Take Responsibility for Your Trading Decisions
Professional traders are not renowned for their introverted personalities or humility. Far from it.
Most are only too willing to speak of their triumphs and rewards, not to mention providing opinions on everything with or without even a remote connection to trading.
And yet it has been my experience that the best traders often speak very simple truths if you can get them to speak about their work at all.
Some Truths are Simple
I remember speaking to quite a senior trading floor manager at a conference some years ago and amid a lot of background hot air I noticed that he spoke quietly and expressed his thoughts in very simple terms.
It immediately struck me that here was someone who was on top of his game. He didn’t need to speak about everything because he knew he could speak authoritatively and expertly about the one thing he knew best.
He didn’t need to use complex arguments because he could cut straight to the essence of the issue. He understood his topic that well.
Someone in the group asked him what was the one piece of advice he would give to a new trader in his firm.
I was immediately interested in hearing his reply because I’ve often thought that a newcomer onto a trading floor is in quite a similar position to a private trader in that they come with some preset ideas and biases and it is up to the manager to ensure these do not lead to losses.
Of course, this newcomer has big advantages over the private trader since there will be a manager with controlling systems in place to ensure they follow rules, as well as almost unlimited information. The private trader has none of these.
The manager said that he did not so much provide advice to newcomers as impose rules on them. And the first and greatest rule that his traders must never break was that they must never make excuses for their trading outcomes.
Losses were acceptable, even relative outliers, provided they had not broken basic rules of risk control and analysis. But they must always take responsibility for their decisions.
If the trade resulted in a loss then either they had made a mistake – in which case they were responsible for the loss and would be held to account – or it was just the unpredictability of the market – in which case the trader needed to just accept the loss.
How Did this Work?
We all have an inbuilt impulse to accept credit when things go our way but to deflect responsibility when they don’t. It’s totally irrational to do so but it’s a strong urge to resist.
Trading experience, previous success, outstanding systems of analysis, intelligence – all are helpful in trading. But none will counteract this urge.
The reason for the strict rule of no excuses was to ensure that traders minimized or totally avoided the first type of loss. If they kept to the rules then losses were to be expected.
If they broke the rules then they were to blame for the loss. The clear incentive for a new trader was to never break the rules. And of course the rule applied no matter how long the trader worked on the floor.
There was no need for the manager to detail all the rules of analysis or trading or to prioritise one activity over another. There was just one primary and overarching rule – every trader must take responsibility so that there can be no excuses.
An Example of Failure
The failure of Long Term Capital Management, which was once the leading hedge fund around boasting huge assets and Nobel prize winners among its directors, is one of the best examples of what can happen if this is forgotten.
When it failed in 1998, LTCM nearly caused the whole global financial system to crash. The key cause of its failure was that when some large trades went wrong the main decision makers refused to accept that they were wrong and increased their risk. Even after the collapse they continued to blame outside forces.
A similar idea emerged during the credit crunch when the idea of the ‘black swan event’ was popularized. A black swan event cannot be foreseen, although it appears inevitable in hindsight.
So the traders who lost billions were not to blame. Were they? Of course they were, or at least the systems within which they worked were to blame. If proper risk analysis was done and constraints enforced then the outcome would have been different.
When a professional trader losses a big amount they risk losing their job. If a private trader loses a big amount what do they risk losing? There is no limit.
What Must a Private Trader Do?
However, it’s all too easy for a private trader to bypass the need to take responsibility for their trading outcomes, particularly the losses.
The private trader must have 3 things in place:
- A written trading plan that includes strict rules on risk control.
- The discipline to follow the plan and not make excuses in advance for deviations nor excuses afterwards for why a deviation was warranted even though it did not work out.
- A methodology for assessing how well the plan is being followed.
If you don’t have these in place then you will always be able to rationalize your actions and find some reason to blame outside forces when things don’t work out.
You will be able to do this for as long as you trade and particularly so when you have lost your funds and are no longer trading.
After all, there’s no shortage of excuses for losses:
- it was the market suddenly moving against me
- it was a piece of unforeseen news
- the markets are rigged by insiders
- it was a crooked broker.
Do you need more? Of course all of these can happen and can lead to losses on any trade.
But we know this in advance. We know that anything can happen in the market.
You don’t drive down the road with your eyes closed because you know it would be dangerous to do so.
If you do drive down the road with your eyes closed and hit another car then you can hardly use the excuse that it was their fault or that you could not be expected to have seen the other car because you had your eyes closed.
The similarity between this analogy and trading without a plan that you follow and know that you follow should be clear.
The 4x4BOSS gives you the plan. You need to develop the discipline to follow the plan. And you need to get a system so that you can monitor how well you are doing in following the plan and in your trading outcomes.
Keeping good records of your trading is an essential aspect of taking full responsibility. Find out more by clicking here.