What do futures traders Larry Benedict, Linda Bradford Raschke, and Marty Schwartz have in common? Each of them suffered losses that would have sent most traders packing, but ended up being some of the most successful traders in recent memory.
When it comes to the markets, it seems the road to success with paved with big mistakes — especially at the start. Here are a few of our guesses as to why.
The market is your greatest teacher. But you don't have to risk your own capital to profit.
Trading Is a Hard Skill to Learn
Trading is deceptively easy. Buy low. Sell high. Make money. But let’s take a look at just a few of the skills traders have to learn. On top of understanding the markets, they have to know how to:
- Build a solid trading plan. Markets are extremely nuanced. Every trader needs a strategy that either works in any market condition or tells them what to do when conditions are unfavorable. Looking at a chart or two isn’t going to provide that information.
- Manage risk. It sounds simple, but in the heat of the moment, taking a loss is challenging. It’s emotionally charged. And if you don’t watch yourself, you’ll be moving stops and fighting the market.
- Account for what you can’t control — like slippage, earnings reports or government speeches. There is a lot that you can’t control in markets. All you can control is your entry and how you manage risk. Then, the market goes where it goes. But sometimes it will gap open or slip through your prices.
Put these elements all together and you can see why one study found that 80 percent of traders quit within the first two years. But it may also explain why so many successful traders suffer early losses. The ones who can weather the a major blow-up are rare, but they have a shot at making money.
Trading Can Be Emotional
As a trader, you make decisions in situations that are full of risk and uncertainty. Plus, your decisions impact your livelihood. These conditions cause your brain to initiate its flight-or-fight response. The stress that produces your sweaty palms, nervous stomach, and racing heartbeat also make it difficult for you to think clearly. The result is usually losses. Big ones.
Successful traders have learned to control their emotions. They don’t take losses personally. In fact, they are more likely to see a loss as an opportunity, much like Bruce Kovner describes in the book Market Wizards. Instead of falling apart after his first big loss, he went on to make a fortune. Read the details in “These 4 Money Management Tips Helped This Trader Build a $5.4 Billion Fortune.”
Successful Traders Learn from Failure
Paul Tudor Jones, the trader best known for predicting the Black Monday stock market crash in 1987, once said the secret to being a successful trader is to have “an indefatigable and an undying and unquenchable thirst for information and knowledge.” In part, that means they need to know all they can about their markets. But it might also indicate how valuable early failures are.
Successful people in all walks of life often have a story about how close they came to losing it all. Michael Jordan was cut from his high school team. The University of Southern California film school rejected Steven Spielberg more than once. Oprah Winfrey lost her first reporting job because she was too emotionally invested in the stories.
Traders are no different. The successful ones are not only resilient; they also use losses to fine tune their system. You can read several examples in “What These Traders Wish They Knew Before They Lost Huge."