moving for a while.
The Dow prints 26,649, and I buy once more. I am adding to my winning
position. Now my stop-loss on the first position I bought has been moved to
reflect the fact that I have taken on more risk. My first stop-loss is now at
26,629. The stop-loss on my second position is also 26,629.
At this point, two things can happen. Ideally, the market will carry on
moving higher, and every point move is now making me twice as much as
if I had only one position.
The less appealing alternative is that the market moves against me, and I
will get stopped out of the first position at breakeven, and I will lose 20
points on the second position.
There is no magic to it. It is a philosophy, and it is born out of a desire to
not be normal. The normal thing to do is to close half your position and let
the other half run.
Why would you do that? Why would you have the market agree with you,
but you only ride it with half a stake?
That is what the 90% are doing, and I don’t want to do what the 90% are
doing, no matter how logical it may seem. They are wrong over time, and I
want to be right over time!
It is such a crucial point I am attempting to get across to you, right here and
right now. I don’t know what is going to happen over the course of one
trade. Anything can happen. However, I do know what will happen –
statistically speaking – over the course of 100 trades.
Over the course of one trade, you may win, or you may lose. Over the
course of one coin flip, you may get a head or you may get a tail, and you
may get five tails in a row, but you will still end up – statistically speaking –
with a 50/50 outcome when you throw the coin 100 times.
The same applies to trades. You may be on a hot run, and have nothing but
winning trades on your screen, but over time it will even itself out.
Therefore, it is vitally important you don’t think too much about the
outcome of one trade, but rather the outcome of 100 trades.
The outcome of one trade is random. The outcome of 100 trades is
predictable. It is for this reason that our behaviour needs to be the same for
every trade we execute, whether we like it or not. By applying the same
correct behaviour to every trade, we are virtually guaranteed to be
profitable.
What is the correct behaviour? Well, why don’t we observe what everyone
else is doing, and then do the opposite of what they are doing?
The basic premise is that the majority of people who trade end up losing
money. That is our starting point. Now we observe what those people do. I
have been doing that for ten years. Here is what I observed:
1. THEY DON’T ADD TO WINNERS
They don’t add to winning trades. So, to be profitable, add to winning
trades, whether you add a little or you double up. Start slowly, add a little.
2. THEY DON’T USE A STOP-LOSS
They don’t like to use a stop-loss, because that would crystallise the pain of
the loss. As long as the position is open, there is hope. So, to be profitable
over time, use a stop-loss. Use a stop-loss on your first position and on
subsequent positions.
3. THEY ADD TO LOSING TRADES
We all love a bargain at the local supermarket, don’t we? And by all means,
continue to shop for bargains at the loc


They don’t like to use a stop-loss, because that would crystallise the pain of
the loss. As long as the position is open, there is hope. So, to be profitable
over time, use a stop-loss. Use a stop-loss on your first position and on
subsequent positions.
3. THEY ADD TO LOSING TRADES
We all love a bargain at the local supermarket, don’t we? And by all means,
continue to shop for bargains at the local supermarket; but do not do it in
the financial markets by buying more, just because you can buy it at a
cheaper price than the first time you bought it.
While you may get lucky from time to time, this is one of the main traits of
losing traders. Remember, we are focused on establishing the behaviour that
will ensure we will be profitable over time.
4. THEY TAKE HALF PROFITS
This one is going to be tough to argue, so bear with me. I know so many
traders – even people who have traded for decades longer than I have – who
advocate taking half profits. Their thinking goes along this pathway:
I will risk 20 points.
I will take half profits at 20 points and move stop-loss on the other half
to breakeven.
I will take the other half profit at 40 points.
It sounds so compelling. You close half the position, so if the market turns
around, at least you will have made 20 points on half the position. I can
understand the thinking behind it.
The problem I have with this strategy is that it never gives you the home-
run trades that you need to sustain yourself in this business. You will never
be on board the big moves because you have always limited yourself.
I have two fundamental arguments against taking half profits:
1. The market agrees with you. Let it ride.
2. Since I don’t believe in the risk-to-reward argument, because no
human being can know in advance what their reward will be without
limiting themselves, I don’t believe that taking half profits is the right
way to trade.
RISK TO REWARD
Did I just say that I don’t believe in the whole risk-to-reward argument?
Yes, that is correct. I do not. I believe in defining my risk. I don’t believe in
defining my reward.
When I am about to execute a trade, there is only one variable I have
meaningful control over: how much money/points/pips will I risk on this
trade?
Anything else is pure guess work. How much I will make will depend on
the market. It will not depend on me, unless I put a limit on my profits. A
very wise old trader once told me that losers spend their time thinking how
much they will make, while winners spend their time thinking about how
much they will lose.
The only variable I am in control of, as a point-and-click trader (as opposed
to one who uses an algorithm), is how much I can lose on a trade.
Observing hundreds of millions of trades over a decade, executed by an
army of well-meaning traders doing their best to make a profit, I have come
to the conclusion that setting a limit on your profits is not the way forward.
If I buy the FTSE 100 Index at 7,240 with a stop-loss at 7,235, and a take-
profit target at 7,250, I am sure I will be happy if the FTSE goes to 7,250
and reverses back down again. However, how will I feel if the FTSE moves
to 7,260, or 7,270, or higher?
Of course, there are exceptions to this rule. I may genuinely want to get out
at 7,250 because I feel there is overhead resistance at this area. It may even
be an area where I would want to sell short the market. I may also put in a
take-profit order at 7,250 because I may not be able to follow the market as
closely on this particular trade.
But generally, I do not work with targets because a target will limit my
profit, particularly on days where the market is in a runaway mode. With
this in mind, I would like to show you an example of a decision I made, and
how it ended up costing me dearly.
HOW NOT TO DO IT
The DAX gapped up, as shown in Figure 14. I know from statistics that
48% of all gaps get filled on the same day they occur. Considering that 90%
of daily highs and lows occur in the first hour and a half of the trading day,
I felt reasonably good about shorting the DAX on the low bar, indicated by
the arrow. The stop-loss was close to the high of the day. The risk was 35
DAX points.
Figure 14
Source: eSignal (esignal.com)
As shown in Figure 15, instead of continuing lower, the DAX Index
consolidates and moves higher, and it eventually takes out my stop-loss. I
am now at −35 points.
Figure 15
Source: eSignal (esignal.com)
The previous pattern does suggest higher prices to come. Yes, it looks like a
double top sell; but on a gap up day, the odds are higher of continuation
than of a reversal. Remember the saying, “In bull markets, resistance is
often broken, and in bear markets support rarely holds.” Well, you can
replace bull markets with bull trends, and bear markets with bear trends.
In Figure 16, I execute a long position on the close of the bar, as it closes
above my stop-loss. It is in reality a stop and reverse situation. I am stopped
out of my short position, and as a result of it, I am going long.
Figure 16
Source: eSignal (esignal.com)
The market moves into a consolidation, and eventually breaks higher. I add
to my long position, as show in Figure 17. So far everything looks okay.
Figure 17
Source: eSignal (esignal.com)
Then I make a mistake. I am at this point able to close the position with a
profit that exceeds the loss I made earlier.
Do you see what I am doing wrong now? I am not trading the chart. I am
trading my account. I am trading my state of mind. I am trying to get rid of
the pain from my previous trade. You can see this in Figure 18.
Figure 18
Source: eSignal (esignal.com)
Much to my disappointment, I admit I close my long position for no other
reason than being able to offset the prior loss. I talk myself out of the
position rather than just moving my stop-loss higher. It is not until my
review of my trading day that I really come to realise what I have done.
For now the market is not entirely in disagreement with me. For the next
two hours the mark


l (esignal.com)
Much to my disappointment, I admit I close my long position for no other
reason than being able to offset the prior loss. I talk myself out of the
position rather than just moving my stop-loss higher. It is not until my
review of my trading day that I really come to realise what I have done.
For now the market is not entirely in disagreement with me. For the next
two hours the market trades sideways. The longer a market moves from a
trending market into a sideways market, the less the prior trend matters. At
least that is what I tell myself.
Then as the US markets opens the DAX Index moves higher, and I am not
on board. You may not yet see the subtle point I am making here, so let me
point it out to you.
I do not belong to the brigade of traders who believe that “you can’t go
broke taking a profit.” I do think you can go broke taking a profit, if it
means you never have really big profit days because you are unable to let
profits run.
Simple as that!
Figure 19 shows what happened after my exit. While I don’t insist on
perfect trading, I review my trades religiously to pick up on errors creeping
into the inner workings of my trading mind. Am I maintaining my
discipline? Am I adding to winners? Am I impulsive?
Figure 19
Source: eSignal (esignal.com)
You may look at the chart and think I did okay. I look at the chart and I
wonder why I got out. The pain of having missed out on the rally towards
the end of the day was greater than the pleasure from making back what I
had lost earlier in the day.
PRESSING WINNERS
Adding to winners is habitual for me. I have new and experienced traders
following me on YouTube and Telegram exclaiming they want to know how
I do it.
One simple way of doing it is to look over the prior trading days, and come
up with a number of points at which you will want to add to your position.
For example, you may look at Euro Dollar and conclude you want to add to
your position at every 10-pip interval.
I went about my approach in a different manner. I think it is best illustrated
through the use of a theoretical explanation.
I want to trade the FTSE 100 Index, and I am looking for an approach to
adding to my winning trades. How do I go about doing that?
STEP 1
I need to establish what the historical volatility is in this index. I use a
measure called Average True Range (ATR). When using it I carefully
differentiate between periods in which I don’t want to trade the product, and
those in which I do want to trade the product.
For example, the volatility of the FTSE Index on a five-minute chart during
the night could be around 4 points, while the volatility on a five-minute
chart at the open at 8 am GMT is around 14 points. That is a significant
difference.
Say for the sake of argument that I have established that the volatility is
equal to 10 pips/10 points where I day trade the FTSE Index on the time
frame I prefer to trade.
We call that value N.
N = 10
My stop-loss is 2 × N.
STEP 2
Establish how much money you want to risk on a trade. This is a percentage
function of your account value. Say you have £10,000 in your trading
account, and you decide you want to risk 2% of the account.
Hence 2% of £10,000 = £200.
STEP 3
Now I establish my trading size unit, which is essentially how big my
trading size is.
If N = 10
Risk = 2N
Monetary Risk = £200
Then my trading size unit will be £200 / 20 = £10
STEP 4
I can then argue that I want to add to my position at every ½N. I think this
is where your own research should come into play. However, for the sake of
the argument, I will take you through an example, based on the numbers
above.
EXAMPLE
I buy the FTSE Index at 7,500.
My stop is 20 points.
My risk is £10 per point.
My add-on is at every ½N. This means I add at every 5-point increment.
The FTSE Index now trades at 7,505. I buy one more unit, meaning I am
now buying £10 a point at 7,505.
I now have two open positions:
Long 7,500 with stop-loss at 7,480.
Long at 7,505 with stop-loss at 7,485.
As you can quickly gather, this will cause a bigger loss than anticipated if I
do not move my stop-loss up on the first position.
Before I enter the second position, I have already planned to move my stop-
loss up by ½N. I will move the stop-loss up on the first position by 5 points.
This means that the stop-losses on the first and second positions are
identical. My total risk is now 35 points.
As I hope you can see, this way of trading can quickly materialise a larger
loss than perhaps you had wanted it to. It is for this reason I urge you to
consider variations of this method, such as adding with smaller stake size
on the second, third and fourth positions.
You may ask, “Why add at all?”
Because by adding, I am actively combatting the brain’s proclivity to
scaling down risk. Our brains want to take profit. I am doing the opposite. I
am adding to my position.
REAL-LIFE EXAMPLE
The following chart shows the Dow Jones Index on a trend day. I define a
trend day as a day when the market opens at the high or the low of the day,
and closes at the low or the high of the day.
The problem with trend days is that you won’t know it was a trend day until
the day is over. So, you have to make an assumption, based around what
you see on the chart, about whether you think it is a trend day.
I have researched the price action behaviour of the Dow Jones Index over
18 years. I have identified a handful of first hour patterns, which I believe
are precursors for trend days. One of those patterns is a gap down after a
gap up day, where the gap down is not filled within the first hour.
Figure 20 shows a positive Thursday. The trade I want to show you took
place on the Friday. Friday is notorious for producing lasting trends, often
leading to trend days, especially on Fridays at the beginning or end of the
month.
Figure 20
Source: eSignal (esignal.com)
I have also included a screenshot of my trading monitor.
Wall Street 3,000.0
25419.625135.9
kr851,150.00

500.0
25458
25135.9
kr161,500.00

700.0
254


tive Thursday. The trade I want to show you took
place on the Friday. Friday is notorious for producing lasting trends, often
leading to trend days, especially on Fridays at the beginning or end of the
month.
Figure 20
Source: eSignal (esignal.com)
I have also included a screenshot of my trading monitor.
Wall Street 3,000.0
25419.625135.9
kr851,150.00

500.0
25458
25135.9
kr161,500.00

700.0
25455
25135.9
kr224,000.00

350.0
25469
25135.9
kr116,725.00

450.0
25455
25135.9
kr143,775.00

200.0
25441
25135.9
kr61,100.00

300.0
25329
25135.9
kr58,050.00

250.0
25356
25135.9
kr55,250.00

125.0
25258
25135.9
kr15,312.50

125.0
25259
25135.9
kr15,437.50
The top line shows my overall exposure. It states I am short 3,000 in Wall
Street. My average entry is 25,419.6. The current price is 25,135.9. The
3,000 means I am short 3,000 Danish kroner per point, which equates to
about 500 US dollars per point movement in the Dow.
So, for every point the Dow Index drops, I make 3000 kroner, and vice
versa. For every point it rallies, I lose 3000 kroner. At the time of the screen
shot I am in profit by 851,000 kroner.
Below my total exposure, you see each of the entries, which add up to
3,000.
If you look at the previous chart, you will see the numbers 1, 2, and 3.
Those are points where I am adding to my position.
At Point 1 on the chart, I start selling short. I scale into my short position
over five entries. Those are the first five entries you see below my total
exposure.
At Point 2, I add more short positions. I do so because the market is weak,
and I am certain a trend day is developing. I add about 25% more to my
short position at Point 2. At Point 3, I add about 10% more to my short
position
As the market moves lower, I add to my positions, as I have been trained to
do. I move my stop-loss down as well. What you are unable to see on the
chart is that initially the market moved against me.
What I am doing here is critical to your understanding of fear. I have been
under water on my position, and now I am finally making money. My brain
has had to endure pain during the loss period, and I am now being sent
signals from my mind to relieve my brain of the pain it felt during the
losing period (15 minutes earlier).
I counteract this pain by actively doing the very thing that causes me pain. I
am embracing the discomfort by compounding it. This is required if I am to
actively engage in behaviour that is the opposite of the 90%’s. You will
notice that my add-on is not a big position. Yet, it serves to reinforce the
right kind of behaviour.
The Dow falls strongly. I am in the safe zone now. My core position cannot
be threatened. My stops are placed at breakeven. However, I am still
prepared to let this trade turn into an insignificant trade (small profit trade)
in the hope that it will turn into a significant trade.
You must find your own level of risk temperance. Once I was asked “If you
keep adding to your trades, when do you take profits?” That is a great
question. I use the charts to take profits. If I double bottom on a chart, and I
am short, then I might be tempted to take profit.
Alternatively – and this is a really good trick – I will place my stop-loss
where I would want to get into the market, but in the other direction. For
example, in this case, if I am short the Dow Jones Index I might place my
stop-loss at the price level where I would turn into a buyer of the index.
Although I am 100 points in profit, I am by no means relaxing. I am adding
to my position again and again, in smaller increments, in order to reinforce
the right behaviour.
The trade had the potential to turn into a spectacular trade. It didn’t. The
Dow bounced strongly (before falling again), and although I made a profit,
it was not the amount you see on the screenshot.
That is very important for me to get across to you, because I think it is
important that you establish some criteria for how much of your paper
profits you are prepared to give away in order to capture the really big days.
There are days when I come to work, and I just want to capture 20–30
points, and then be done. Not every day has hundreds of points available in
it.
Then there are days when the market starts out very strongly or very
weakly, and you think to yourself, “This could be a really big day.”
I have a philosophy to trading that means I am prepared to sacrifice profits
in order to discover how big the profit can get. If you don’t have that
philosophy, you will never discover how big the profit can get.
If you always think of potential targets, using technical analysis, you are
most likely just talking your way out of a good trade. You might be using
technical measures to time your exit, but I don’t subscribe to this method.
There is a reason for that. When the market is trending, and I am on board
the trend with a position, I hope that the market will close that night at its
strongest/weakest for the day.
It happens on at least 20% of all trading days in stock indices. Yes, I have
had plenty of disappointments, but I have had sufficient stellar days to make
it part of my philosophy.
DAX INDEX – TRADING EXAMPLE
Let me show you another example of a trade where I added to my positions.
However, this time I will show you what I saw at the time of the trade. See
Figure 21.
Figure 21
Source: eSignal (esignal.com)
I am not on board the first push down. I look at the rebound for an
opportunity to short the DAX Index. On the next image you can see my
initial position entries highlighted in box 1.

DAX finally caves in and resumes its downtrend, as shown in Figure 22.
You can see my subsequent short entries in box 2. There are a couple of
things I would like you to see here:
Figure 22
Source: eSignal (esignal.com)
1. I am not afraid to sell short something that has already fallen in
price. This is consistent with what the majority of people do not want
to do.
2. I scale into the position in this example, and I add aggressively to
my short position once my


e 22.
You can see my subsequent short entries in box 2. There are a couple of
things I would like you to see here:
Figure 22
Source: eSignal (esignal.com)
1. I am not afraid to sell short something that has already fallen in
price. This is consistent with what the majority of people do not want
to do.
2. I scale into the position in this example, and I add aggressively to
my short position once my position is in profit.
I urge you to contemplate how you can introduce the element of adding to
winners into your trading. I am not interested in rewriting your trading plan.
I am not interested in turning you into a copy of me. I am interested in
trying to make you understand the value of pain in trading, as a barometer
for adding to positions.
If it is uncomfortable, then it is probably the right thing to do.
I will repeat something I mentioned earlier. I think you should give serious
contemplation to the question of why people in general find it easier to add
to a losing trade than a winning trade.
I don’t ever want to be accused of glorifying trading. It is a risky
proposition. Twenty years ago most brokers in Europe didn’t have what we
today know as negative balance protection. Today, it is a legal requirement.
It means that you can’t lose more money than is available on your trading
account.
You can still lose a lot more than you anticipate, especially if you add to
positions, like I do.
As you become better at trading, you will want to trade bigger and bigger
size, and the market on a big position doesn’t have to change direction by a
lot before you give away a big portion of your open profits.
If you want proof of that, here it is. This was a perfectly good-looking DAX
position which turned from being very profitable to showing a significant
loss. It starts well with a short position at 11,288. I then add to the position
as the DAX Index falls. Then the market reverses, and I add a little more at
the old top.
At the point of the screenshot I am short 4,500 kroner per point, and I am
losing 25 points. I close the position shortly after for a loss.
4,500.0
11289.411314.0
kr−110,5100.00
300.011288.311314.0
kr−7,710.00
350.011286.811314.0
kr−9,520.00
400.011285.211314.0
kr−11,520.00
500.011285.011314.0
kr−14,500.00
500.011279.011314.0
kr−17,500.00
500.011274.811314.0
kr−19,600.00
450.011295.211314.0
kr−8,460.00
500.011293.211314.0
kr−10,400.00
500.011292.711314.0
kr−10,650.00
500.011312.711314.0
kr650.00
UNCOMFORTABLE
There are no shortcuts in the trading industry, any more than there are
shortcuts in, say, professional sports. I expect to get uncomfortable during
the trading. At times it feels like the minutes last for hours. My impatience
to do something is raging within me. I am battling my own emotions more
than I am battling the markets.
Finally, when I am in a position, my mind has something to occupy itself
with. Be careful what you ask for! Maybe the position is showing a loss, so
now I am battling my subconscious mind, which wants the position to run a
little longer.
My conscious mind has a stop-loss, but my subconscious mind wants to me
to remove it. It doesn’t want to lose.
It could be the position is going well. Now my subconscious wants me to
take my profits. It loves the gratification of a good profit. So, I am battling
it whether I am winning or losing on my trades.
The key to victory starts with being mindful of the existence of two brains.
The ability to anticipate your enemy’s next move is crucial. The
subconscious brain is a rather simple beast. It just wants to avoid pain.
For the subconscious brain there are two pains in trading. There is the pain
of seeing a profit. When it sees a profit, it wants you to close it because then
it doesn’t have to deal with the pain of seeing the profit disappear. Then
there is the pain of loss. When the subconscious brain sees a loss, it wants
you to hold on to the position a little longer and a little longer. Otherwise, it
will have to deal with taking the loss. As long as the position is open, there
is always hope.
In a nutshell, what separates the 10% of winners from the 90% of losers is
which brain they are listening to. It took me many years to realise this. I
developed a system for my mind, a training program that enabled me to
withstand the influences of the emotional subconscious brain on my trading
decisions.
During the Round the Clock Trader event referred to previously, a guest
asked me if I wasn’t afraid that the market would turn back up the moment I
went short.
Who do you think was really asking that question? It was the part of his
mind controlled by fear. Of course, the market might very well turn around.
I would lie if I said that had never happened. It probably happens five times
out of ten. So, the real question to be asked is this:
what would cause you more pain?
1. You sell short and the market reverses back up.
2. You do nothing and the market reverses back up.
3. You sell short and the market continues lower.
4. You do nothing and the market continues lower.
OPTION 1
I sell short and the darn market moves against me again. It is annoying, but
the stop-loss will take care of my exit. At least I can say that I followed my
plan.
OPTION 2
I do nothing and the market moves back up. I might be happy, but I have
just trained my mind not to follow the plan, and I was rewarded for it.
I was rewarded by not selling short, which would have lost me money, and
my mind is now congratulating me for my excellent chart reading skills, but
for all the wrong reasons.
OPTION 3
I sell short, like I am supposed to, and the market follows through to the
downside. Instead of clapping my small paws in joy, I am proactive, and I
add to my winning trade. I am doing absolutely everything I am meant to
do.
OPTION 4
I decide not to follow the plan of shorting, and the market moves
aggressively lower. I would have made all the lost money back from the
first trade, but I do not.
I can’t speak for you, but I will tell you how I feel about it. It c


h to the
downside. Instead of clapping my small paws in joy, I am proactive, and I
add to my winning trade. I am doing absolutely everything I am meant to
do.
OPTION 4
I decide not to follow the plan of shorting, and the market moves
aggressively lower. I would have made all the lost money back from the
first trade, but I do not.
I can’t speak for you, but I will tell you how I feel about it. It causes me
more emotional pain to miss a move because I didn’t follow through on my
plan than when I followed through with my plan.
WHAT IS TOO FAR?
Another question that came in after the short trade was this: “Were you not
concerned that the market had already moved too far? Do you not think you
had already missed the boat?”
The person who asked this question is most likely the same person who
would not buy the DAX because it had already rallied 1% on the day.
This is the supermarket analogy all over. We seek out bargains, but we
avoid buying items that have risen in price.
It is a mental illusion. You can’t say the DAX is too expensive just because
it has rallied 1% on the day. We do not want to buy something that is
already going up. We would rather wait until it comes down again to buy it,
because then it is cheaper.
Similarly, we do not want to sell short something that is already going
down. We want to wait for it to rise again and sell it when it is higher (more
expensive) because it gives us better value.
In principle, I don’t disagree with these statements, but here is the flaw: that
is what everyone else wants to do, and the majority tend to be wrong.
Correction: they don’t tend to be wrong; they are wrong. Sure, they are
right 60% of the time, but when they are wrong they are really wrong. How
do you know where the top or the bottom is? I have seen a lot of trading
systems, but none of them had an acceptable success ratio of predicting tops
or bottoms.
This is why I say that you should buy strength and you should sell
weakness. Buy high, sell higher; sell low, buy back lower. Will I miss the
absolute turning points? Yes, I will. Top pickers and bottom pickers soon
become cotton pickers.
When I am distressed about profits disappearing, I remind myself of the
story of a US super trader whose reputation for doing the right thing under
pressure is legendary. His name is Paul Tudor Jones.
He was once watching the market and, as it had been rising all morning, he
had been buying steadily. He was long several hundred contracts showing a
good profit.
Suddenly the market jolted lower for no apparent reason. Without blinking,
he sold out all his long positions, and as the market continued to fall, he
started to sell short the market too. One of his colleagues who didn’t know
he had commenced shorting the market commented on the fall and said this
was a good chance to start buying.
The conversation, edited for expletives, went on as follows:
“Are you mad?” said Paul.
“What do you mean?” said the colleague.
“You must be mad. The market has just broken 100 points in 15 minutes,
and you are looking to buy it?”
“Well, what would you do?”
“Let’s put it this way, I am certainly not looking to buy it here.”
“Well, would you sell them short here?”
“Of course I would!”
“But they have come down so far.”
“Exactly, that’s the point.”
“Right,” said the colleague. “Well just how far would the market have to
fall before you started to buy it?”
“As long as it is going down, why would I buy it?”
“Because it’s so cheap, it’s an absolute bargain. It’s 100 points cheaper than
it was 15 minutes ago.”
“Forget cheap. Forget expensive. It’s just numbers on a page.”
“But I don’t understand. If it kept going down, where would you try and
buy it?”
“If it kept going down, I’d want to be selling it, not buying it. If it kept
going down, I would sell it down to zero.”
“And if it was going up?”
If it kept going up, I’d buy it to infinity.”
I absolutely love this story. Having seen Paul Tudor Jones trade, you sense
his energy, his intensity and determination, and his utter conviction in
whatever he does. He doesn’t just say, “Sell short.” He shouts, “Sell short!”
stamps his feet and swings his hands.
I admire his mental agility – flowing from being convinced on the long side
to turning the position to the short side. Sadly, this is one trait that is hard to
acquire. I know some traders with decades of trading experience who are
unable to flip the switch and go from being long to being short.
FINDING A LOW
Trying to find the low in a stock can be a costly affair. We all make
mistakes, but how costly is the mistake going to be? I remember very
vividly watching a CNBC show called Mad Money, during the financial
crisis in 2008.
On the show Jim Cramer received an email from a viewer asking about the
health of Bear Stearns. Now I am sure that if Mr Cramer had an opportunity
to go back in time he would most certainly amend what he said in that
broadcast.
He basically shouted at the screen, saying that Bear Stearns was fine. But a
few days later Bear Stearns was gone, done and dusted, never to be seen
again.
You may recall my first brush with meeting clients back in 2001. I gave
them the not-so-welcome advice to get the hell out of their Marconi shares.
Would you believe it if I told you that history repeated itself in 2007?
It is easy to be swayed by a supermarket mentality when we are trading. As
I mentioned previously in the book, when we go into a supermarket, we are
drawn towards the special offers. When I look at my shopping basket from
this weekend, I see things that I wouldn’t normally buy.
Of course, I would need these things at some point or another. We all need
toilet paper. We all need dishwasher tablets, and we all need hand soap. The
reason why they were in my shopping basket this week was because they
were on offer. Who can resist a 50% discount?
But a 50% discount in a supermarket is not the same thing as a 50%
discount in the financial markets. Many clients of City Index, the broker I
worked at for more than eight year