Losers Anonymous

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in "Trading for a Living" de Alexander Elder

cumprimentos,
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10. LOSERS ANONYMOUS

A social drinker enjoys an occasional drink, but an alcoholic craves alcohol.
He denies that alcohol controls and destroys his life- until he reaches a per-
sonal crisis. lt may be a life-threatening illness, unemployment, desertion by
a family member, or another unbearably painful event. AA calls it "hitting
rock bottom."
The pain of hitting rock bottom punctures an alcoholic's denial. He sees a
stark choice- to drown or to tum and swim up for air. His first step to recov-
ery is to admit that he is powerless over alcohol. A recovering alcoholic can
never drink again.
Loss is to a loser what alcohol is to an alcoholic. A small loss is like a sin-
gle drink. A big loss is like a bender. A series of losses is like an alcoholic
binge. A loser keeps switching between different markets, gums, and trading
systems. His equity shrinks while he is trying to re-create the pleasurable
sensation of winning.
Losing traders think and act like alcoholics, except that their speech is not
slurred. The two groups are so much alike that you can predict what a loser
will do by using alcoholics as a model.
Alcoholism is a curable disease—and so is losing. Losers can change if
they start using the principles of Alcoholics Anonymous.

The Urge to Trade

Successful traders treat drawdowns the way social drinkers treat alcohol.
They have a little and stop. If they take several losses in a row, they take that
as a signal that something is wrong: It is time to stop and rethink their analy-
sis or methods. Losers cannot stop—they keep trading because they are
addicted to the excitement of the game and keep hoping for a big win.
One prominent trading advisor wrote that the pleasure of trading was
higher than that of sex or flying jet aircraft. Just as an alcoholic proceeds
from social drinking to drunkenness, losers take bigger and bigger risks.
They cross the line between taking a business risk and gambling. Many
losers do not even know that line exists.

Losers feel the urge to trade, just as alcoholics feel the urge to drink. They
make impulsive trades, go on trading binges, and try to trade their way out of
a hole.
Losers bleed money from their accounts. Most of them bust out, but some
tum to managing other people's money after they lose their own; still others
sell advisory services, like bumed-out drunks who wash glasses in a bar.
Most losers hide their losses from themselves and from everyone else.
They keep shuffling money, keep poor records, and throw away brokerage
slips. A loser is like an alcoholic who does not want to know how many
ounces of liquor he drank.

Into the Hole

A loser never knows why he loses. lf he knew, he would have done some-
thing about it and become a winner. He keeps trading in a fog. A loser tries
to manage his trading the way an alcoholic tries to manage his drinking.
Losers try to trade their way out of a hole. They switch trading systems,
buy new software, or take tips from a new guru. They act out a rescue fan-
tasy- a charming belief in Santa Claus. Their desperate belief in magic solu-
tions helps many advisors sell their services to the public.
When losses mount and equity shrinks, a loser acts like an alcoholic
threatened with an eviction or a firing. A loser grows desperate and converts
outright positions into spreads, doubles up on losing positions, reverses and
trades in the opposite direction, and so on. Losers get as much good from
these maneuvers as an alcoholic who switches from hard liquor to wine.
A losing trader careens out of control, trying to manage the unmanage-
able. Alcoholics die prematurely, and most traders bust out of the markets
and never come back. New trading methods, hot tips, and improved software
cannot help you until you leam to handle yourself. You have to change how
you think in order to stop losing and begin your recovery as a trader. Q
Losers get drunk on losses; they're addicted to losses. Traders prefer prof-
its, but even losses provide plenty of excitement. The pleasure of trading is
very high. Few losers are actively trying to lose —but then few alcoholics are
consciously trying to end up in the gutter.
A loser keeps getting high from trading while his equity shrinks. Trying to
tell him that he is a loser is like trying to take a bottle away from a drunk. A
loser has to hit rock bottom before he can begin to recover.

Rock Bottom

Hitting rock bottom feels horrible. It is painful and humiliating. You hit it
when you lose money you cannot afford to lose. You hit it when you gamble
away your savings. You hit it after you tell your friends how smart you are
and later have to ask them for a loan. You hit rock bottom when the market
comes roaring at you and yells: "You fool!"
Some people hit rock bottom after only a few weeks of trading. Others
keep adding money to their account to postpone the day of reckoning. It
hurts to see a loser in the mirror.
We spend our lifetimes building up self-esteem. Most of us have a high
opinion of ourselves. It hurts a smart and successful person to hit rock bot-
tom. Your first impulse may be to hide, but remember you are not alone.
Almost every trader has been there.
Most people who hit rock bottom die as traders. They slink away from the
market and never look back. Brokerage records indicate that 90 out of 100
people trading today will probably be gone from the markets a year from
now. They will hit rock bottom, crumble, and leave. They will try to forget
trading as they would a bad dream.
Some losers will lick their wounds and wait until the pain fades away.
Then they will retum to trading, having leamed little. They will be fearful,
and their fear will further impair their trading.
Very few traders will begin the process of change and growth. For these
rare individuals, the pain of hitting rock bottom will interrupt the vicious
cycle of getting high from winning and then losing everything and crashing.
When you admit that you have a personal problem that causes you to lose,
you can begin building a new trading life. You can start developing the disci-
pline of a winner

The First Step

An alcoholic needs to admit that he cannot control his drinking. A trader
needs to admit that he cannot control his losses. He needs to admit that he
has a psychological problem with the losses and that he is destroying his
trading account. The tirst step of an AA member is to say: "l am an alco-
holic, I am powerless over alcohol." As a trader, you have to take your first
step and say: "I am a loser, I am powerless over losses."

A trader can recover using the principles of Alcoholics Anonymous.
A Recovering alcoholics struggle to stay sober, one day at a time. Now you
have to struggle to trade without losses, one day at a time.
You may say this is impossible. What if you buy, and the market immedi-
ately ticks down? What if you sell short at the bottom tick, and the market
rallies? Even the best traders lose money on some trades.
The answer is to draw a line between a businessman's risk and a loss. A
trader must take a businessman's risk, but he may never take a loss greater
than his predetermined risk.
A storekeeper takes a risk every time he stocks new merchandise. If it
does not sell, he will lose money. An intelligent businessman takes only risks
that will not put him out of business even if he makes several mistakes in a
row. Stocking two crates of merchandise may be a sensible business risk, but
stocking a full trailer is probably a gamble.
As a trader, you are in the business of trading. You need to define your
businessman's risk—the maximum amount of money you will risk on any
single trade. There is no standard dollar amount, just as there is no standard
business. An acceptable businessman's risk depends, first of all, on the size
of your trading account. lt also depends on your trading method and pain tol-
erance.
The concept of a businessman's risk will change the way you manage
your money (see Chapter 10, "Risk Management"). A sensible trader never
risks more than 2 percent of account equity on any trade. For example, if you
have $30,000 in your account, you may not risk more than $600 per trade,
and if you have $10,000, you may not risk more than $200. lf your account
is small, limit yourself to trading less expensive markets, or mini-contracts.
lf you see an attractive trade but your stop would have to be placed where
more than 2 percent of equity would be at risk—pass that trade. Avoid risk-
ing more than 2 percent on a trade the way a recovering alcoholic avoids
bars. If you are not sure how much to risk, err on the side of caution.
lf you blame excess commissions on a broker and slippage on a floor
trader, you give up control of your trading life. Try to reduce both, but take
responsibility for them. lf you lose even a dollar more than your business-
man's risk, including commissions and slippage, you are a loser.
Do you keep good trading records? Poor record-keeping is a sure sign of a
gambler and a loser. Good businessmen keep good records. Your trading
records must show the date and price of every entry and exit, slippage, com-
missions, stops, all adjustments of stops, reasons for entering, objectives for

exiting, maximum paper profit, maximum paper loss after a stop was hit, and
any other necessary data.
If you bail out of a trade within your businessman's risk, it is normal busi-
ness. There is no bargaining, no waiting for another tick, no hoping for a
change. Losing a dollar more than your established businessman's risk is like
getting drunk, getting into a brawl, getting sick to your stomach on your way
home, and waking up in the gutter with a headache. You would never want
that to happen.

A Meeting for One

When you go to an AA meeting, you will see people who have not had a
drink in years stand up and say: "Hello, my name is so-and-so, and I am an
alcoholic." Why do they call themselves alcoholics after years of sobriety?
Because if they think they have beaten alcoholism, they will start drinking
again. If a person stops thinking he is an alcoholic, he is free to take a drink,
then another, and will probably end up in the gutter again. A person who
wants to stay sober must remember that he is an alcoholic for the rest of his
life.
Traders would benefit from our own self-help organization—I'd call it
Losers Anonymous. Why not Traders Anonymous? Because a harsh name
helps to focus attention on our self-destructive tendencies. After all,
Alcoholics Anonymous do not call themselves Drinkers Anonymous. As
long as you call yourself a loser, you focus on avoiding losses.
Several traders have argued against what they thought was the "negative
thinking" of Losers Anonymous. A retired woman from Texas, a highly suc-
cessful trader, described her approach to me. She is very religious and thinks
it would not please the Lord for her to lose money. She cuts her losses very
fast because of that. I thought that our methods were similar. The goal is to
cut losses due to some objective, extemal rule.
Trading within a businessman's risk is like living without alcohol. A
trader has to admit that he is a loser, just as a drunk has to admit that he is an
alcoholic. Then he can begin his joumey to recovery.
This is why every moming before trading I sit in front of the quote screen
in my office and say: "Good moming, my name is Alex, and I am a loser. I
have it in me to do serious financial damage to my account." This is like an
AA meeting- it keeps my mind focused on the first principles. Even if I take

thousands of dollars out of the market today, tomorrow I will say: "Good
morning, my name is Alex and I am a loser."
A friend of mine joked: "When I sit in front of my quote machine in the
morning, I say, 'My name is John, and I'm gonna rip your throat out."' His
thinking generates tension. "Losers Anonymous" thinking generates serenity.
A trader who feels serene and relaxed can focus on looking for the best and
safest trades. A trader who is tense is like a driver who freezes at the wheel.
When a sober man and a drunk enter a race, you know who is more likely to
win. A drunk may win once in a while thanks to luck, but the sober man is
the one to bet on. You want to be the sober man in the race.

11. WINNERS AND LOSERS

We come to the market from different walks of life and bring with us the
mental baggage of our upbringing and prior experiences. Most of us find that
when we act in the market the way we do in our everyday life, we lose
money.
Your success or failure in the market depends on your thoughts and feel-
ings. It depends on your attitudes toward gain and risk, fear and greed, and
on how you handle the excitement of trading and risk.
Most of all, your success or failure depends on your ability to use your
intellect rather than act out your emotions. A trader who feels overjoyed
when he wins and depressed when he loses cannot accumulate equity
because he is controlled by his emotions. If you let the market make you feel
high or low, you will lose money.
To be a winner in the market you must know yourself and act coolly and
responsibly. The pain of losing scares people into looking for magic meth-
ods. At the same time, they discard much of what is useful in their profes-
sional or business backgrounds.

Like an Ocean

The market is like an ocean—it moves up and down regardless of what you
want. You may feel joy when you buy a stock and it explodes in a rally. You
may feel drenched with fear when you go short but the market rises and your
equity melts with every uptick. These feelings have nothing to do with the
market- they exist only inside you.

The market does not know you exist. You can do nothing to influence it.
You can only control your behavior.
The ocean does not care about your welfare, but it has no wish to hurt you
either. You may feel joy on a sunny day, when a gentle wind pushes your
sailboat where you want it to go. You may feel panic on a stormy day when
the ocean pushes your boat toward the rocks. Your feelings about the ocean
exist only in your mind. They threaten your survival when you let your feel-
ings rather than intellect control your behavior.
A sailor cannot control the ocean, but he can control himself. He studies
currents and weather pattems. He leams safe sailing techniques and gains
experience. He knows when to sail and when to stay in the harbor. A suc-
cessful sailor uses his intelligence.
An ocean can be useful——you can fish in it and use its surface to get to
other islands. An ocean can be dangerous—you can drown in it. The more
rational your approach, the more likely you are to get=what you want. When
you act out your emotions, you cannot focus on the reality of the ocean.
A trader has to study trends and reversals in the market the way a sailor
studies the ocean. He must trade on a small scale while leaming to handle
himself in the market. You can never control the market but you can leam to
control yourself.
A beginner who has a string of profitable trades often feels he can walk on
water. He starts taking wild risks and blows up his account. On the other hand,
an amateur who takes several losses in a row often feels so demoralized that he
cannot place an order even when his system gives him a strong signal to buy or
sell. If trading makes you feel elated or frightened, you cannot fully use your
intellect. When joy sweeps you off your feet, you will make irrational trades
and lose. When fear grips you, you'll miss profitable trades.
A professional trader uses his head and stays calm. Only amateurs
become excited or depressed because of their trades. Emotional reactions are
a luxury that you cannot afford in the markets.

Emotional Trading

Most people crave excitement and entertainment. Singers, actors, and profes-
sional athletes command much higher incomes in our society than do such
mundane workmen as physicians, pilots, or college professors. People love
to have their nerves tickled-they buy lottery tickets, fly to Las Vegas, and
slow down to gawk at road accidents.

Trading is a heady experience and can be very addictive. Losers who drop
money in the markets receive a tremendous entertainment value.
The market is among the most entertaining places on the face of the Earth.
It is a spectator sport and a participant sport rolled into one. Imagine going to
a major-league ball game in which you are not confined to the bleachers. For
a few hundred dollars you can run onto the field and join the game. If you hit
the ball right, you will get paid like a professional.
You would probably think twice before running onto the field the first few
times. This cautious attitude is responsible for the well-known "beginner's
luck." Once a beginner hits the ball well a few times and collects his pay, he
is likely to get the idea that he is better than the pros and could make a good
living at it. Greedy amateurs start running out onto the field too often, even
when there are no good playing opportunities. Before they know what hit
them, a short string of losses destroys their careers.
Emotional decisions are lethal in the markets. You can see a good model
of emotional trading by going to a racetrack, tuming around, and watching
the humans instead of the horses. Gamblers stomp their feet, jump up and
down, and yell at horses and jockeys. Thousands of people act out their emo-
tions. Winners embrace and losers tear up their tickets in disgust. The joy,
the pain, and the intensity of wishful thinking are caricatures of what hap-
pens in the markets. A cool handicapper who tries to make a living at the
track does not get excited, yell, or bet the bulk of his roll on any race.
Casinos love drunk patrons. They pour gamblers free drinks because
drunks are more emotional and gamble more. Casinos try to throw out intel-
ligent card-counters. There is less free liquor on Wall Street than in a casino,
but at least here they do not throw you out of the game for being a good
trader.

In Charge of Your Life

When a monkey hurts its foot on a tree stump, he flies into a rage and
kicks the piece of wood. You laugh at a monkey, but do you laugh at your-
self when you act like him? lf the market drops while you are long, you
may double up on your losing trade or else go short, trying to get even.
You act emotionally instead of using your intellect. What is the difference
between a trader trying to get back at the market and a monkey kicking a
tree stump? Acting out of anger, fear, or elation destroys your chance of

success. You have to analyze your behavior in the market instead of acting
out your feelings.
We get angry at the market, we become afraid of it, we develop silly
superstitions. All the while, the market keeps cycling through its rallies and
declines like an ocean going through its storms and calm periods. Mark
Douglas writes in The Discqalined Trader that in the market, "There is no
beginning, middle, or end—only what you create in your own mind. Rarely
do any of us grow up leaming to operate in an arena that allows for complete
freedom of creative expression, with no extemal structure to restrict it in any
way."
We try to cajole or manipulate the market, acting like the ancient emperor
Xerxes, who ordered his soldiers to horsewhip the sea for sinking his fleet.
Most of us are not aware how manipulative we are, how we bargain, how we
act out our feelings in the market. Most of us consider ourselves the center of
the universe and expect every person or group to be either good or bad to us.
This does not work in the market which is completely impersonal.
Leston Havens, a Harvard University psychiatrist, writes: "Cannibalism
and slavery are probably the oldest manifestations of human predation and
submission. Although both are now discouraged, their continued existence in
psychological forms demonstrates that civilization has achieved great suc-
cess in moving from the concrete and physical to the abstract and psycholog-
ical, while persisting in the same purposes." Parents threaten their children,
bullies hit them, teachers try to bend their will in school. Little wonder that
most of us grow up either hiding in a shell or leaming how to manipulate
others in self-defense. Acting independently does not feel natural to us—but
that is the only way to succeed in the market.
Douglas warns, "If the market's behavior seems mysterious to you, it's
because your own behavior is mysterious and unmanageable. You can't
really determine what the market is likely to do next when you don't even
know what you'll do next." Ultimately, "the one thing you can control is
yourself. As a trader, you have the power either to give yourself money or to
give your money to other traders." He adds, "The traders who can make
money consistently . . . approach trading from the perspective of a mental
discipline."
Each trader has his own demons to exorcise on the joumey to becoming a
successful professional. Here are several rules that worked for me as I grew
from a wild amateur into an erratic semiprofessional and finally into a pro-
fessional trader. You may change this list to suit your personality.

1. Decide that you are in the market for the long haul- that is, you want
I to be a trader even 20 years from now.
2. Learn as much as you can. Read and listen to experts, but keep a
degree of healthy skepticism about everything. Ask questions, and do
not accept experts at their word.
3. Do not get greedy and rush to trade- take your time to learn. The mar-
kets will be there with more good opportunities in the months and
years ahead.
4. Develop a method for analyzing the market—that is, "If A happens,
then B is likely to happen." Markets have many dimensions—use sev-
eral analytic methods to confirm trades. Test everything on historical
data and then in the markets, using real money. Markets keep chang-
ing—you need different tools for trading bull and bear markets and
transitional periods as well as a method for telling the difference (see
the sections on technical analysis).
5. Develop a money management plan. Your first goal must be long-tenn
survival; your second goal, a steady growth of capital; and your third
goal, making high profits. Most traders put the third goal first and are
unaware that goals 1 and 2 exist (see Chapter 10, "Risk Management").
6. Be aware that a trader is the weakest link in any trading system. Go to
a meeting of Alcoholics Anonymous to leam how to avoid losses or
develop your own method for cutting out impulsive trades.
7. Winners think, feel, and act differently than losers. You must look
within yourself, strip away your illusions, and change your old ways
of being, thinking, and acting. Change is hard, but if you want to be a
professional trader, you have to work on changing your personality.