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Best Loser wins by Tom Hougaard

Introduction

So our author name is Tom Hougaard. he has degree in economics, money, banking and finance.

He is finacial anlayser for some some brokerage firm.

They went for some event where his boss client asked him about company named Marconi which is down almost 60% in last 1 year.

Author reply

Marconi is garbage, gentleman. why are you chasing stocks that have fallen in price? the stock market is not like supermarket, where it make sense to buy toilet paper when there is a sale on. Sure, it makes sense to buy toilet paper at 50% discount, but it makes no sense to buy a stock that has fallen more than 50%. Concept like cheap and expensive may work in the world of grocery shopping but not in the financial market.

what this is about?

This book is about how to play the game of trading.

also here is important declaration : this is insanely difficult profession. one that is beyond the apparent mental abilities of almost everybody, yet at the same time a profession that will reward you with wealth beyond your imagination, once you understand how this game really should be played.

Now you know the end destination. if you don’t like sound of it, it is good time to put down the book and go to YouTube and tiktok videos and watch the Ferrari driving 20 year old trading coaches tell you how it is all done.

If you want lasting change not only in your trading, but in how you live your life - then stay with me. Your transformation into consistent trader will permeate other parts of your life. it will give you a deep understanding of who you are and what you can do to better yourself. the end result is not just more money on your trading account but more harmonious and exciting life journey.

Everyone is a chart expert

Chart Indicators

i have seen many of my trading friend build impressive library of technical indicators and acquire knowledge about them. but it didn’t translate into making more money. when it comes to chart less can be more

Charts can be as simple or as complicated as you want. There seems to be tendency amongst traders to make charting more complicated than it needs to be.

It surprises many people, especially newcomers, when they see my chart screens. there is not a single indicator on them.

My job as trader is to find low-risk trading setups. my approach to trading is not centred around any other tool than price itself. all indicators - more or less are built from time and price. therefore, the indicator is a distortion of the reality i am seeing right in front of me.

The market can be range bound, or the markets can trend. some idicators work well in rangin markets but perform terribly in trending market. other indicators work well in trending markets, but are dreadful to use in range-bound markets.

As famous trader friend of main said “ Indicators they all work some of the time, but none of them all of the time.”

How to think during trade

I truly believe that what separates the 1% from the 99% is how they think when they are in trade, how they handle their emotions when they trade. I know from my own experience that chart reading is an absolute must for my decision making, but that is only small part of the whole trading picture.

one of my friend has followed one of my trade where i was in good profit. but my friend wanted to take this profit and exit this trade because yesterday he made loss and now that he was in profit he wants to break even.

response from author to is friend

i think you are trading yesterday’s experience. you haven’t wiped the mind slate clean. you are not present. you are focused on the past. you are trying to get back to an emotional equilibrium. you’re in a state of imbalance because you are unable to shake the loss from yesterday. as a result, you are not judging the trade on its own merit, but on the merit of a past trade. you are not seeing the world as it is. you are seeing it as you are. i understand it’s soothing to close the trade. however, we are not trading to break even. we are trading to make money.

The Role of Charts

The role of the chart is to give you a visual representation of the thoughts of other market participants. it enables me to be much more specific in my entry and exit criteria than, fundamental trader.

However it is easy to get seduced by the randomness of charts. Over time, though, it is not your chart reading skills that will decide the number of zeros on your trading account.

Fighting my humanness

something is wrong when 90% of people fail. In the following table I have identified a handful of behavioural patterns that I think are detrimental to traders. the most frequently observed behaviour is the inability to take loss.

Hope Features high on the list of reasons. As the saying goes hope dies last. our minds seem ill equipped to engage in risk management. our minds have one primary objective : “to protect us against perceived or real pain”

during the process of running an open position that is producing a loss, our subconscious mind is telling our conscious mind to keep the position open. it will mask this message as well as it can, in order to protect the ego, which is more fragile than the state of your trading account.

Avoiding Pain

As long as a losing position is open, there is hope that position will turn positive. the moment you close the position, and you crystallise the loss, the pain of the loss becomes real.

I accept there are many permutations to the situation of handling losing trade. some will argue that the very act of closing a losing trade is the point when you can stop agonising over the open loss and open yourself up to other trade options.

when i have a losing position and i no longer believe in it, the worst i can do to myself and my psyche is to begin to hope. I don’t feel free in my thinking and in my market perspective when an open losing position is beaming at me on my open position monitor. when i close the position, if feel free again, and i am opening myself up to taking in market information from an opportunistic frame of mind.

I saw it frequently. they didn’t hold on to the position because they believed in the position. they held on to the position because they could not stand being wrong.

they moment they were relieved of their pain of the losing position, they got out for nothing. they were so relieved to have avoided the pain of being wrong that they completely ignored the fact that the market was now actually agreeing with them.

they weren’t trading the financial market. they were trading their emotions, responding to how they felt.

If you are taking your profits early under the excuse that ‘you can’t go broke taking a profit’, you are reacting to your mind warning you against future pain.

If you are on a winning streak, and you reduce your stake size, you are essentially anticipating the pain of losing some of your gains. you are now rationalising your way to avoid the pain, even though nothing painful has actually happened.

My Hero

this is story about guy name charlie d, he is legend in trading pit.

some quotes form his biography

The time you know you’ve become a good trader is that first day you were able to win by holding and adding to a winning position. there are many people here that have traded for long time, and who have never added to a winner

Adding to wininng trades is an absolute key trait of the successful trader. It reinforces correct behaviour. It servers as an antidote to the temptation of wanting to take profit. when i am in profitable position, i have trained my mind to ask, “how can i make my position bigger?” rather than dwelling on the idea of taking profits.

The Trading Floor

Risk versus reward

I personally find the whole risk-to-reward concept enormously flawed, but since i am the only one who ever talks about it, i accept that i am probably wrong.

How on earth do i know what my reward will be? I literally do not know. Even if i pretended to know - say, by using measured move calculation or a fibonacci extension - i know myself that when it got to my target, i would not close it, because that is my philosophy.

I would kick myself if i closed a trade at my target, and then it went even further. I would rather give away some of my open profits than miss out on potentially even more profits.

Targets are not for me. I want to see what the market will give me. I am prepared to accept that this may mean i will give away some of my open profits. I have lost count of the number of times i have had 100 point winner in the dow, which then turned into zero.

It gives me much less pain to kiss 100 point winner goodbuy than it does to take my 100 points, only to see the market moving even more in my favour.

It is because of this philosophy that i am at times able to make 400, 500 point gains, as i did today. It is one or the other. I don’t think you can have the best of both worlds.

Interview with CNN

In an interview with CNN some years ago, i was asked about the traits of winning traders. In this interview i highlighted few points.

  • Trying to find the low
    • when the market is trending lower, there seems to be tendency for retail traders to find the low of the move
    • whether that is out of desire to buy cheap, or because they use ineffective tools, i don’t know. what i do know is that this trait is immensely damaging to anyone’s trading account.
    • winning traders seems to be much more trusting of the prevailing trend. this attitude adjustment may seem trivial but it literally makes the difference between the winning trader and the losing trader.
    • overtime the losing trader will repeat his distrust in the prevailing trend and will take positions against it. he will do so because from an emotional standpoint it appears as if he is buying a market that is cheap or selling short a market that is expensive.
  • Trying to find the high
    • the opposite also hold true. when the market is trending higher, traders tends to want to find a place to sell short.
  • thinking every small counter move against a trend is start of a new trend
    • I have sat on a trading floor through the darkest days of the financial markets. for example on 15 september 2008, when lehman brothers declared bankrupt
    • through the trading day, there were two attempts to rally. both failed. it was tragic to see how many clients tried to buy the low of the day, only to see the dow move lower and lower.
    • whenever there was a single green candle on 5 minute chart that day, we saw the buy order flow into our position monitors on the trading floor. it seems as if the clients were possessed by the notion that low was near, and that they had to be the one buying it.
    • the low didn’t come that day. nor the next day.
    • This is a common trait amongst trader. they think that every single counter reaction against the trend is the beginning of new trend. more fortunes have been lost trying to catch the lows in falling market than in all wars put together.