Is There Really Only 1 Thing All Great Traders Have In Common?

01/07/2015 6:00 am EST

Focus: STRATEGIES

Rather than yet another article about "how to make money in the market," Sherwood Tucker, of Tucker Trading & Consulting, focuses on loss because he feels that learning how not to lose money is more important than learning how to make money in the markets.

I think this article on trading and the markets will be slightly different than anything you have read on the subject, in that the main focus is on "Losing." So, why an article on losing? First, my belief is that people learn the most from their mistakes, or through adversity, if they are willing to open their eyes and confront what's going on around them and the role that they play in the outcome. Specifically, in regards to the markets, apparently people have at least some knowledge about making money. However, since most people have lost more money than they have made, it is equally apparent that they lack knowledge about not losing money. When they do lose, they buy books, courses, and attend seminars in search of a new method of how to make money since the last method they had employed was obviously defective. Most of these books or seminars people invest in are usually of the rags to riches or "How to" genre, from: How to get rich in the market…, How to make a million dollars a year in the market…, How to apply secret entry strategies. All of us have read them, but if these types of books were the answer we were looking for then we'd all be rich.

If you look through all of the books or literature on trading and investing you will not find a whole lot written about losing money. Usually things written about this subject matter losing panders to people who delight in the misfortune of others. Not as an effort to teach or learn from the person's mistakes. The book's that I have read that touch on the subject of losing money-or risk-highlight its importance in trading and then leave the rest up to your imagination on how it works or how to implement it into your trading plan.

This article is intended for those of you who are interested in delving into the subject of losing, or have lost money in the markets; the psychology of it, the causes of it, and how to protect against it.

One of the things I have become aware of in the markets over the years-doing research and studying how the pros made money so I could follow their example and learn their secrets-is that the pros not only make profits in hugely varying ways, but also in methods that contradict each other. What one market wizard advocates, another market wizard vehemently opposes. It finally occurred to me that studying losing, losses, and how to keep from losing was more important than studying how to make money or entry techniques. The bottom line is that there are as many ways to make money in the markets as there are participants in the markets, but there are only a few ways to lose money. Participants either lose money in the markets due to errors in their analysis or because of psychological factors which prevent them from properly executing their analysis.

So, why a book on losing? Because, there are as many ways to profit in the markets as there are people trading but relatively few ways to lose, and given the fact there are so many books on how to make money in the markets, most traders lose money.

NEXT PAGE: Decrypting the Advice of the Market Masters

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As I said, most people who trade futures and commodities lose money. The percentage varies depending on where you get the statistics from but ranges anywhere from 85% as high as 95% of the investors in the commodities markets who lose money. And, conversely, those investors who usually make money don't really know how they did it. I have-over the years-had the opportunity to watch 100s of different traders invest in futures, their varying methodologies and the balance of their accounts on a day to day basis. Out of all these accounts, some were day traders, swing traders, trend followers, seasonal traders, spread traders, arbitrage traders, options traders, fundamental traders, technical traders, system traders, etc. You name it and I've seen it. The similarities that were revealed to me watching these accounts were that; at the end of the day…most had lost money, if not all their money. Usually, but not always, it was due to one trade, as they rode the trade until they were forced out by the margin clerk or kept paying the margin calls until they ran out of money. If a trader did, in fact, show a positive balance in his account, the profit did not last for long and they soon joined the other traders that had lost money. This was a painful realization to me as it really didn't seem all that tricky to buy low and sell high or vice versa. So what was I missing? In order to try and sort this out I went and started doing research into the 'Master Traders' and how they went about making money (and a lot of it), year in and year out in the markets, by reading their interviews, books and articles. After all, when you're sick, you want to consult the best doctors, and when you're in trouble, you want to consult the best lawyers. I figured if I could find out how they did it, then I would undoubtedly make a lot of money trading and also be more effective at guiding and showing my clients what they may be doing right and what the pitfalls are before they were devoured by the markets.

Below is some of the advice these 'Market Masters' offered for making money in the markets;

Advice and Objections

"I haven't ever met a rich technician."-Jim Rogers

"I always had to laugh at people who say, 'I've never met a rich technician.' I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and then got rich as a technician."-Marty Schwartz

Not very encouraging. Okay, so maybe the key to success wasn't whether you were a fundamentalist or a technician. I mean, I had made a lot of money using both of these methods. While I found technical analysis indispensible, there was nothing like a good fundamental situation to really make a market move. Maybe another topic would begin to reveal the masters' secret.

"Diversify your investments."-John Templeton

Okay, now I was getting somewhere. This was striking a familiar chord. I figured maybe traders placed too much emphasis on one trade. They put too large a percentage of capital to one market. This looked like my first glimpse of knowledge from the masters: diversify. Or it looked that way until I read the following:

"Diversification is a hedge for ignorance."-William O'Neil

"Concentrate your investments. If you have a harem of 40 women you never get to know any of them well."-Warren Buffett

Buffett has made more than 1 billion in the market. Who was I to disagree with him? But Templeton was also one of the greatest investors who ever lived and he said something totally opposite of Buffett.

So maybe diversification wasn't the answer either. Maybe you could put all your eggs in one basket and still get rich by watching the basket very closely. Perhaps the topics I had selected thus far were too broad in their implications. The Masters would have to agree on the more specific and applications of investment and trading mechanics.

NEXT PAGE: Digging Deeper Makes the Hole Bigger

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Averaging a Loss

"You have to understand the business of a company you have invested in or you will not know whether to buy more if it goes down."-Peter Lynch

"Averaging down is an amateur strategy that can produce serious losses."-William O'Neil

Picking Tops and Bottoms

"Don't bottom Fish."-Peter Lynch

"Don't try to buy at the bottom or sell at the top."-Bernard Baruch

"Maybe the trend is your friend for a few minutes in Chicago, but for the most part it is rarely a way to get rich."-Jim Rogers

"I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops."-Paul Tudor Jones

Spreading Up

"When you're not sure what is going to happen in the market it is wise to protect yourself by going short in something you think is overvalued."-Roy Neuberger

"Whether I am bullish or bearish, I always try to have both long and short positions, just in case I'm wrong."-Jim Rogers

"I have tried being long a stock and short a stock in the same industry but generally found it to be unsuccessful."-Michael Steinhardt

"Many traders have the idea that when they are in a commodity and it starts to decline, they can hedge and protect themselves, that is, short some other commodity and make up the loss. There is no greater mistake than this."-W.D. Gann

I had expected there might be some subtle differences among the Masters. After all, some were stock market pros and others traded options or futures contracts. But didn't these guys agree on anything? Based on the opinions above, they sounded more like members of a debate team trying to score points against each other.

I had to find out how the masters made money in the markets. I had to learn the secret that all of them must know. But if the pros couldn't agree on how to make money, how could one possibly learn the secret? And then it began to occur to me: there was no secret. They didn't all do the same thing to make money. What one master said not to do, another master said you should do it. Why didn't they agree?? I mean, here was a group of individuals who had collectively taken billions of dollars out of the markets and kept it. Weren't they all doing at least a few things the same when they made their money? Think about it this way; if one master did what another said not to do, how come the first guy didn't lose his money? And if the first guy hadn't lost, why didn't the second guy?

If modeling the masters was supposed to make you rich and successful and not imitating them was supposed to make you poor and destitute, then each one of these masters should have lost all his money because none of them imitated each other. They all should be flat broke because they very often did things opposite each other. It finally occurred to me that maybe studying losses was more important than searching for some Holy Grail to making money. So I started reading through all the materials on the masters again and noted what they had to say about losses.

NEXT PAGE: There's Agreement in Loss

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Losses

"My basic advice is don't lose money."-Jim Rogers

"I'm more concerned about controlling the downside. Learn to take the losses. The most important thing in making money is not letting your losses get out of hand."-Marty Schwartz

"I'm always thinking about losing money as opposed to making money. Don't focus on making money; focus on protecting what you have."-Paul Tudor Jones

"One investor's two rules of investing: 1. Never lose money. 2. Never forget rule #1."-Warren Buffett

"The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly."-William O'Neil

"Learn how to take losses quickly and calmly. Don't expect to be right all the time. If you have a mistake, cut your loss as quickly as possible."-Bernard Baruch

"The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance."-Ed Seykota

Now I was getting somewhere. Why was I trying to learn the secret to making money when it could be done in so many different ways? The masters could all make money in contradictory ways because they all knew how to control their losses. While one person's method was making money, another person with an opposite approach would be losing (if the second person was in the market). And that's just it; the second person wouldn't be in the market. He'd be on the sidelines with a nominal loss. The masters consider it their primary responsibility not to lose money.

The moral-of course-is that just as there is more than one way to deal blackjack, there is more than one way to make money in the markets. Obviously, there is no secret way to make money because the masters have done it using very different and often contradictory approaches. Learning how not to lose money is more important than learning how to make money in the markets. Unfortunately, the masters didn't really go about explaining how to acquire this skill. So I decided to study loss and losing in general. My losses and client losses, to see if I could determine the root causes of losing money in the markets. As they say; "Mistakes show us what we need to learn."

By Sherwood Tucker, of Tucker Trading & Consulting

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