Why do people get into trading?

In this episode of 2Traders Podcast, Darren and Walter dig into the hindsight bias and why you need to be wary of it with your trading. You will also learn about Bayesian Probability, statistics, and a lessons on optimism – might it help or hinder your trading? And what’s the difference between hoping and cheering?

Walter shares a story about risk. And he shares his test results of William Eckhart’s trading concept. Darren shares an interesting idea by Nassim Taleb and how it gives you a better chance of understanding probabilities in your trading.

Download (Duration: 29:13 / 70.1 MB)

In this episode:

00:56 – exciting possibilities
02:10 – times of uncertainty
03:35 – risk thinking
04:41 – destination of pain
06:33 – a bad idea
08:32 – knowing what you don’t know
10:51 – huge payoff
12:59 – big surprises
15:10 – weather apps
18:13 – infinite variants
20:04 – negate or guard against it
21:13 – sound reasoning
24:25 – adjusting risk every week
26:42 – double-edged sword
28:50 – unknown unknowns

Tweetables:
It’s not all about positive thinking [Click To Tweet].
See the real probabilities [Click To Tweet].
Base your risk around every setup[Click To Tweet].

Download The Full Episode 136 Transcript Here

Darren: Or maybe it’s like, think positive but don’t be surprised if it all works out horribly. That’s probably a good mantra, isn’t it?

Announcer: Two Traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.

Walter: Welcome back to the Two Traders. Walter here. Hi, Darren!

Darren: Hello, Walter.

Walter: So today’s episode Darren, we are going to talk about the effect of positive thinking on your trading. Do you want me to go first or what do you think?

Darren: I think, I need you to go first on this one.

Walter: Okay. This is the thing I’ve been thinking about. Here’s my theory and I could be wrong. I think, most traders, they get into trading and the reason they get into trading is because they get really excited about the possibilities.

I think that we gloss over the risk and the negative. I think that hindsight bias has a lot to do with that. I mean, I recall myself scrolling back on the charts looking at different indicators like Stochastic or whatever and going, “Yeah, I would’ve taken the trade here. I would’ve exited here.”

It’s almost like, it was totally a mess. It never worked out in real time. That sort of scrolling back and eyeballing it. That was before I even knew forex tester or I didn’t know it was around but I didn’t know about it.

I think that it’s common. I don’t know maybe I just assume that I’m like the average case where we look at things and we think, “Okay, this is a great way to make money. I want to make money. I’ll do this great thing and I will make money” and you forget about the risk.

The other side of it, is I think that some of the best investors think a lot about risk. So, that’s thinking a lot about the negatives when you think about trading. Because the negatives are that, we risk money in exchange, we are getting paid for taking on risk in the times of uncertainty. We’re putting up money in things that are totally uncertain.

We don’t know if we’re going to get that money back and the payoff is we might get more with our money back. So, that’s basically what the trader does. Now I wonder if, people say, “Oh you need to think positive. Being positive is the way to do it. You’ve got to think positive.

And there are all these great correlates that go along with positive thinking and approaching things that way. I think in trading, if you don’t have the yin to the yang, so to speak, you don’t have the risk thing, you don’t have risk in mind, you can really get into trouble.

And the other part of that is, when you see what you don’t want, when you see the negative, it helps you to find what you do want. So that’s why I think we can learn. We make mistakes about looking at things in trading such as forgetting to look at risk or maybe correlated risk or risk of holding a position over the weekend or whatever it is.

We kind of gloss over this risk and then boom! When we learn that is really something important that you need to pay attention to, it helps us to refine what we do want and helps us focus in what we want.

In that sense, it’s not all about positive thinking. I think you still need to have some of the risk thinking. And I know all pessimist will say, “I’m a realist.” I get it. I know that’s true, right? Every single pessimist you’ll ever meet…

Darren: That is true.

Walter: It’s true. You’ll never meet a pessimist who’ll say, “I’m a pessimist”. Every pessimist is a realist. I think that it’s not all about positive thinking. Positive thinking helps in terms of setting goals and expanding your limitations a little bit farther out and that’s great. But, I think that if you don’t have the focus on risk as a trader, you’ll get into big trouble.

I believe that’s why most traders get into trouble. It’s because they don’t understand that what they’re doing will eventually send them to a place where they’ll get really stressed out and they’ll feel helpless. It was actually just, they were already on that road. They were already headed to where they ended up. They just didn’t know that the road they were on was going to go there.

And, if they had figured out the risk side of it, they would’ve known long before they reach their destination of pain that, that is where they’re headed. It is all about understanding that risk part. So, I don’t think that you could just say, “Yey, let’s all think positive and we’ll make tons of money” I don’t think that’s true.  

Darren: Yeah. When you say positive thinking, it reminds me those books in the ‘80’s. Think Yourself Rich. It’s just the case of like, if you’re thinking positively then everything is going to go your way and you’re going to be rich. I think that’s a really bad way to approach trading.   

I think the problem is, like you say, it’s the information that we discount that is the important fit. Generally, we’ve got all of the information but we tend to focus on the bits  we like. The nice fluffy, comfortable bits and the bits we don’t like are the bits that we’re kind of try to block out and discount.

You need to see the real probabilities rather than just the stuff that backs up the outcome you want. I think that is the problem. So in my eyes, positive thinking is probably a really bad phrase to use to your trading.       

Walter: What will be better then? What is the better way to look at it?

Darren: Is it bayesian?

Walter: Bayesian probability, yeah.

Darren: Where you kind of really, you have to look at just because something is highly likely, it’s not guaranteed. Whereas generally, 75% would kind of, that’s a guarantee. I think we fall into that trap a lot in trading.     

Walter: Absolutely. To me, I’m not against like when you’re in a trade, I don’t think it’s necessarily a bad idea to think that, that trade is going to work out. I don’t think it’s a bad idea.

What I think is a bad idea is looking at a trade and thinking, that is such a no-brainer that I should risk a third of my account on it. That’s what I think is a bad idea. You know what I mean?

I think there’s a difference between hoping and cheering on a trade. Envisioning, “I see it on my head. It’s going to hit the profit.” All that is cool. Totally cool but I think the issue comes in when we let that cloud or judgement, which should be based more on probabilities than on sort of feelings.

I always remember, Darren. This was a long time ago and there was a couple of guys, a friend of mine who wanted to get into trading and then at this stage, I just basically moved beyond breakeven. And I was like super excited.

So, everything that had to do with trading I would tell them about. I’m like, “I think, this is going to work” I was really excited. Anyway, so this guy he was like, “Hey, my brother and I want to come over to your house. We just want to talk and see if you can teach us some trading stuff” And I’m like, “Okay. Alright, sure”

You know what was interesting about this — and I’ll never forget this —  I said to them, “Can you tell me what’s some great, what are the best methods for a risk?” “What are the best methods you know of for managing a risk?” You know what they both said?

They both said, independently mind you, they both said, “Obviously, just risking more on the trades where you know it’s going to work out.” You know what I mean? That is exactly what we were talking about here, isn’t it?

Darren: That’s a good plan.

Walter: Exactly.

Darren: Exactly if you know it’s going to work out.

Walter: Exactly, yeah.

Darren: In trading, it is about knowing what you don’t know. If you truly know what you don’t know then you are in a much better place.

Walter: Yeah but you see, the problem is there are known unknowns and then there are unknown unknowns. To quote a certain former Secretary Of Defense in the U.S. So that’s the problem, right?   

There are things that we now, we don’t know which is like for example, what is going to happen on the next trade. We don’t know that. But then there are also things that we don’t know, we don’t know. How do you deal with those? Those are just like black swans, it’s just like out of the blue. What is the contingency for that?   

Darren: Nassim Taleb would say, be antifragile. He’d say, “Have something that prospers from that possibility, that probability rather than in something that blows up”. So, perhaps, you could, let’s say, you work out that risking 3% of your account means you’re never going to blow up based on your data then perhaps risk 1% of your account.

It gives you a greater chance of not succumbing to that but I think there’s a lot of people that don’t agree with that. They think they do know all of it. I think that’s where the danger is. As long as you accept that you don’t know everything and you’ve got a pretty good idea of the things you don’t know then you stand a better probability of making money in this game.     

Walter: Some people also just, it’s so sexy to be able to just pick up and make money every single day not knowing that the one day is coming that is going to completely wipe you out.

Whereas, Nassim Taleb, he’s comfortable losing money everyday and then the big payoff comes some years down the road. He takes the opposite side of it. I think, human nature is, we are not really built for that.  

We are not really built to the point where we can say, “Yeah, I’m happy losing money between today and the nex 5 or 6 years” knowing that one day between now and whenever, 5 or 6 years from now, I’m just going to get this huge payoff.         

Darren: Yeah. I don’t think we are setup to think like that and I think most of the things we do in life don’t necessarily adhere to that rule.    

Walter: That’s right.

Darren: Most of the things we do, we can pretty much guarantee the outcome in our daily life. I think that is the big, not known that is a good idea to take onboard. It’s what the outcome is going to be and not just the outcome today. The outcome in a years time and you can practice and test and have live trading data as long as you want but you don’t know how much money you’re going to make this year.

When you start believing you’re in control of that outcome, I think that’s when you’re in a danger zone. You really kind of have to let the whole outcome thing go and just focus on the process. That is something that we don’t do well naturally as human beings.

Walter: No because we look at the outcome and then we adjust on off of that, absolutely. I would argue that most of what we do as humans is we just draw the straight line like you’re saying.

To me, everytime I look at some sort of article in a business or economics magazine or something, they’re always saying basically like, “This is what happened”. All the banks and all the experts they’re all saying, “Yeah, we kind of expect to keep going.” It’s so funny. It’s like nobody ever learns.

Everyone thinks that, today is sunny. Tomorrow is probably going to be sunny. Last quarter, the market went up. Next quarter is probably going to go up. It’s crazy to me that, that is the case but sometimes you wake up and then the next day, there’s a tsunami. Or sometimes, you wake up and then boom! There’s a nuclear power plant meltdown or you wake up and there’s a revolution or a coup or whatever.

These things happen and yet they’re just not even on the radar. They just come in as these big surprises. I suppose, you’ll go crazy if you had all these anxieties. Worrying about tomorrow there could be a tsunami or whatever.

It’s just crazy to me that the so-called experts, the guys that’s telling us what’s going to happen tomorrow, they just draw a straight line based on what has happened the last week, or the month or the last quarter. It never seemed to be the case where they’ll say, “It’s been going up for five years but we think it’s going to be tank this year.” It’s crazy. It’s just crazy.      

Darren: You know weather apps always give you a 10-day forecast and it’s known without any doubt that their 10-day forecast is basically worth nothing. But they all have 10-day forecast and we all believe them and we buy into them.  

Amount of people have come up to me ad say, “Look, in 10 days time, it’s going to be 25 degrees and blaze in sunshine.” You can show them the statistics and say, “look, it’s really, really inaccurate” past ten days. In fact, weather reports have only really accurate for sort of 24-hours. Still can’t believe it, you still can’t buy into it and then that’s how we think.          

Walter: Yeah, I totally do. I totally fall victim to that. I’m like, “Oh yeah, 8 days from now it’s going to be raining so I won’t do this. I’ll do that” and then it’ll come up and I’ll be like, “Are you kidding me? It’s supposed to be raining today. What?”    

Darren: Usually it’s because there’s some sort of an event going on in their life that they want to have a good outcome. Maybe they’re going camping or something and they’re attached to that one particular outcome.

So when you’re in that kind of mindset, any data that comes at you just bounces off. You’re not going to take that. Your mind’s made up, it’s going to be sunny when I go camping. It’s says on my weather apps. So whatever you tell me now, fact or otherwise, is just going to bounce off me.

I think that’s the key system that you have to build into your trading is, some way to rationalize that. A different way of thinking about outcomes. If you can do that and you can get good at that then it will improve your trading ten-fold.

Walter: So how do you do that? How do you think about outcomes?  

Darren: Let’s say, I’ll cast my trading strategy that has a 50% win rate. When I enter a trade, it’s no good than instantly thinking that it’s going to be a winner and acting based on that emotion. You have to be realistic with your expectations.

So, you have to say, “This has got much chance of being a loser as being a winner “ and there’s going to be variants in there as well. If I have 3 winners on the trough, that doesn’t mean that my win rate is now suddenly a 100%. It’s still 50% but you just happen to have about 3 on the trough.

It’s kind of this idea of thinking in bets and looking at all the information and being realistic with your expectation. I don’t think you have to be particularly clever to do this. It’s just kind of a personal choice. I’m going to be a little bit more rational about what I’m expecting and what the possibilities are.

That can go a long term data as well. You can have ten years of data that says that your returns are going to be an x amount. There could be a massive variants in the next ten years.              

Walter: Yeah.

Darren: You have to accept that.

Walter: William Eckhart talks about that in the New Market Wizards. Actually, I’ve tested what he was saying. It was exactly what you are saying, Darren. He says that, for example, you have a 50% win rate.Sometimes what you’ll notice is that the actual data, the actual trade results will get away from that 50% mark and they will stay away from that 50% mark for a long, long, long time.

So you’ve tested your system. You have a 50% win rate and then here you are, 3 years into trading it live and your win rate is at 48%. It could stay at 48% for years. It may not get to 50%. You may die before it gets to 50%.

So if you’ll get really aggressive with your risk or if you make any sort of mistakes based on assuming that 50% win rate, you can get into big trouble and I’ve done this with random numbers.

I’ll dump them into the spreadsheet and just see like, if you dump a 1 through a 100 into a spreadsheet, you can just make it randomly assign 50 to 100 as a winner, or whatever 51 to a 100 as a winner and 1- 50 as a loser. You just do that and see how far away can it get from the true mean, which is assumed to be 50% and what happens. And then it happens. It does happen exactly like you said.

And so, what he says, is that we have in the markets, we have infinite variants and everything in statistics is not assuming that. Every normal curve you’ve ever seen, every statistical test you’ve ever seen in your life, all that stuff, assumes a normal curve distribution. Which means that only occasionally do we get those outliers on the tail.

We don’t have fat tails and what he’s saying is that not only do we have fat tails but we have really fat tails. I believe it. I’ve tested it. I think I’ve mentioned this before, probably in an episode a long time ago where I look at Swiss Franc and I said, “Okay, let’s look at Swiss Franc. Let’s see the distribution of the prices and is it true that we would have, the distribution of the Swiss Franc prices fit the normal curve” and the answer was no.

It was 300% more variants in that distribution. And that was over like 3 years or something like that. It wasn’t even a big sample. I think that you can make the case quite easily that we have such variants in the markets. Even if you don’t want to say that it’s infinite variants.

There such variants in the markets, that means the market can move really fast, really quick and you have to decide what you’re going to do to counteract that. What are you going to do because that means you can get literally wiped out.

It’s just crazy. That’s one of the things I guess. Thinking about our main topic I suppose. We don’t think of that. As a trader, you think positive, “Okay, it’s going to be a win or a loss” you don’t think in terms of this huge variants that’s out there so you can decide to take advantage of it like Taleb does. Or you can decide to try and negate it or guard against it.

Be aware that it’s going to happen but that is why I think it’s crazy to give all your money to one broker or it’s crazy to put, let’s say, you have x dollars for trading, you don’t want to put all of that money in with your brokers. That’s crazy too. There’s risk everywhere and it’s just not, to me, we just forget it. It’ too easily forgotten.  

Darren: Yeah so really the message isn’t think positive, is it?

Walter: No. I guess not.

Darren: Well maybe it’s like, think positive but don’t be surprised if it all works out horribly. That’s probably a good mantra, isn’t it? It’s basically saying, the one thing you don’t know and you need to forget about is the outcome. You need to focus on other areas.

Walter: What can we control? We can control process and execution, right?

Darren: Yeah, those two. And there has to be sound reasoning behind your process and really kind of get into the area of edge. What is your edge and how sound is the reasoning for your edge?     

Walter: Are you focused on making sure that the way that you interact with the markets will pull out that edge? In other words, are you executing a sound manner so that your edge will show itself? Because we get in the way, I guess.

Darren: Definitely.

Walter: Cool stuff.

Darren: I did it last week. I started trading my stop earlier than I normally would and I’ve convinced myself there was a sound reasoning for this. It end up causing me a lot of profit. I didn’t lose any money but it caused me a lot of profit. I basically took my edge away.

Walter: Which is more painful: to lose out on a potential profit that you should have had — the missed opportunity — or is it to lose money? To actually lose money because of a mistake. So the mistake causes you to lose out on more profit or missed opportunity or the mistake causes you to actually just lose money.

Darren: I run a very low win rate system so for me, it was missing out on the winners because I don’t get many winners. And, execution mistake that takes one of those away can really damage my outcome in the long run.

Whereas, loses happen a lot and I should’ve set my position size correctly that they are not going to matter so much. So, for me, it was missing out on the winners. That was the painful thing.

Moreover, the fact that the failure was in me. The system was clear. I know what I needed to do and I break the rules. That’s the most painful. I can’t blame it on anyone else. I can’t blame it on the markets. I’d like to blame it on the markets but it was me.  

Walter: Let’s say, you’re in a trade and you calculate, because what I do is, if I’m in a trade and then I’d take another one, I calculate my risk assuming that the trades I’m in currently are going to be lost. They’re counted as a losers. Do you do that or how do you manage your risk? So, when you’re calculating your risk, what do you do with the open positions?     

Darren: My risk is based around I take on every setup.

Walter: Right. For example, let’s say, you have 5 positions on and you’re taking a 6th position, would you assume that those 5 previous positions are like, let’s say, you’re risking 1% per trade, do you just assume that those previous 5 positions were all 5 percentage lost or how do you do that? Or do you just keep the risk the same or do you adjust it every week or something? Is that what you do, you adjust the risk every week?        

Darren: Only up. If I’d make profit then I’d compound it but if I made loses I don’t.  

Walter: Right, you keep the same risk.

Darren: Yes, I keep the same risk. So, if I have 5 trades open as far as I’m concerned, they’re gone. To be fair, I’ve never gotten to the point where I got 6 trades open with these strategies.   

Walter: So you would go like, We’re up 10% off of last week, — so you go — “Okay, now this is our new risk amount” and then all week long, you’re using that amount. And, let’s say you’re down 2% on the week, the following week, you’ll keep the same dollar amount or pound per trade risk.     

Darren: I’m not an expert on risk and I need to do a lot more studying on it and I wouldn’t advise anyone to take my advice. I may well be doing it right based on the data I’ve got then it works good enough. I try to stop trying to optimize. Stop trying to be at the maximum all the time and try to find a place that the works good enough and be comfortable with that.      

Walter: Gotcha, cool.

Darren: Again, whether that’s the right thing to do or not. I don’t know but I think you can. Optimizing can help but again, you don’t know what the outcome is going to be. So you test 3 years and workout you can risk 5% and risk 5%. It could be too much. You could just have 3 really good years.

If you’ll look at some like Dunn Capital who go a whole year and make a loss and then the next year makes 30%. He makes massive returns but there’s a lot of volatility in his returns. He’s probably not best to optimize on one good year of data. Optimizing is a double-edged sword and you need to be careful with it.

Walter: Absolutely. The systematic traders are very aware of this but even discretionary traders need to be wary of this. It’s a common thing. The best example I’ve seen of this is the book — and I’ll put in the show notes, I mentioned it before I think. — The Holy Grail or something like that.

It’s like some books on Kindle and these guys got together and there was like this A-team of traders. They all met in the forum. They’re on some forum on the internet and they basically came up, they concocted this strategy and they really build up their account really quickly.

They’ve got really aggressive with risk and everything. What they didn’t realize though is, they basically optimize everything on the Euro during the first 6 years of the Euro. So, it was just an uptrend more or less.

So, when the Euro first came out, it was in a straight downtrend and then it immediately reversed of that. Basically went roaring essentially in an uptrend and so, what they didn’t realize is that everything that they had come up with was based on these data. On the Euro because they were just trading the Euro which is basically just trending in one direction. They’ve got into big trouble and essentially they’ve lost it all.

But, that was based on what you’re saying. In this instance they took all of the data available. They were trading the Euro, they’ve took all of the data they had in the first 6 or 7 years of the Euro or whatever it was. ‘99 to 2006 or something like that and they still made a mistake.                  

Darren: Again, they’ve bought into the outcome and even if you have all the data available, it doesn’t mean that you’ve got all the data. I think that is the take away from this. Be positive but accept that you don’t have all the data.    

Walter: There are definitely unknown unknowns. Thanks so much, Darren. This has been a great episode and I can’t wait to see you next time.

Darren: Okay. I’ll see you next week, Walter.

Walter: Bye.

What trading advice would you give your younger self?

In this episode of 2 Traders Podcast, Darren and Walter talk about the “DeLorean” effect and whether it can help, or hinder you trading.

Darren would tell his younger self to find this really old book and do this one thing (listen to hear what he says). He also shares his insights into making mistakes and the reality of trading.

Meanwhile, Walter takes us back down the memory lane of what happened years ago regarding trading through the technical analysis lens. Walter claims you must do this one thing to advance to trading consistency.

Download (Duration: 21:42 / 52.1 MB)

In this episode:

00:50 – Back To The Future
01:46 – losing, struggling and starting
02:32 – simple core ideas
04:56 – No-No-No-No-No!
06:47 – early bird gets the worm
08:01 – don’t glare on the sun
09:50 – good money after bad
10:35 – patience is a big deal
12:07 – small failures build up
13:34 – the secret
16:58 – the big thing
18:51 – end of the line
20:36 – the right mentor, the right approach

Tweetables:
Understand your psychology [Click To Tweet].
Lessons are learned by failing. [Click To Tweet].
Markets are designed for the patient[Click To Tweet].

Download The Full Episode 135 Transcript Here

Walter: You know, systems aren’t nearly as important as understanding what you’re doing with your trading. Like we’re talking about, it’s the Psychology of really understanding your psychology. Once you understand “You”, in the end, most traders I think come to that conclusion. I really believe that.

Announcer: Two Traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.

Walter: Welcome to the the Two Traders Podcast. It’s Walter here. Welcome, Darren!

Darren: Good morning, Walter.

Walter: So Darren, we have this idea. This topic is, we fire up the old DeLorean. What was that?

Darren: Back to the Future.

Walter: Yeah, back to the future. So you fire up and go back in time and as the sage trading adviser, you say, “Hey, this is what you really need to know about your trading”. What would you go back in time and tell yourself, if you’ve had an opportunity?

Darren: It’s a bit of a difficult one to answer really because my first instinct was the obvious stuff. And then I did sort of think a little bit more on it and I thought, I wonder whether it would be a good idea to go back and tell yourself anything.

A lot of the best things, best lessons in trading, all of the things that are most important to learn, are things that maybe can’t be taught and have to be learned. Learned over a long period of time through a lot of losing and struggling and starting again.

I think some of those subtle lessons that you need to pull together are those personal skills. Even if someone tells you this is what you need to do, you have to go through the process of learning it yourself.

So that was one thought but if I did go back and I had to tell myself something, I’d probably suggest say, one book. Find the oldest technical analysis book that is still in print. Read it twice and then put it in a drawer. Forget about it because that’s all you need to know about technical analysis and stop learning about it. Then, you’ve got all you need to know about technical analysis.

I don’t think there’s anything new now that wasn’t known before. We are just essentially taking the simple core ideas and coming up with new ideas based on them. So if you understand those basic core ideas you really know everything you need to know about technical analysis.

Walter: Yeah.

Darren: I’d probably tell myself one quote a well. I think the only trading quote you really need to know – this is my personal opinion, is – “Cut your losers short and let your winners run.” Jesse Livermore, I think that was?

Walter: I think so. I think many people have probably said it, yeah.

Darren: Yeah, I think it applies to all trading systems and that encompasses the idea behind trailing stops. The idea behind not holding on to winners or not holding on to losers or adding to losers. I think that’s really important.

I would have taught myself one thing. To continue studying, it would be human behavior and Psychology. Why you make decisions and how you make decisions and how to improve that process. How to build strategies that deal with those issues as well.

Those would have been three simple lessons that I would have tried to teach myself. Whether I would’ve listened or not is another thing, because I probably wouldn’t have changed my mind. Going back comes over a long period of time. Lessons were learned by losing and failing.

Walter: Yeah, that’s a good point.

Darren: So, what about you?

Walter: Well, you’ve got me thinking now about this idea about learning your own lessons and that sort of thing. I suppose, it’s interesting what you’re saying about finding the oldest book on technical analysis and put it in a drawer.

A couple of years ago, there was a group of traders together. One of the traders, was quite good but he had this feeling that he needs to learn more about technical analysis. He said even though he had a system and everything he had it all lined up and everything was good. He said, “I just feel like, I’m missing out. I need to learn and get more well rounded.”

You know what everyone said? All the more experienced traders in the room said, “What are you doing? No-No-No-No-No!” They all said, “Don’t do that!” It was really interesting. It was fascinating actually to see all of the other traders, myself included say, “No! Don’t do it.” Don’t you mess yourself up basically was the the main message and it kind of reminds me of what you’ve just said.

Darren: You also need to ask the question, “Why do you feel you need to know more technical analysis?” You always have to reflect on yourself and analyze why you’ve got questions in your head. Where they’re coming from, what is the root cause of them.

Walter: Yeah, I remember when I was studying Religions in a University, it was my minor. I  wanted to see how did all the religions deal with the big questions – Why are we here?  And all that sort of thing. And I just thought it was really important to me to see all of the different perspectives. But, I can see in trading it would just be a real mess.

It’s sort of like changing your sexual orientation or changing your political bent, or something like that. I can see where it would really mess you up, when it comes to trading. You almost need to adapt a certain way of seeing things and just stick to it. At least that’s my feeling, anyway. I don’t know that you get a lot out of exposing yourself to different ideas. I didn’t know that there’s a lot of value there.

Darren: Well, I think there are only a few simple big ideas. When you start to delve into them, you kind of realize that it’s like the saying, “The early bird gets the worm.” Implying that you need to be early. But, the early worm gets eaten so it depends where you’re…

Walter: Where you are in the food chain.

Darren: Yeah! You might prefer like value entries. You might like buying stuff when it’s really cheap. At the same time, you may prefer buying things when they’re rising in value quickly. Buying with momentum. They’re two opposite ideas but they’re essentially the same thing.

When you can study those two core ideas and if you build a strategy with two different entries – One has a value entry and one is like a break out entry.  You start to realize that there really isn’t a great deal of difference in them. Then you can start to simplify the technical side of it. And realize that it is an important part of trading but it can only get you so far. When you know that, you realize that you don’t have to keep learning about it.

Walter: Makes sense. I guess, if I have to tell myself one quote like you said — you had the one quote — I would say, “You don’t glare on the sun.” To be honest with you, I’m not really well-versed in all the Warren Buffett stuff. I haven’t read his books or things like that. Just because I don’t see him as a mentor or someone that I aspired to be because he does things different to what I would do or what I’m interested in doing.

But, I do believe that what he said, and Denis in France was the one who brought this to my attention. The quote was, Warren Buffett said something along the lines of “Markets are designed to pull profits, or pull money away from the impatient and give it away to the patient.” I just thought, that was so true.

If you think of a lot of things in trading like, who are the impatient ones? The scalpers. Who are the impatient ones? The ones who are taking their profits too early. Who are the impatient ones? The ones that need to get in right now and don’t want to wait for the signal to actually fire off. They get in 15 minutes early or whatever.

It just seem to fit so well. Even from a crowd psychology point-of-view: Who are the impatient ones? The ones that are following the crowd or following social proof, which is what everyone else is doing. “I got to get in now, I can’t wait.” That sort of thing. I just feel like it’s such a great way of encapsulating what the markets do.

I know it’s not perfect but it just seems to make such great sense in so many different ways. I’m sure that there are places where it doesn’t fit, but this idea of impatient people throwing their money. You know, good money after bad. To me, it just really fits.

Also, I’ve noticed in my trading, if I miss a signal. Let’s say, that I want to trade a H4  chart. For whatever reason I get home late or something, I check the charts and that H4 signals are already printed.

Often times, not taking the signal on the absolute close of the candle when I should have taken it, and instead having a little bit more data there on the chart, will often help me: One, to avoid a bad trade. Or two, get in even better on the trade, on the signal.

I’m a big fan of letting the market give you a little bit more of information and not feeling like you have to go in right now. For me, patience works that way. I think that patience-thing is a big deal.

You brought us some good points about learning your own lessons. I suppose, the best lessons – I often wonder is it possible that the lesson where you lost $5000, you know you learn more from that, than the one where you lost $50? I wonder if that works.  Does the math work on that.

Because it could come down to, it could depend on what percentage, how much is that means to you. When you lose the $5000 that might not mean nearly as much as when you lost the $50, 15 years prior. It could be what your situation is.

I just tend to think that there are certain situations where the mistakes that you made, is kind of easy to burn those into your arsenal, into your tool chest, into you learning. And then in other instances, it’s easier for you to gloss over those and just say, “You know what? That was because of this and that.” And not really attribute it to the right reason why you made that mistake. Does that make sense?

Darren: Yeah, it’s almost like we don’t really learn the lesson until it gets really painful. I suppose that could be true. But I think, small failures build up over time as well. I kind of like that rather than one massive crash if you’ve had a few years of repeating the same small mistake. It’s like the difference between the long term memory and the really sort of shocking memory. I think they are both easier to learn from.

Walter: Definitely. I always think of the stories of the traders that you read and they talk about the one big mistake or the one lesson that they learned when they took on too much risk or whatever they did. It’s so interesting to me. And then you see people like Jesse Livermore, who has never seem to learn from their mistakes. They keep making the same mistakes over and over again.

Darren: Yeah and he knew he was making those mistakes as well but continue to repeat them.

Walter: Would you say that he wasn’t cut out for trading? I mean, people hold him up as this great trader but in the end I don’t know if you can really say that. This great trader in the end just kind of did himself in, quite literally because of where he was at. It’s just not a nice thing.

Darren: I think, it’s probably psychology and personality that he had a problem with. But I think he could have put systems into place to counteract that. The secret is knowing what you don’t know and knowing what your mistakes are. And then, being able to design a system that incorporates that and stops it happening. I think that’s the real secret.

I think when get to have those elements right together, you’re in a much better place going forward. You’re increasing your probabilities of being profitable. I think perhaps maybe the traders who do really become consistent and profitable, they have either consciously or subconsciously built a system that deals with their failings.

Walter: Yes. I think that’s the key. I think the traders who do well know how to deal with failure, basically. When you’re talking about these systems, do you think that it’s easier if you have somebody else helping you with that? Or do you think it’s okay like some traders can just do it on their own?

Darren: I think you need a checklist. I think, just sitting on your own and saying, “I’m smart enough to deal with this”, is probably the least effective way. There’s two proven good ways of dealing with it or two tested ways of showing to give good results. Writing stuff down, some sort of journaling and the other way is, like you say, having somebody that you are accountable to, who is going to question what you’re doing.

Like on trading floors they’ve found that, if they have good managers who speak to the traders and tap into their emotions and get them to express their emotions. Which is similar to writing stuff down. That’s an expression of emotion. Those are proven and tested effective ways of doing it. That can happen in many ways.

It can be just running a journal on a thread where you just post every trade. You don’t need to discuss what’s necessarily is going on there but you’ve got some sort of transfer of what’s happening inside you onto some sort of written journal.

Walter: Yeah, then when you go back on that first of all, if you do that on a forum or whatever, it’s kind of good because you’re almost committed to it. Like you’ve got to keep going. Once it’s going, it’s going. Then you go back and you learn so much.

When you go back and read it, “Wow, I can’t believe.” It’s a lot like journaling, but you are a little bit more exposed. And you can leverage the experience of others, if there are people that you trust, that you respect, they offer some advice. Sometimes you can incorporate that as well.

Darren: Definitely. I will often get to the end of the week and feel inside myself that I’ve traded and executed fairly well. My systems pretty systematic. There’s not really much leeway in what I need to do and when. But then, just going back and looking at the individual trades that I’ve posted, I kind of realized, I actually made a few mistakes there. Common mistakes which you shouldn’t be making anymore. So that’s a really good way of dealing with it.  

Walter: Anything else that you would like to say to your younger self about trading? I guess I would say, patience is the big thing. The other thing would be, systems aren’t nearly as important as understanding with what you’re doing with your trading. Like we’re talking about the Psychology of, really understanding “your psychology”. Once you understand You. In the end, most traders I think come to that conclusion. I really believe that. Most people would say, “That’s it. That’s me.” It’s self reflection, it’s understanding your issues that’s what it comes down to.

Darren: Yeah. If you could have gone back and pushed yourself in that sort of direction, I think that would have been really helpful. The only question that remains in my mind is whether you can learn that quickly by somebody telling you or whether you need this kind of long term memory of failing, when you’re going against those principles.

Because I do remember back when I started trading, there was a lot of stuff about Psychology. And I just made a mental note, “Yes, Psychology is important”. I didn’t really do anything more about it. I’ll just file it out at the back of my head and continue doing what I’m doing. Even when you can see in front of your eyes that your back testing ideas, you’re working out what makes them tick and then you’re doing the opposite in your life trading.

Even then, it takes a long time for that to sink in. But you know, the thing that I never did was really have somebody to be accountable to who would say, “Look, you’re lying to yourself here. You’re saying you are going to do this but it’s not what you’re doing. What systems are you going to put into place to stop that?” For me, it was just a case of getting to the end of the line and thinking, “I can’t do this anymore. I’ve got to make some radical changes”.

Walter: The traders when they leave the bank desk they always think that they’re going to do well. They’re going to trade their own money and all these so often, they just fall apart because they don’t have that structure in place.

You were saying before about, how do you know if you would just take a lesson that someone gives you versus having to learn it repeatedly or picking up that experience over time. I feel like it depends on the person. I feel like I’m a pretty good student. If I had made the decision earlier on to seek someone out and just really listen to what they said, just let them mentor me then, it probably would have shortcut for me.

I don’t know if that is for everyone. I don’t think that’s necessary the norm. I just think that I’ve kind of trained myself to be a student. I’m good at copying stuff. Which is basically what our whole Western school systems are like. Copy stuff and then spit it back out.

It’s ridiculous but those are the ones that are rewarded. I think some people wouldn’t do that well. I know people like that. They would be like, “Ah that’s B.S. I’m not going to do what he says.”

In fact, I did that with my own friend, who got me into trading. He was a good trader. I just said “What you’re doing is crazy. There’s no way I would ever trade the M5 chart like you do.” I said, “No way!” I just knew right away that, that was not what I wanted to do. So I guess, it depends on getting the right mentor, the right approach. I suppose.

Darren: The point that you brought up about making big mistakes, there’s a book that’s just about to come out called Big Mistakes: The Best Investors and Their Worst Investments on this topic. Michael Batnick I think, is the author. That’s on that theme as well.

Walter: That’s cool.

Darren: Thankfully, I’ve never made big mistakes. Or maybe I have.

Walter: Big Mistakes, you said? I’ll have to check that out. We’ll put that in the show notes for everyone so you can find that one if you’re interested.

Thanks so much for your time Darren, I really appreciate it. I guess, we’ll see you in the next episode.

Darren: Okay, Walter. I will see you then.
Walter: Thanks.

SHOWNOTES:

“Big Mistakes: The Best Investors and Their Worst Investments” by Michael Batnick

Which trading skill predicts your longevity in the markets?

In this second half of a two-part episode of 2Traders Podcast, Darren and Walter reveal the best way for you to look at your trades and the reality of big trading returns. Why do money managers do this thing? The two traders talk about a poker player and what she can teach you about trading for consistent profits.

According to Walter, there’s a great technique for you when looking at your trades, and once you do this, you will never look at your trades the same way again. Darren also digs in to the idea called “the of a better option” and what this means for your trading.

All these and more in this last half of a two-part episode of the 2 Traders Podcast.

Download (Duration: 27:57 / 67.1 MB)

In this episode:

01:52 – blunts the pain
03:12 – a better option
06:09 – gambling book
08:29 – human decision
10:55 – poor chicken
12:47 – plane crash
14:02 – how to simplify?
17:06 – focus on the process
19:36 – think on the other side
22:12 – horribly average
24:36 – keeping clients happy
26:41 – solid strategy

Tweetables:
Trading is not an evangelical thing[Click To Tweet].
You can learn to be resilient [Click To Tweet].
How can you accelerate?[Click To Tweet].

Download The Full Episode 132 Transcript Here

Darren: Markets are made by human behavior and human decision.

Announcer: Two Traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.

Walter: Welcome back to Part Two. In today’s episode, we’re going to talk about the best way for you to look at your trades. Once you’ve looked at your trades this way, you’ll be able to analyze them much better.

Also, Darren talks about the FOBO – the Fear Of a Better Option. What this means for traders. We’ll talk about a poker player and what she can teach you about trading and a specific recommendation from her as well.

And, the reality of big returns. What you must mentally prepare to do if you are looking to make huge trading returns. Why money managers have a job and that job is not to make the most money for their clients. We’ll talk about this.

And finally, we’ll talk about the one skill that predicts your longevity as a trader. As what I believe to be one of the probably, the most important trading skill and it has nothing to do with picking tops or bottoms. All of these and more in Part Two today.       

Yeah, I agree. Especially that first part that you said about how sometimes you get these psychological edges in what you’re doing. I’ve become more and more aware of that over the last 6 years. It’s like, I’m doing something. I know it’s not the most efficient way to trade in terms of bottomline and profits but, I know that it blunts the psychological pain.

One example would be to split your trade up so that you have one really easy way to achieve target and then one trailing exit or really difficult position to hit. It’s a really aggressive target.

If you run the numbers, that’s not the best way. You’re never going to come out ahead doing that but it just feels right. It just feels good to have those little baby winners in there. It’s more of a longevity thing. It’s more of a psychological play than anything else.

Darren: Yeah. I saw someone call this “FOBO” the other day – Fear Of a Better Option. I notice some people get really caught in this. They can work out all the elements of their trading strategy.

All looks great on paper and they go and start trading it and they’ll see that there is a better entry option so they kind of need to change the entry option and they see that on the last trade, there could be a better trailing exit option.

They tweak and they just never really settle on a process because they are always seeing that on a small sample there could have been a better option. I think, at some point, you have to say, “Look, the entry is important but I can probably draw 10 different entries that are sufficiently good.”

And in the environment that we are working in, sometimes that is the best option. You’ll say, “Look, this probably isn’t the optimum entry pattern but it performs well enough. I’m comfortable with it and I personally like it, so this is what I’m going to do.”

That’s really hard for some people to do because at the back of their mind, it’s always more in a way, “Is this entry good enough? Is it the best?” and that becomes an issue for some people. For a lot of people.

Walter: Yeah, no doubt.

Darren: I mean, I’ll run it through my head all the time but I’ve learned not to act on it now. I think it’s probably always there but it’s whether you act on that feeling or not.

Walter: Do you look at your trade in big chunks? Do you analyze them in chunks of 30, 50 trades rather than… Like you say there’s that trap of, “Oh, the last 2 trades, if I use the trailing exit, this would have happened!” or “Okay, the next one I’m using the trailing exit.” If you are analyzing trades, do you look at them in big chunks like that?

Darren: Yeah, as big as possible. I’ve got a lot of data sets running at different variations of exits and entries and trailing stops over 10 years and that’s really what I always refer back to because, for me, that’s the most robust data I’ve got. I use that and I tend to use like the worst variants from that set as well. I tend to air on the pessimistic side.

Walter: Absolutely, yeah. The reality is you can end up on the pessimistic side, as you say, for a long time. You could trade a trading system that has a 52% win rate but end up trading it live for months or years where the win rate is below that and it’s still is the true win rate 52%. You just end up down at 49 or 50 for a long, long, long time.

Darren: Yeah, because of variants.

Walter: Absolutely. In the market, we have a whole bunch of that variants way more than what we think. So, Darren, before we hit the recording button today, you were talking about the Annie book. Can you explain to the listeners about the gambling book? What’s going on there?

Darren: Yeah. Annie Duke was a professional poker player, won a lot of money, a lot of tournaments. She’s written a book called “Thinking in Bets: How to Make Better Decisions with Uncertainty”. She coaches traders now and she’s an author.

It’s a really good book. It highlights the similarities between poker and trading and how to really approach these uncertain environments better. It’s a really good book. There are great ideas in there and it’s one that people should read for sure.

Walter: We’ll put it in the show notes. Its Annie Duke, right? We’ll put it in the shownotes so people can read that. It is interesting you say this because I ran into a psychologist guy — last week, in fact — who had been working with poker players.

He’s been working on the psychology of basically these professional poker players. Then he said that he was going to start working with traders. I said, “Ah, that’s interesting.” So I wonder if its a similar thing. I don’t really know enough about poker to know what the main issues are.

My understanding is that in poker, there’s also some reading of people, right? Like, so and so could be bluffing. So, there’s some of that involved too. It’s not just the odds. The odds obviously are shifting, changing every time you get a new hand. I get that, but there’s also that element of the human reading other people and stuff like that too. Right?

Darren: Yeah.  This sort of Game Theory is a big part of it. Like trading, that’s something we have to do. Some of the problems I see with trading is that, people believe that, that needs to be in the moment.

I think one of the big ideas people need to grasp is that, markets are made by human behavior and human decisions. That doesn’t necessarily mean you have to look at the last 3 bars, and from that decide what people are going to do next.

You can look at the movement of markets and decipher from that. You can look at the history of the S&P 500, from that you can assume that people are going to generate trends. Trends become, because of human behavior. Unless you think human behavior is going to change, then trends are going to occur.

So you can look at the big picture and say, “Well, I’ll use trends as my edge because trends are the results of human behavior. That’s not going to change. Trends are going to occur.” I think we get too microscopic. Like, “I need to know what’s going to happen next.” That’s not necessarily the only way to go about it. You can know that trends are going to occur. You don’t necessarily have to time these things.

Walter: I’m with you on this. I have two questions for you. From your point of view, lets say, you look at a chart from the 1880’s. So, that’s a while ago from today. Would you say that you might look at that chart from the 1880’s and see some of the same things going on back then that would translate today?

In other words, another way of asking the question is: Could you trade a system that was working, made positive expectancy in the 1880’s and today would work as well? That’s number one, let’s just go with that. What are your thoughts on that?

Darren: If the system was based on something that is generated by human behavior, yes. If it was a system based on a market opened at a certain time and it didn’t do it then, then no.

Walter: Right. To me, this is so interesting. I agree. In the same way that you can take a child and you can do things to that child, and pretty much know that there’s a range of behavior. That child’s probably going to end up at a certain range.

Or like you can take a poor chicken. You get this chicken and you don’t feed it very much and so, you know the chicken’s going to end up looking something between this and that. And I think the same thing can be said about the markets.

When there’s a certain emotion that permeates the markets, you probably are going to see, this sort of chart. And that doesn’t matter if that was because of the Industrial Revolution or whatever, or because of bitcoin.

It doesn’t really matter what the “reason” is behind it, but these emotions pop up in the pattern over and over again. So things like double tops, things like trends, all these things I think, you’re going to see over and over again because people are the ones that are involved.

Even the computers, people are the ones who program these computers. Although, we’re getting away from that, aren’t we? Like, there are machine learning and things like that. We’re at this point now where we are actually programming the computers to teach themselves, so to speak.

So, that can maybe perhaps change things. I think that the interesting point they are making here is that humans are the ones that are operating in the markets. They are the ones that are taking on risks in the markets. Therefore, you see kind of similar things over time. I agree with that.

But to me, someone could listen to you Darren and they could say, ”You know what?” he doesn’t really believe in repeatable patterns. He thinks there’s a lot of noise going on in the markets and you just kind of have to hook into a trend basically, and lock into a trend. I don’t know if that’s a fair assessment or a fair characterization, but I can see where someone might listen to you a few times and think that.

Darren: Yeah. I mean, when you sit on a plane, do you think about the plane crashing?

Walter: Unfortunately, yeah.

Darren: But, is it the thing that is on your mind for the whole journey?

Walter: Yeah! No, I’m joking. Of course, not. I need another Vodka. But, sure. I got it.

Darren: I mean, what are you going to focus on? Are you going to focus on the things that are the most important or the things that you can argue have some importance but you know are not.

If you had to rely on one thing, then you want that to be, the thing that has the most importance. So you need to push that to the front of your thought process and your ideas. Now we naturally, when it comes to trading, focus on the things with the least importance and we put those to the front of our thought process and they take precedence. If you do that, you’re just making it harder for yourself to make profit.

So how can you simplify the whole process? All you can do is gather information. Gather as much information as you possibly can. Try and pinpoint the elements that are most important for achieving your goal. Then you have to build a belief system around those things and put them to the front of your thinking.

That’s what I try to do. Now, in all of my tests, I’ve never come up with a result where the other elements are the most important because I change them and it doesn’t make a great deal of difference to the results. The bits that I consider the most important, when I change them, it makes dramatic differences to the results on the same sets of data.

So, what am I going to do? Am I going to go with my gut feel? Or you know, “I love studying the charts, I’m trying to work out and forecast what’s going to happen next. Feels good to me, feels right.” But my information does not agree with that.

So I try and reinforce those beliefs because it’s hard to operate against what your gut instincts and your biases tells you is right. The only way you can build resilience to that is by slightly dismissing them and perhaps taking them down. But you still need to be open-minded to them, like we were saying before. That’s why I might come across sounding like that is because my data suggests that other things are more important.

Walter: Right. So, things like what’s the reward to risk ratio of your profit targets?

Darren: Risk/reward ratio is the one element that I see makes the most dramatic difference to a system over long term tests. Confident thinking, you know I’m smarter than that. A lot of people do. But after a while of losing, a couple of years of going nowhere, you either bug out or you rise up to the fact that, “Look, listen to what the data is telling you.”

At the same time you have to accept that it is possible to find alternatives to that because it is uncertain. There’s randomness involved but, I find something good. My data suggests it’s something good. I’m comfortable with that so I should reinforce those beliefs and use that as my strategy.

Walter: We were talking earlier about the process. Focusing on the process and not the results of your trading. That’s really kind of where the gold is. If you have that discipline, you keep pulling back and focusing on the process.

Do you think that when traders look at things like, “Oh, this pattern is very reliable or whatever.” Do you think that it’s just because they want to feel like they’re clever and that they have control over their trading? And that in the end, what’s making them money is the reward to risk ratio essentially for that trade? It has nothing to do really with the pattern obviously.

Darren: Yeah. I think, it’s fairly uncommon to find people like that. Let’s say, they’re using high risk/reward but they think the result are all down to their pattern. I think that they’re probably — the people, like you were saying earlier — they are at some points can really have a big blow up. Then perhaps come back and say, “Look, probably the pattern is a good pattern. It has some good probabilities.” But really, the reason I was making money was because my winners were much bigger than my losers.

Perhaps there are one time they thought, “This is such a perfect pattern. I’m going all in” was the time they all blew up.Because like I was saying earlier, they’ve given importance to the elements that really aren’t that important and aren’t as robust. So you have to get good information and you have to base your trading on that information regardless of what your gut feel and you instincts might be telling you.

Walter: It’s interesting because I think, you look at the markets and you can see, for example like the markets really moving in one direction and the Pound is really falling for example. And then you say, there are going to be people out there that are thinking, “Okay, the Pound is on a downtrend, I need to get in on this.” And, there are other people who are thinking, “Yeah, it’s out of whack! It’s out of whack! It’s going to come back. It’s going to snap back like a rubber band or whatever.” You know that’s what makes up the market.

It’s so interesting to me. It doesn’t really matter, does it? Like you’re going to have these people and they are going to see it in a totally different way, and when you take a trade and think it’s useful to think about the people on the other side. So you say, “Okay, I’m taking this trade because I think the Pound trend is going to continue.” Who’s on the other side of it? Well, it’s the reversion to the mean, the bollinger band traders.

Darren: The different time frames.

Walter: Exactly. The H1 trade chart traders and all that. The interesting thing about it Darren is, there’s actually room for both of them to be right. The D1 chart trader that’s selling the Pound in the downtrend and there’s the H1 reversion to the mean trader who’s pulling out 30 pips on the pull back. They could both make money. It’s just so interesting.

I also find it interesting that, when you see the really strong trends that the retail traders typically are going against it, that’s when you see the numbers get out of whack in terms of the open positions. When the market’s really trending, that’s when you’ll typically see a lot of the retail traders trying to pick the tops or pick the bottoms of the uptrend or the downtrend, respectively. That’s another interesting thing.

I remember, you posted that great study in the forum, about how the real issue with retail traders looking over millions of trades is that, they’re typically right more often than they’re wrong. So they have a higher, better than 50% win rate but their losers are so big and their winners are so small, they end up losing overall.

That makes sense if you look at it from that point of view. Like I just said, where so many retail traders, forex traders are looking to buy when the market’s trending down and looking to sell when the market’s trending up.

So there’s room for this little tiny profit. These little tiny retracements that they can capture, but otherwise they’re just going to get stopped out. If they keep moving their stop or whatever – what do you call when you add to a loser, Martingale or whatever? — you’re averaging down.

All those fancy terms for you keep making your losers bigger. That’s when they run into trouble. It’s just crazy, but we’re built to be attracted to the Martingale stuff or the end of the trend sort of thing. We’re built that way.

Darren: Yeah, we all think we’re all too good as well. I think a really good mindset to accept were, I’m pretty horribly average in most things.

Walter: Yeah and so where do you get your edge? Where do you get your edge, exactly?

Darren: Exactly. I mean, in like a super competitive industry where there’s a lot of people chasing the money. Smart, clever people with a lot of money behind them, how can you have an edge?

I think a lot of people seem to think that, “Well, I’m going to be the edge. I’m going to read the market better than anybody.” I’m at the point now where I’m quite happy to be average. I’m just going to use the market movement as the edge because that’s always been true.

Is the market true for me? So, that’s going to be my edge. I’m just going to be horribly average and just follow the process. I’m going to wake up everyday and that’s a setup. I’m going to bound my trading in there. I’m going to take profit in my target, and I’m just going to repeat. If I get to the end of the year and I haven’t made any money, then so be it.

I saw an interesting report. The top 30 money managers of all time, have had a greater than 50% drawdown. Who would have thought that? I’m not advocating big drawdowns. I’m just saying, if you want massive returns then that’s probably going to come along with it.

Walter: That’s interesting, isn’t it? Imagine Darren, you’re trading 800 million or something. Just imagine how difficult it would be to move that money around. You’ve got all these assets and things like that. I often think about that and how difficult it would be. If you got caught in a market crash and how do you get out of that. It’s just really a tricky thing, isn’t it? I don’t envy them at all, really. I don’t.

Darren: They’re not trading for themselves as well. I think a lot of people look at funds that make 7% a year but have a maximum drawdown of 2%. And then them, as a single retail trader think that, that’s the way that they should trade.

I’m not saying that is not a bad way to trade. But you have to remember that half of these people, their job is to keep their clients happy. It’s not to trade in an optimum style. It’s not to get absolute returns. It’s about the people are giving us the money. What do they want in return? Let’s give them what they want.

I think you’ve kind of need to do that on a personal basis as well. That’s not like, that’s a good way to trade, and big returns or big drawdown is a bad way to trade. They’re different options but they’re meeting clients’ needs.

Walter: Yeah, that’s right.

Darren: There’s no black and whites in this. There’s hardly any black and white. It’s just a lot of gray area. Same with poker. If you go into poker saying, “Have I got the best hand all the time?” Then, you’re not going to win because it’s not about having the best hand. It’s about how often can this hand win.

Walter: Yes. To bring it back to the idea of reward to risk. I mean, that’s why having the high reward to risk trading strategy, it just makes it easier. You can be really bad and it can still work.

So in other words, you can just totally stuff up the entry. You can get slipped out of your mind. You can have a horrible broker that’s re-quoting you and all these stuff but if you’ve really got these good fat winners, when they do pop up eventually, it just kind of erases all that. Doesn’t it?

You are able to sort of withstand all those worst. If I’m scalping and my losers are 11 pips and my winners are 6 pips, I’ve really got to be on my game or it’s just not going to work. It’s just really not going to work.

Darren: Yeah. Again, that’s what my big data suggests to me. A 2 to 1 risk/reward in my data, is as good as a solid strategy. 4 to 1 has more negative elements in it but it makes much bigger returns.

When you’ve got to that point where you’ve made those returns, you have to understand that. If the next year you have a particularly bad market and you’ve got some buffer there, with a much tighter risk/reward, then those returns can disappear much quicker. But that only becomes evident over a long time.

It brings us back to the resilience thing. If you really want to make good returns, you have to have more resilience because you need to go for more negative experiences to get there. People aren’t happy with that.

Walter: Wrong answer. Yeah, no doubt. Well Darren, thanks a lot for your time. I really appreciate it and we’ll catch you on the next episode. Thanks so much.

Darren: Yeah. Great talking to you again, Walter. I’ll see you next week.

Walter: Okay. Bye.