Failed Trader – We Know Why 95% Never Make Money Day Trading
Failed Trader: What is the difference between a good trader and a bad trader? Always inverse, says the famous investor Charlie Munger, Warren Buffet’s friend, and business partner.
What is inverse thinking? This is when we turn a problem on its head or look at it backward. If a newspaper headline claims one-third of the population is against passing new legislation, it also states two-thirds approve it. You might develop a strategy that performs well on paper, but instead of trying to approve the strategy, you might want to kill it. If you can’t find any reasons why it shouldn’t work, then perhaps you are onto something.
Similarly, by looking at failed traders, you can find out what not to do. This article lists eleven reasons how to fail as a trader. By making sure you don’t follow what sloppy traders do, you might stand a better chance.
What is inverse thinking?
Inversion involves thinking and focusing on the opposite of what you want. If you want to be a successful trader, learn what it takes to be unsuccessful (and avoid that). Mr. Munger claims he has been very successful in life by studying how to prevent mistakes and remove errors. After all, if you avoid managing failure, there are not many options left.
Presumably, The Stoics used the same logic and thinking to overcome fear and negative experiences. Done correctly, inversion is a potent tool that can be used in all aspects of daily life. Just think about it: life is a journey where mistakes are made daily. By inversion, you can spot and track potential pitfalls before you do them. At your job, you can be successful just by showing up on time every day, even though you’re not particularly smart.
We at Quantified Strategies are not particularly smart either. But we have managed to become moderately successful traders and investors for over two decades simply by making sure we:
- Survive another day.
- Removing markets and strategies we know are difficult to trade.
- Avoid investments we don’t fully understand.
- Make sure we don’t make the same mistakes over again.
- By not trying to be smart and advanced.
- By focusing on simple strategies in markets where we can get an edge.
Most energy is spent on avoiding strategies, markets, and behavior that are difficult to master. For example, we are not involved in penny stocks or forex.
Backasting and premortems
Annie Duke offers a different but somewhat similar approach in her book Thinking In Bets called backcasting and premortem. Mr. Munger praised this book.
Backcasting starts with a positive end result, and you imagine how you ended up there. For example, you look at yourself as a successful trader ten years in the future, and you write down reasons and plans on how you ended up successful.
Likewise, you can imagine a negative result in ten years’ time. Annie Duke calls this premortems. For