EP124: What is a “Successful Trader”?

Truth About Forex

6 years ago

Would you do anything for money?

In this episode of Truth About FX, Walter digs into what really makes a trader successful. Is it the money or driving a brand new Ferrari? According to Walter, having this one key element can define a trader’s success or failure. He tackles the importance of understanding risk and knowing yourself.

Hugh also shares his idea of what a successful trader is and what other people perceive as being a “successful trader”.

Download (Duration: 10:07 / 11.5 MB)

In This Episode:
00:47 – scrapping the system
02:12 – fair-weather trader
05:12 – submerged
07:32 – morals for a buck
09:43 – try to withstand

Tweetables:
Understand the dynamics of risk. [Click To Tweet].
Be true to who you are. [Click To Tweet].
Am I able to let it go? [Click To Tweet].

Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.

Hugh: Hi, Walter. How do you define success in forex trading? I mean, obviously, that varies by individual but it’ll be interesting. I’ll be interested to hear your definition.

Walter: Probably a successful trader to me is one that can go through a drawdown with a perspective. If you go through a drawdown and you find yourself changing your system; or if you go through a drawdown and at least find yourself completely scrapping the system, not even changing the rules but just completely throwing it away; or if you go through a drawdown and have really emotional pain, consider giving in into that dark place and reconsider your life as a trader; all of those things come from the root of either not understanding the dynamics of your system or more likely not understanding risk and the definition of risk for your trading.

Being able to go through those drawdowns is really what I consider a successful trader. I’m not the only one. If you talk to other traders who’ve been around for awhile, longer than me, they’ll tell you it doesn’t really matter that there’s a drawdown. Everyone has them.

What matters is what do you do after your drawdown. Are you going to pull yourself out of it or do you freak out and do you change the game? That’s the main thing here. It’s to make sure you know everything that you need to know about the drawdown that’s coming because everyone listening to this is going to have a drawdown.

If you’re not in one right now, you’re going to have one that’s going to be terrible. That’s trading. That’s it. I mean, if you look back and you look at these famous traders like Jesse Livermore and a guy that I know — that I knew — these traders, they couldn’t handle the drawdown and that’s the end of them.

That was literally the end of them because they couldn’t handle a drawdown. Understanding the dynamics of risk and how that plays into your future drawdown and how are you going to get out of it, that really the key part of it to me.

Not trying to be a fair-weather trader where you’re always going to what looks good today or next week or next month, but rather just figuring what your drawdown is going to be and pushing through it.

To me that’s the success because you see, if you’re a successful trader, you can’t shake the successful trader’s confidence. You can’t because he/she knows that in the end, he’s or she’s going to make money.

Same thing with the casino. Casino doesn’t care that somebody hit the $15 Million jackpot today because they know that they’re going to make money tomorrow and that’s the same thing with trading.

You just have to keep that positive edge and know that no matter what kind of situation you’re in, in terms of a drawdown, you will get out of it. That really just comes from understanding your statistics and understanding the likelihood of certain drawdowns and what you’re plan to get out of them.

All that to me, really, is success. It’s not about buying a 12-bedroom mansion or 17 Ferraris or travelling forever for three years and never having a home and going from Four Seasons to Four Seasons Resorts because that can come and go. Martingale traders can do that.

Literally, a martingale trader can get to the point where he’s travelling around the world because he’s crazy with his risk but once you understand that you’re going to succeed even though you have a horrible drawdown, then that’s when you know you’ve made it. That was my thoughts. What do you think about that?

Hugh: I think it’s along the same lines but I see a successful trader as someone who has confidence in themselves and a lot of those guys who are at that point that I’ve met, they’re just really laidback and kind of like, “I’ll get it back later” or “It’s just a small hit, I’ll come back next week” or whatever and I think that’s what success is. You’re just going with the flow and you’re comfortable with the process, I guess.

Walter: That’s a good point. And, you bring up a good point because those traders who are able to do that often also means that they haven’t risked too much. Because, if you risk too much, you’re going to freak out but if you have a really low risk, you concentrate on the execution and not the outcome.

The other thing that you bring up actually, this idea of being laidback because I remember in the Market Wizard book. I don’t remember which interview it was but Jack Schwager, he mentioned after the interview — kind of in the summary of the interview — he said, “I went home and I checked this guy’s trades,” because he found out which trade this trader was in or his funds were in or whatever and he said, “I couldn’t believe that he was down”.

When he was interviewing the trader, even though the guy seemed upbeat, positive and everything, he was like in a series of bad trades. He was not making money and he was fascinated about that.

The author, Jack Schwager, was fascinated by the fact that this guy was totally upbeat and everything even though he was like in this position that was taking on water completely submerged. He thought, “Wow, that’s interesting”. I like that observation.

I think it makes a lot of sense that he would find that traders who even have losing streaks — I’ve had the last two trades that I took, they’ve been losers — that’s just part of the game. You just have to keep going.

I think you’re right. Being able to…. It’s probably not for you. Trading is probably not for you if you’re always wondering, “What did I do wrong in the last trade? How could have I fixed it?” That’s a dangerous road because you start to modify your system now.

Whereas, if you’re more likely to let it go and go like playing a game of chance. Sometimes you roll the dice and they come out snake eyes and it’s no good for you. So, that’s the approach.

I think you’re onto something that I think that’s definitely something that I would look for as a trader. Am I able to let it go? Do I have small enough positions? It’s okay to have these losers when I have drawdown and I know that I’m going to pull myself out of it. That’s a pretty critical aspect to trading as I see it.

Hugh: How much of that do you think comes from detaching yourself or detaching your identity from being a trader? I think a lot of people get wrapped up in the fact that they’re a trader and they have to prove that money occur or whatever and then it leads to downfall. What do you think about that?

Walter: Yeah, I’ll tell you a quick story. One of our forum members — I’ve met him in London, we had a little meet up in London — and he was telling a story about how he met a trader at a pub in London.

The trader asked him — he has a job, this guy has a job and he also trades on the side — so the guy said — and I don’t know if this trader works in a hedge fund or bank. I think he work at a hedge fund but anyway, it doesn’t matter. The point is he was talking to this guy and he was asking — so the hedge fund trader said to my friend — and he said, “Would you do anything to make money?”

My friend said, “No, I wouldn’t do anything to make money.” The guy was like, “Pfff! Well then you’re not really a trader,” and he turned around and started talking to somebody else. He’s like if you do not completely throw out your morals to make a buck then you’re not a trader.

That’s kind of what I think this hedge fund trader had fallen into this trap of identifying himself as a trader and what a trader means. He probably learned that the older traders and the more experienced traders. He learned that this is what a trader does.

A trader does whatever he can for a buck, like basically you’re a prostitute, you do whatever you can for bucks. That was kind of his point of view and my friend was like, “That’s crazy.” I agree with him, obviously. I think that’s part of it too.

You’ll get stuck into this idea of, “What does a trader?Okay, a trader has to have a Ferrari. A trader has to jetsetter in the world. A trader has to…” All of these things have to make x amount percentage per month or whatever it is.

I think that’s not necessarily what’s going to… You know, having the long view, being able to say, “Okay, we’re going to make this. This is a long game that I’m trying to win. I’m not trying to make something happen over the next year, or week or month. I’m trying to last for ten years.”

What kind of approach would you take if you, sort of, just have the long view? What about compounding? Can you use compounding in your trading so that you’re not pulling money out of your account?

Maybe it’s a smaller account. You start with a smaller account but by compounding, you see that by year eight, you’re fine. You’re set by year eight. Whereas, if you will just trade a larger account, kept pulling money out of it, maybe it would never grow that fast. Even though you’re starting smaller but you can afford to just compound that small account.

All of these things I think go into it but I think you’re right. I think we get sucked into what it means to be a trader because we watched “Wolf of Wall Street” or whatever. All these, the “Big Short” or “Wall Street”.

Hugh: Was it “Wall Street” or “Wall Street 2”?

Walter: Yeah, and there was another one. All of those movies, you know it’s just crazy to get sucked in and ratings on the internet. People say, “Hedge fund traders only do this and hedge fund traders only do that” No, they don’t. They do everything.

Everything that you can think of what a hedge fund trader do. They trade all different kinds of way so it’s just crazy what you hear. Just be true to who you are and remember that the drawdowns are coming. Have a plan for it and try to withstand that because that’s really the long view, being able to withstand those valleys along the way.