Lose Your Way To Trading Success
From the Trading Desk of Oliver L. Velez
Most active market participants (we'll call them traders) are ceaselessly looking for certainty, albeit in the wrong places. They are looking for more certain techniques, information that is more certain, systems that deliver more certain results, reports that offer more certain assurances, analysts that spit out more certain predications, etc., etc., etc. All of this searching, while admirable, is really for naught, because the only thing certain in this world of ours (besides death and taxes) is LOSS. And even death and taxes are a form of loss, as I'm sure you can see.
Big profits are not certain, but losses are. Right decisions are not certain, but losses are. Wealth is not certain, neither is income but, yup...you guessed it, losses are. Now I know this may seem a bit dark and discouraging, but it's really not. Give me a few moments and what I'm about to explain will change your paradigm in a way that could positively change the way you trade...for life.
Lose Right And You'll Win Big
Most traders trying to find their way in the markets are focused entirely on the wrong thing. Their objective is all wrong. They are seeking the ability or skill to profit, to gain, to win, when in fact they should be seeking the ability or skill to lose. Let’s me explain.
If you bought a stock at $20 and the stock rallied to $26 to deliver a $6 gain, what did you do to produce that gain? What did you do to help the stock rise the $6? NOTHING! Besides a silent prayer or a little bit of hoping perhaps, you did absolutely NOTHING. The stock rose all by itself. It did not need your help. It took care of the gain without you. Now, let’s take the reverse scenario. You bought the same stock at $20 and instead of rising, the stock dropped to $14, delivering a $6 decline, but you sold out at $18, to suffer only a $2 loss. What did you do to incur only a $2 loss? Ahhh! Do you see where I’m going here? You rose to the occasion to cut the neck of the stock off. You sold it, killed it, murdered it, eliminated it, fired it, tossed it, removed it, erased it, and you did it quickly. Had you not acted, your loss could have been as much as $6. The point is clear, my traders. “Profits take care of themselves. Losers never do.” Remember this!
No Skill Required
There is no skill required for a gain. Please think about this, people. I know it’s bold and almost sounds preposterous, but I’m here to tell you that what I’m saying here could not be more true. Some of the stocks you chose will move in your favor and others will not. Plain and simple. I don’t care what super-duper stock picking method you use, I don’t care how gifted or even psychic you are, the fact will always remain that some of your picks will go in your favor and some will not. The key to success does not lie in your stock picking method as much as it lies in your ability to kill the picks that move against you so that they don’t choke off or cancel out the ones that do. You will always get your share of wins, no matter what your method or skill level. And you’ll do nothing to get them or deserve them, either. The wins will happen all by themselves. But so will the losers. However, when the stocks you chose move against you, you must be as intolerant as Mr. Scrooge would be of an ineffective, money-squandering employee. Whenever you buy (or short) a stock, you are in effect hiring an employee to do one job and one job only…to swiftly move in your desired direction. The moment it fails to do that, the stock should be fired! No questions asked. If you gain the skill of quickly firing the dudes, you’ll never have to worry about being profitable, because through no effort of your own, the market will hand you your fair share of rosy wins. No skill required! so throw darts, roll dice, call the psychic hot line or even better, listen to Jim Cramer. It makes little difference. The fact is, some of your plays will go in your favor, despite your approach. Just make sure you quickly kill the plays that don't. It's as simple as that.
Loss Your Way To Success
So the goal is to be a professional loss taker. Practice it. Make it your number one focus, and greater levels of trading success will be yours. Stop this nonsense of working on better picks, better plays, better this and better that. Stop the nonsensical search for the Holy Grail. It does not exist. Just focus more on killing the weeds, so that your roses can grow. If you do that, as I said before, you can throw darts at a stock page and the results will be favorable over time.
In my 5-day Live Trading Labs, my students and I will practice the “art of losing” by literally doing hundreds of live trades with real money designed to lose. In fact, I will purposely put the traders in losing trades to see how effective they become at exiting with speed and agility. I’ll say something like, “O.k. traders, WXYZ is about to breakout above $40. Short the stock at $40.01 and exit for exactly a 5 cent loss. I do not want to see a 4 cent loss. Neither do I want to see a 6 cent loss. Your job is to bring me back a perfect 5 cent loss.” Its drills like these that hone and perfect the most important skill of all…the skill of losing professionally.
If you learn how to lose properly, my friends, the winners will take care of themselves. Remember this. In my next installment, I will outline a trading system that is simple, yet powerful and mathematically impossible to lose money over time. Did you hear that? I said this system will never lose money over time. It’s mathematically impossible, no matter what your stock selection criteria or method is. Don’t believe me? Then stay tuned and watch me prove it. In the meantime, have a great Thanksgiving. We all have much to be thankful for.
Happy Trading!
Common sense but so dificult to practice.
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Yes. Trading is intrinsically simple. Not easy, mind you. But very simple. Simple and easy are totally two different things, for sure, but the mechanics of the market are very simple After all, stocks go up, down and sideways. What's complex about that? Nothing.
So if its so simple, what makes trading so hard? What's makes dealing with this rather simple mechanism so difficult? WE DO! The complexity comes from us. We are an emotionally driven species whose psychological balance gets affected with each new experience. This is what makes the following statement true: "Knowing what to do is no guarantee that you do it."
But get this. If it were easy...if everyone got it, this activity we call trading would not be so lucrative for those who do get it. Thank goodness for the difficulty. I say let's thank our lucky stars that the vast majority will never get it or do it right, otherwise the huge potential that awaits the talented trader every day would vanish like a whisper in the wind. And we can't have that, can we?
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WOW Oliver what a great blog especially after my last e-mail to you which was about learning to lose. Good stuff Thanks, Larry
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You're quite welcome Larry. Thanks for the kind words. The best is yet to come.
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As a beginner trader, who has made a lot of mistakes so far while learning to trade, I've lost a lot of money because I didn't sell quickly enough. But, fortunately, I'm now starting to learn from these mistakes. Thanks, Mr. Velez, for the reassuring words of advice.
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85% of solving a problem is recognizing first that the problem actually exists. You've done that, so I commend you. Problems (frequently recurring mistakes) are like thieves that lurk in the shadows of the night. They are most powerful when unrevealed, but weak when seen. A thief is most dangerous when he is allowed to operate in your home unseen. When you shine the light on him, to reveal that fact that you now see him, the thief will have to make one of two choices: 1) flee; or 2) stay and fight. In most cases, the thief will flee, because thieves are generally cowards.
Your thief has begun to take flight. Why? Because you have spotted him and his antics. Now, chase him all the more to make him runaway faster.
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Oliver,
Your passion for trading still amazes me. Very truly put that we do nothing about winning stocks. But if we do NOTHING about the loosing stocks, then we'll be out of the market PERMANENTLY. I will be watching out for the next installment.
Always & still an inspiration - keep going.
Thanks
The Stockman
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Thanks so much Eric. The best is yet to come. Stay tuned.
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I've only recently heard of you, but I'm already a fan. I know from personal trading experience that what you say is true. Waiting to hear future installments of this entry.
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Thanks so much. There is only one thing that is as special as old fans... and that's new fans. Welcome and stay tuned. The best is yet to come.
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Hi,Oliver:
I really like your artical"lose your way to tradinng success".It's great!I'm still in level one,and made many mistakes.One thing I'm still not so sure that is my stop loss have to follow the rule of each of stralegie i use.like stop loss set at "0.01 below the entry bar's low.or for level one trader,I have to cut the loss when it hit $3.00 a trade.If I set the stop loss 0.01 below the entry bar's low,the loss will be more than$10.00 a trade when it hit the stop loss point.Which one you think it's better for me to follow now?
2)questions about the 2mins and 5mins time frame.I found this I like to follow 5mins chat,but the range between the entry point and the stop loss point is very high which more than $10.00 a trade also.But if I follow the 2 mins chat,I will lose money very fast because the move is so fast.which time frame do you think it's good for the beginer to follow? Hope can hear from you soon!thanks a lot!
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Dear Feng:
First of all, where did you get the idea that you should have a maximum $3.00 stop on each one of your trades at level 1 of the VCM Trader Advancement Program (http://www.vcmtrading.com/advancement.php)? Not only is there no such guideline, enforcing that tight a stop will almost ensure that you stay a level 1 trader indefinitely, as it will ignite too many insignificant stop outs on good trades.
Secondly, you are not (and I repeat) you are NOT to create arbitrary stops to fit your level of trading. If a correct stop is too far away for your particular level, then you must pass on the trade. Remember, all trades are not yours, only the ones that fit your current trading/risk plan. For instance, let's assume you zero in on a trade that calls for you to buy at $20.01. The stop, based on the VCM Method of trading, would typically be placed 1 penny below the entry bar's low. Let's further assume that the low of your entry bar (at the time of the trigger at $20.01) is $19.89. This would call for an entry at $20.01 with a stop at $19.88, 1 penny below the entry bar's low. A 100 share lot would lose $13. A 1000 share lot would lose $130. At level 1, $13 is too much to lose on any one trade, so this play would have to be missed or passed on. I repeat, you would not change the stop to make this trade fit your plan. Doing so will alter the statistical beauty of the method. Initial stops in your case must be "technical" not "arbitrary."
Tip: At level 1, you can lose up to $8 on any one trade. Losing $5 is even better, but an arbitrary $3 stop is a faulty approach. Now, if the play happens to call for a $3 stop because that's where the correct placement of a stop is, then so be it. Just don't set a tighter stop just because the technically correct stop is too far away for your current level of comfort. You pass on the trade and only take those trades that fit your model. And if you can't find them, THEN DON'T TRADE until you do. Sometimes the BEST action is NO action. If the market does not give you what you want, you don't play its game. The market must play YOUR game. Therein lies our edge.
Lastly, your final question regarding time frames ties into what I've detailed above. Yes, you can use the 5-minute chart to find opportunities, but you must wait for set-ups that meet your risk parameters, which for you is a maximum of $5 to $8 per trade at level 1. Quite naturally more trades will meet this criteria on the smaller 2- and 1-minute charts, but instead of picking a time frame, why not let the plays pick you. If a trade shows up on the 5-minute chart that meets your criteria, take it there. If an opportunity shows up on the 2-minute then take it there. Why choose which window to take money from. Use them all and if money shows up in any one of them, take it.
Think about this, Feng. Let's say you have a large, lovely picture-frame window in the front of your house and an old regular window that is not very special in the back of your house. If a very, very generous person in your neighborhood got the holiday spirit and decided to throw a large bag of $100 bills in your back window instead of the nice front one, would you not take it because you like your front window better than the back one? If you would not care which window the bag of money came through, why would it matter which time frame (chart window) the money shows up on? 1-minute, 2-minute, 5-minute...makes no difference to me. Money is money in all time frames.
I hope this helps.
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