THE POWER OF ADVERSITY Thirteen years ago, at the very ripe age of 20, I experienced my very first stock market trade. It was a losing trade, but from that very moment, I knew that I had found my joy, my love, in short, my purpose in life. The excitement, the rush, and, yes, even the pain made me feel as though I' discovered something that truly fit the description of being ‘‘the most fun you could have with your clothes on.” Despite being a dismal failure at the game in the beginning, I was not deterred in the least. Why? Because I wouldn't allow myself to be deterred. I was determined to conquer the market, to learn its mysterious ways. But I will be the first to admit that the tuition I had to pay was very high. It took me a full 6 years before I started to see some consistent progress. Was I every discouraged? Absolutely. Beaten? Heck no. There were points at which I was so close to rock bottom that the only other possible direction was up. Then it happened. At a certain point, I began to gain a rhythmic stride that lead me into a glorious twilight zone that I feel I've been in ever since. Two years later, I found myself consistently pulling big profits out of the market. I became a force to be reckoned with, and was no longer a victim. Today, I am asked almost daily, “To what do you attribute your remarkable market success?” And my answer is always the same. “I am a success today because I was a dismal failure yesterday.” In the end, it was my losing
trades that prompted me to discover every tactic, every technique, and every winning strategy I use to this very day. In retrospect, I see this very clearly now. My winners sent me to the local bar to brag to my friends, a very unprofitable activity, I might add. But it was my losers that sent me back to the drawing board, an exceptionally profitable activity. Now, I've told you all of this as a way to provide you with the most valuable tip I will ever be able to offer you. And it is this: Adversity—losing—is the greatest gift the market can give you. Losing is nothing more than an opportunity in disguise. Every mistake, every error, offers the trader an opportunity to kill a fault, to destroy a demon. From this day forward, I encourage you to start a “journal of losers.” Write down every losing trade, starting with the symbol, the day, the entry point, the exit point, and the reasons for both. Once you've accumulated five or more losses, revisit them. Study them. Search for the common denominator in them all. Believe me, it will be there. Once you've found it, in no uncertain terms, kill it! Do this enough, and your problem will not be the loss of money, but the lack of losers from which to learn more. SEED OF WISDOM I have been trading for over 13 years, but it is only recently that I have grown to fully appreciate the enduring period of loss and frustration I had to suffer. At the time, I felt like I was battling for my life. Now I realize this period was helping me to gain my life. My losses kept me up at night, studying, correcting, and revising my thinking and my methods. They motivated me to rid myself of what was not working and accentuate what was. Today, with the benefit of hindsight, I can truly say that those years of frequent loss formed the foundation for the wonderful years of success I have managed to enjoy thus far. If I could have only one wish, I'd wish that every aspiring trader developed the mature understanding that losing is not the enemy. Failing to do something with your losses is the real foe. MAKE YOUR LOSSES WORK FOR YOU The path that leads to trading mastery is a journey often fraught with countless perils. The danger, the loss, the trials and tribulations that an aspiring trader must endure are enough to break the backs and crater the souls of most individuals who dare to trek its course. It is a shame that we
are so quick to assume that individuals who have perfected their skills and command the markets with incredible dexterity have accidentally stumbled upon their gift by some innate tendency or natural endowment. This is far from true. Pain. Loss. Frustration. Confusion. Uncertainty. Inconsistency. These are the teachers that provide the education necessary to reach the desired heights of greatness. Each trader who enjoys a certain level of success today is guaranteed to have suffered through the pain and agony of being a loser yesterday. We, as human beings, simply do not learn very much from our successes. It is only our failures that seem to light the path and show us the way. We know that fire should not be touched because, at one time in our young lives, we got burned by it. So it is with trading. We learn how to win only after we learn all the ways to lose. This was the method used by Thomas Edison when trying to come up with the light bulb. So my question to you is this. What are you doing with your market failures? Are they wasted and for naught? Or are they serving as valuable examples of what not to do? Remember that we leap forward by great distances only after first stepping backward. SEED OF WISDOM Understandably, we spend a great deal of energy and effort trying to avoid the loss and the pain that goes with it. But have we ever stopped to contemplate the grand purpose that loss serves? Isn't it only through frequent loss that we can be sure our actions need correcting? In its purest state, the pain of loss serves as a personal messenger of change. Each time we violate a law, it tells us, in no uncertain terms, that our actions warrant dramatic change. This is why we grow through loss and excel by way of pain. The discomfort gets us to act, to get off our backsides and do something. Without the agony of defeat and the pain that rises from that, we doubt if our traders would ever grow. Learn to respect loss, because in a weird way, it is precisely what will lead the way to the future you want. SMALL LOSSES: THE HALLMARK OF A MASTER TRADER Losing money in the markets is never a pleasant ordeal, but as all intelligent traders know, it is —and always will be—a permanent part of the trading landscape. Far too many starry-eyed novices deplete their ener
gies, not to mention their precious financial resources, searching for that perfect investment approach or trading system that promises to forever eradicate the losing side of the equation. Needless to say, these individuals are only deluding themselves, because the holy grail simply does not exist in the real world. In fact, a large part of traders' success is dependent on how well they manage their losses, not how well they eliminate them. What's even more significant is the fact that winners have an uncanny way of taking care of themselves, so astute traders who focus solely on managing their losers will always come out on top. In short, losing is an art, and it must be mastered if we are to ever reach a high level of proficiency. Why? Because our professionalism as traders is measured not by our winners, but by how adept we are at keeping our losses “controllable.” Learn how to lose professionally, and the rest of the details seem to fall into place automatically. And what exactly is a professional loss, you ask? A small one, of course. Please keep this concept in mind. The underlying message is far more valuable than most would ever think. SEED OF WISDOM It has been said that the difference between a winning trader and a losing one can be measured in eighths and quarters. If this is true, and we believe it to be, the management of one's losses is what makes all the difference in the world between a winner and a loser. Let's face it. It is not uncommon for traders to luck into winning trades. In fact, during a bull market, one can luck into winning trades rather frequently, simply because a rising tide raises all boats. This leads us to the inescapable fact that winning trades are not always the truest indication that the trader is a winner. In reality, there is only one hallmark sign of a professional: small losses. No matter how lucky novices are, the truth about them can be found out by taking a look at the size of their losses. On the other hand, no matter how off professional traders are at the moment, you can be sure they are the real deal if their losses are consistently minuscule. The point is this. You can fake being a winner for a while, but you can't fake or luck into a record of consistently small losses. That hallmark sign belongs exclusively to the astute, the pro, the winner. Novices can't consistently lose small. It takes too much skill and discipline to pull that off. They may be able to luck into an occasional big win, but their losses will rat them out every time. The hallmark sign of winners is not how they win, but rather how well they lose. If you learn to manage your losses, you won't even have to look for wins. They will find you.