Sunday, August 23, 2009

How To Be A Mediocre Trader

Never let a winner turn into a loser. Great trading advice right? What if I told you that it's advice like this that's keeping you in mediocrity. Most traders don't question the general trading "wisdom" out there, but let's do something a little different this time and shed a little scrutiny on this issue.

If you stop to think about it, this little nugget of wisdom sounds a lot smarter than it actually is in a practical sense. Let's start with the obvious. What exactly is a winner? If you're trading the S&P e-minis, then the technical answer is that you're in a winner when you're up 0.25 points, the smallest increment the instrument can move. So does this mean that when you're up a tick, you should quickly move to break even so that it doesn't become a loser? Good luck ever getting a real profit with that strategy. So what is it then, is a winner a point? Is it a relative amount based on your original risk on the trade? Is it a multiple of this number? When should you say, I can't let this WINNER turn into a loser?

I can't give you an answer because, well, I really have no clue. Instead, I've chosen to think differently about the issue altogether. In my mind, it's futile to try to put a distinct label on what a winner is, and more than this, it can actually be quite unprofitable. To start with why it's futile, well, simply, each trade and context is totally different. What can be considered a good profit in one trade can be peanuts in another one that has much more potential. So why not consider a winner any trade that has reached a point where from the market's perspective you could say that if it returned to your entry point, that would imply that it's failing. For some trades that may mean 2 points, and for others that may mean 10 points. Yes, I said 10 and that's not a typo. In the past there've been some rare occasions where I had 7 or 8 point paper profits (on a 2 point original risk in similar volatility environment to last Spring) and I've let them reverse all the way back for a loss because I didn't think that the market had reached a point where a return to break-even would negate the reason for the trade. Is this crazy? Was I just being imprudent? It may seem so if you only look at one instance, but your view might change if you saw some other trades that were up relatively big (say 6 or 7 points), came back to break-even, but I didn't exit because the basis for the trade was still there, and then went on to eventually become 10, 12 or 14 point winners.

Now is it very hard emotionally when a large profit becomes a loss? Absolutely. But does that mean that we should avoid it at all costs? I beg to differ. You see, no one said that long-term profitable actions are comfortable. It's not comfortable for me when I'm holding a good profit and watch it retrace back to break-even into a potential loss. But if I still believe in the trade, I'm not going to exit just to protect profits, or just so I don't have the stigma of "letting a winner turn into a loser." If I have a good profit and all of the sudden I see something to make me question the market and my odds, then yes I'll often lock in the profit. But I'm not doing it just to obey some conventional trading wisdom that says never let a winner turn into a loser. I'm doing it because it's the correct course of action to take in my view. And if the correct course of action is to hold on despite the potential for what most traders would consider a "winner" to reverse and become a loser, then I'm going to sit with that discomfort and do it.

You see, it's a matter of principle. The problem with this old adage is that it makes traders trade with a fear of themselves. "How could I let a winner turn into a loser? I must be a loser if I do that." Traders that blindly follow such conventional wisdom fear their own negative criticism if they break it, even when it might have been the correct course of action to do so. They might notice that to have some really large winners, you can't always be scared of trades coming back to break-even and thus bailing just so a profit doesn't become a loss. You have to determine what's normal movement, and then allow whatever outcome to be in that context. Why is it so bad anyway to let a profit become a loss? It's only bad to not get out when your reason for the trade is gone, whether it's a profit or a loss. Don't let some dogma force you into being unforgivable with yourself when you see that to trade right in some circumstances, you may have to let a profit turn into a loss. Of course, you can alleviate the self-reprimand by only labeling something a winner once it has reached the threshold of no-return. But ultimately that's just semantics. Every profit feels like a winner and thus it becomes a matter of principle like I stated earlier; If it's correct process, then you shouldn't think it's wrong to break some old trading wisdom.

Of course what I'm talking about here extends much farther than just winners becoming losers. There are endless varieties of this type of crowd thinking that goes unchecked and thus leads to diminished profitability in the name of comfort and conformity. And before the comments start coming in that this advice is too general as some traders are scalpers and aren't looking for big winners anyways, yes I know. But even there it applies if they take it down to their timeframe and point of reference. If they're up 2 ticks and there's potential for 6, they shouldn't be in fear of letting this profit turn into a loss just because it would be considered wrong or it would feel uncomfortable. And in the end this is what it's all about. Are you willing to do what's uncomfortable in the short-term if it will yield long-term profitability? Let me tell you, it's not easy to do. I don't do it perfectly. I still struggle with it every day and sometimes I slip and do what feels comfortable instead of what I know is right. But the point is that I don't settle for the comfort zone. I keep pushing myself to move beyond it and take my trading to new levels.

You don't have to agree with all of this. In fact you can staunchly oppose it. So go ahead. Never let a winner turn into a loser. And never forgive yourself if you ever did so for good reason. Like the title of this post implies, it's your surest path to trading mediocrity.



  1. Good post Ziad. You said..."Are you willing to do what's uncomfortable in the short-term if it will yield long-term profitability?", is a key point for me. We have to push our own mental envelopes if we are to make real progress. In The Way of the Turtle, Curtis Faith lists 3 cognitive biases which doomed many to mediocrity. One of them is "loss aversion" where many traders have a tendency to prefer "not losing" over "winning", thus they take the quick gain and bail.

  2. nice thought provoking post. as humans we do tend to do what's necessary to avoid pain. Some people move stops to b/e very quickly, and some people run their stops to avoid taking that loss. The 'pain'of losing is a lot more intense then the joy of winning big trades.

  3. Hi ziad, is Daniel here, great post you are right in what you are explaining, and yes !!! it is hard to not cut losses sometimes. Do you have an e-mail where i can reach you, i want to ask you a couple of things since you are already more advance than me in the SP.


  4. Hi Ziad,
    Another great article. I think 0.25point isn't considered as a winning trade. I used to locked profit partially on very minimum target (of course not 0.25 point) and run the rest of it.

    And you're right. I had a mediocre result this far, around 10% per month. But my win-lose percentage ratio was very high. Almost 90%.

    Please give me some insight, is it achievable to lower my win lose ratio and reach higher % return? Thx in advance

  5. Thanks for the comments everyone. I definitely agree that loss aversion is a major issue for every trader to deal with.


    post your e-mail as a comment and I'll get in touch with you. I do have to say that I honestly don't have a lot of time to correspond with other traders as I am continuously working on my own trading goals. However, I'll be happy to answer a couple quick questions if I have insights regarding the issues.

  6. De'Trader,

    I think it's definitely achievable, but there's no straight-forward or generic answer about how you go about achieving it. It will take take experimentation and a certain ability to leap into the unknown on your part. It's not easy, but if you desire to improve your results, and can handle a potentially rocky period in the short-term as you try to do so then anything is possible. Just a note though, be careful to not move away from your core strengths in your attempt to do this. If you're good at scalping and have a knack for that style of trading, then it's not necessarily a good thing to try to change it.

    You have to ask yourself: why do you lock in a partial profit so quick? Is it based on your experience that in the majority of times this is what it pays off to do for you, or is it due to discomfort and an intolerance of loss? If it's the former, don't change it, just fine-tune your skills. If it's the latter and you see that you could make more money by tolerating the discomfort of having a lower win/loss ratio, while not drifting too far from your core strengths and predominant style, then make the necessary changes. Realize that with a lower win loss ratio comes a more volatile P&L as drawdowns can be bigger. This isn't a bad thing like most people think. P&L volatility in and of itself is not bad in my book as long as it's an upward trending equity curve. But it DOES require different emotional skills to deal with it, and this comes with time as everything else. So if you think it's the right path, go ahead and do it, but do it gradually and have patience with yourself as you'll fail along the way, but that's okay... it's how we learn.

    All the best,


  7. Daniel S, I would say just post the question right here in the comments, so everyone can benefit from the Q & A.

  8. Hi Ziad,

    I am just commending you for your great comments about the post I pick up from Carl Futia about "becoming a successful trader" that a guy "plagiarized" your opinion. I really admire and agree with your comment and I made (your comment) as my "guiding priciple". I am just learning my trading by myself and these kind of ideas that I really value for they come from "real" traders like you. Thank you very much Ziad!

  9. You're very welcome GD. I'm glad I could help.

    I too took this journey pretty much all on my own and I have to say that it was a very tough road in the beginning (and continues to be at times!). However, that's what makes it so amazing. So hang in there through the inevitable rough times and realize that every successful trader has been through it and occasionally goes through it every once in a while. It's not true that the best traders don't fail or make mistakes- they're just better at bouncing back from them.

    All the best.

  10. Hi Ziad, e-mini and all of you guys, great blog e-mini.

    I have been demo the emini for over a year now, and i have been taking it very seriously, ok here are my questions. (sorry for my english i am from spain)

    1) Do you guys trade from 9 30 to 4 15 and 3 15 to 4 pm. Experts say it is the best time BUT supports and resistance are marked at this hours specially in the open from what i have seen.

    2) Which timeframe do you use for
    a) market structure or bigger picture?
    b) trading timeframe or timeframe wher you are going to play
    c) triggering timeframe or timeframe where you enter and exit.
    Maybe some won't understand this but this is what i use to trade. but i am still not ready for a live market since consistency is still lacking.

    3) How many points do you avarage a normal day, i try to make just 2 points

    4)how many hours do you spent a day trading if you day trade the sp

  11. ok continuing here since i dont know how big is goint to be the post

    4) Is there any indicator apart from volume and market internals that you have found worth it? i havent found anything but the two stated

    5) Is there a way you use to determine a VALUE AREA apart from just looking at a chart

    6)anyone uses time and sales or level 2)

    7) i guess...Have you ever consider giving up? why? i have but something insides me is telling me hang in there you are just 24, but sometimes i feel it is destroying me inside because of th uncertainty level of trading

    8) Do you guys have other jobs apart from trading if you are in real world

    well guys this has been long enough sorry to make it do long and untidy.

    happy trading and happy mind

  12. Daniel,

    1) I trade from the New york open to the close. This is the time with the best liquidity by far.

    2) I'm always looking at many different timeframes (from daily to 1 minute) to get a feel for what the market context is. I trade off of 1 minute charts. I use it to zero in on trades within the larger context. I don't have any preplanned "triggers" per se.

    3) the number of points you average really depends on market volatility. Averaging 2 points a day now is actually very good- if you compound your account growth and gradually up position sizing, averaging 2 points a day could multiply your account severalfold in one year. However, in the crazy volatility of last fall, 2 points would have been nothing. So it's all relative.

    4) I spend the whole new york session trading, but typically my busiest time is in the first hour. Lately i've been taking almost nothing mid-day. But i'll hang around and try to stay focused in case something develops.

    4) (you labelled two questions #4) I don't rely on any indicators other than volume and market internals (NYSE TICK and A/D line). But I do follow different markets (ES, YM, NQ, TF) and sectors, to make my trading decisions (I get lead/lag relationships, confirmations/non-confirmations from these).

    5) you can see value areas from Market Profile charts, and you can approximate them from a simple bar chart by looking at the place price ranged and built up volume the most.

    6) I don't use time and sales per se, but i do use a program called Market Delta, to highlight what's trading at the bid vs offer in real-time and historically via a chart.

    7) I've been through very very rough times and crazy ups and downs, and I've felt like I want to give up- but I've never SERIOUSLY considered it. Not even for a second. I know this is the only thing i ever want to do, and i'll stick to it no matter the heartache and pain. What I get from it is so worth it.

    8) I don't have any other jobs. Trading is my sole source of income. However, when I first started out I had enough money saved up to pay for rent and expenses for at least a year, and I got some help from my family as they supported my endeavour to be a trader. This is very important initially so you can focus on your development and experimentation instead of feeling like you need to make money.

    All the best,


  13. Hi Ziad,

    Thank you for your great reply. I have been a fans since your posting about market reading. And become more fans when you said you are a full-time trader. I'd like your opinion about how I trade, especially on market reading.
    1. I day-trade options (AMZN).
    2. My indicator are index,sector,TICK,Bonds,Gold,Oil,Currency.
    3. Before market open I looked at market theme and news, then I made multiple scenario on my mind like what should I do if index go divergence,TICK is supporting,Bonds convergence,OIL increasing, news coming out,etc. Sometimes made my stomach churning and headache.
    4. I trade mainly on opening and most of the time close my position before 11.00

  14. 5. My chart indicator mainly on Candle,S/R,MA,that's it.
    6. I liked to scaling down with a very careful manner and got out with slight margin big volume when I was scaling.
    7. I rarely scaling up so if my first entry is good I just exit on high margin low volume.
    8. My Winning Ratio on August was outstanding already reached over 94%.
    9. I planned to strecthing more profit on September, like 20% per month.

    And many thanks in advance, this community needs more people like you and I hoped I could also give something to the community.

  15. Hi De'Trader,

    Your trading method sounds very good to me. And your win rate is unbelievable! Good job man....

    Just one question. When you say you day-trade options, what is it that you do exactly? Do you buy puts and calls, do you short puts and calls, only one of these things, or all? And If you short options how do you protect yourself?

    One other thing, it's good to be ambitious and go after big things, but give urself credit along the way. Don't be too hard on yourself. 10% per month is quite good, and while it can be bettered, you have to think about it positively and be proud of what you are already achieving. This gives you motivation instead of making you feel that nothing is good enough.

    Anyways, get back to me on those couple of questions when you can.

  16. Hi Ziad,
    Thanks a lot for the encouragement. Today I made a decent profit purely based on market reading and S/R.

    For your question I just buy simple PUT/CALL. My account isn't allowed me to shorting, though shorting options sometimes create bigger profit.

    Please asked me whenever you need to know and maybe you may find opportunity on daytrading options :)

    Best Regard

  17. Thanks a lot for the help guys, I'll try to give as much as i can to the benefit of all,

    great trading



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