After losing $70k trading new highs (Investor Business Daily style) with 7% stops, I learned my first lesson.  If you have 7% stops, how many times in a row can you be wrong and still be able to trade (financially and/or psychologically)??  The answer is 17 times to get to below $30k.  It seems like a lot, but unfortunately, I was using full leverage on the advice of my greedy broker, so that reduces to 8 consecutive losing trades to get to $30k.

What would it take to recover back to $100k from the $30k level?  333%!  How often does one make 333% on 100% of their portfolio?  Not very often ;-)

Lesson:  Leverage and large stops are killers.

Moral:  The tortoise beats the hare.

Now of course, I did not learn this lesson all at that time because, as I have indicated, I am about the most persistent and stubborn guy you could possibly meet. So it took me a decade.  That didn’t keep me from making good on my losses though.  In fact, I made that loss many many times over.  Another thing that makes it tough to learn.  So there is another lesson.

Lesson:  You cannot correct your behavior as a trader unless you agree you are doing something wrong.

It is impossible to distinguish between luck and skill in most cases.

So, if I can impart any wisdom to you at all that will keep you in the game, the above would be it!

Because, you cannot win, if you are not in the game! Here, I will say it again.  You cannot win if you are not in the game.

Having said that, here is another tidbit of crazy inside knowledge.  Since you cannot distinguish between luck and skill a good portion of the time, the real truth of the matter is you are not responsible for your winning at all.  The market is.  Here, I will prove it (cause I know you are probably shaking your head right now).  Go try to extract a bunch of gains out of the market right now.  So you will say well….. this and well…. that.  Fact is, depending on your method, the market will deliver the conditions you need to make a bunch at the exact time it does it.  Not before, not after.  And, you will have to be there at that exact time in order to benefit.

I said before, you have to manage your risk and then, at some point (and here is the blaspemous statement that will make most traders cringe), a good accident happens.  Accident you say??  Yes.  I use that word, because it is the only one that is strong enough to remind me there is nothing personal about trading. It is all management of risk.  It is a disipline.

How does all this impact your personality as a trader?  You have to bring yourself in line with some sense of truth.  We all like to think we are exempt from the physical forces of the universe.  We like to watch Hollywood movies that confirm our invincibility may be real.  But, nothing shows you quicker that you are wrong than trading.  It is instantaneous feedback.  So, try to be humble and the way will open your way to success.

Past my initial starting days (of losing) as a trader I shared earlier, I began to study the market and develop computer models using my background in statistics and experimental design.  In Part III, I will try to cover a bit about how I became a systems developer.

My mother passed in January of 1991 and left me about $100k.  She had
done well through the 80s investing in blue chip stocks and I knew of
her success.  Actually, noboby  in the family imagined she had amassed
a hidden fortune of about $650k even though we all knew she invested
in stocks while working at the phone company job she couldn’t stand to
be in.

When my grandfather passed in the mid 70s, he left me 500 bucks, which
my mother helped me to invest.  A number of shares of AT&T that began
to grow on her advice. I thought she had taught me something over the
years, so I could not begin to imagine that, when I told her, on her
deathbed, that I would do well with my inheritance, I did not have a
clue what I was talking about ;-).

I proudly opened a brokerage account with my new found fortune and
prepared to make it big!  Trading on full margin, using the infallible
principles of William O’Neil and his recommended 7% stops, I quickly
took that $100k down to around $30k.  Needless to say, I was
demoralized and also felt I had betrayed my own mother in my failure
(all this happened over only a few months time).  I felt bamboozeled!

I had two choices. One, I could fold and go back to my miserable life
licking my wounds, or, I could grab my own bootstraps and figure out
what on earth had just happened to me.  I grabbed my bootstraps, yes,
but I could not have ever imagined the incredible road it would take
me on.  An unforgettable journey of unconventional living…..

The first step in realizing you need to fix something, is in the
realization that you are the problem….

In my next post I will cover some of my background and how different
trading approaches have different statistics that impact your
personality and your ability to trade.