Lessons from What I Learned Losing a Million Dollars

Black Friday

Several Friday’s ago I had the type of session that could have ended very badly for me.

I started the session with a good trade but then missed an easy opportunity which would have allowed me to meet my trading goals for the day.  I call it missing the “one and done” trade. 

Truth be told, everything after that feels like a blur.  The mental switch was flipped and I then proceeded to act like the proverbial bull in a china shop and chasing the market to try to make something happen. 

chinabullBy the end of my trading session I was only modestly down.  But things could have easily turned out a lot worst.  In fact I’ve had similar sessions which have resulted in me going full tilt and causing massive harm to my equity.

The only difference this time around was that I was saved – saved by luck.

As luck would have it I had committed to leaving the trading desk early to get ready for some festivities later that day and evening.

For not that planned activity I am sure, without a doubt, that the drawdown on my account would have been quite severe.

What I Learned Losing a Million Dollars

I recently received a very timely book from Tim Ferriss’ most recent Quarterly package.  IMG_3981

The book is called What I Learned Losing a Million Dollars by Jim Paul and Brendan Moynihan.

I spent a weekend reading the book and after a few days to reflect on that Fridays’ trading session I’ve come to a few observations and takeaways that I’d like to share with you kind reader. 

Also this blog post serves as a reminder and lesson to myself in the necessity of maintaining vigilance in one’s trading (more on this later). 

In What I Learned Losing a Million Dollars, Moynihan recounts the true story of Paul’s meteoric rise and subsequent fall from grace, where in the span of 3 months  he loses nearly everything (over a million dollars – big money in the early 80’s) in a futures trade gone terribly wrong.

The book truly has some great lessons for traders and non-traders alike.

One of the great lessons of the book revolves around our hubris of personalizing success. 

“Success can be built upon repeated failures when the failures aren’t taken personally; likewise, failure can be built upon repeated success when the successes are taken personally.”

With enough success we may even begin to buy into the story of how great, special, or different we are; ultimately sowing the seeds for a painful reality check down the road.

This is a profound concept that deserves exploring.

A Fool and His Money Are Soon Parted

“Lucky fools do not bear the slightest suspicion that they may be lucky fools – by definition, they do not know that they belong to such a category.” Fooled by Randomness – N. Taleb

How often do we misattribute our successes to personal skill and competence, when it many cases it was simply chance or good fortune? 

And likewise how often do we quickly deflect failures and blame bad luck or circumstances outside of our control?

This cognitive fallacy, called self attribution bias, is one of the most deceptively common biases that traders need to remain mindful of and ever vigilant.

As Moynihan details, in the case of Paul his early successes in school, the military, and in trading, involved breaking all the rules yet still being successful anyway.  In an ironic twist this groomed Paul for the disastrous trading loss that was consequently years in the making. 

I’m sure most of us can relate to learning some bad habits from some early trading success that we still carry with us.

Likewise how many of us have put together a string of winning trades and felt as though we were on the proverbial mountain just before everything comes crashing down.

How this played out for me personally all started a couple of weeks prior to that fateful Friday trading session.   A couple of weeks prior I had had my best trading session in 2014.    For days afterwards I recall feeling very confident, nearly exuberant about my trading, like i was standing on the shoulders of giants. 

In my mind I was reading the market well, extremely focused, very motivated, so naturally I thought I should be pushing the envelope and riding the streak.

In retrospect I now see that I was starting to get overconfident.  I started letting my preparation slip, I was playing looser with my trade management because I figured I could make up any losers with bigger or more winners. 

All of this is a near perfect description of the actions and behaviours found in self attribution bias – where you are someone who is somehow special or different and that there is no possibility for downside. 

So how did this end? 

Icarus

Many of us may recall the mythical story of Icarus.   In the Greek myth, Icarus’ father extolls Icarus to not fly too close to the sun or risk melting the wax on his wings.icarus

But many of us forget forget the flip side of that parable of how his father also warns Icarus to not fly too low or risk the dampness of the sea clogging his wings. 

This parable also applies powerfully to trading.

I’m fortunate to have been trading for some time now and still be alive to tell the tale. 

By no means do I claim to be a perfect trader but one of my strengths is that I can recognize when I’m trading like an ass or to be more politically correct, with an irrational exuberance.

In these situation when I’ve flown too close to the sun I have learnt that the best thing for me to do is to take some time off. For me this doesn’t always mean stepping away completely.  I have found that this is akin to flying too low, and that I lose touch with the markets.

Rather I want to find a steady milieu where I can return to being a dispassionate observer or participant. 

Again for me this either means trading smaller, focusing only my best setups, or getting back on SIM until I’m back in my groove and desired mindset for trading.  For you this may mean taking yourself away completely to recharge, to recenter, or to reduce the emotional charge. 

Key Takeaways

Casino insiders know that the hot hands will eventually get cold.

If you find you’ve having a hot hand how do you avoid the fallout of self-attribution bias?

Here are some practical takeaways.

Regression to the mean – Respect cycles.

There will be periods of high market opportunity where you can seem to do no wrong. 

Part of this could be a function of the market cycle you are in, the trading strategy you are applying, and your own personal performance.

Understand that you will have peaks and valleys in your equity curve.  If you’re equity curve looks like a pumped up penny stock, and you’re not taking measures to actively monitor your risk, watch out below.

Do not personalize trades. Think – Next trade. 

Recognize that your success does not exist inside a vacuum – ie. it’s not all because of you.

Short circuit the self-attribution bias by staying focused on executing your A+ trades and nothing less. 

Build Inner Awareness

Cognitive biases are often the result of letting unconscious patterns play out.

Cultivate your own inner awareness through practices like meditation, heart-rate variability training, and journaling.

Ask yourself are you really in control of your trading? 

Have a Plan A, B, and C.

Finally if you don’t have backups or discipline then you’re trading without plan.

At all times, in all trades have a Plan A, B, and C.

  • Plan A is your best case scenario.
  • Plan B is your worst case scenario.
  • And Plan C is something in between – the most likely scenario.

Got something to say? Leave a comment and I’ll respond!

Lessons from What I Learned Losing a Million Dollars

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