Trading / Investing

What Separates Great Traders from Disappointed Failures?

4 Min Read

I've spoken before about the importance of root-cause analysis with your trading. We even released a video about a technique called 'the five whys' to help discover what the underlying cause of a problem might be.

For me, this sort of analysis is essential. Not just for my own trading, but also for giving feedback to other people.

I receive dozens (if not hundreds) of emails, comments and messages every day from people learning to trade. They tell me about the problem they're facing and request my advice.

Giving precise feedback to all these people, in a short space of time, with a limited amount of information, should be impossible. However, by looking for the root cause, you tend to find that all trading problems originate from the same things.

I demonstrated this in a video this week. I broke down an interview with Nick Leeson, the famous 'rogue trader' that brought down Barings Bank, the second oldest merchant bank in the world. He was explaining his thought process and the actions that led to him building up a loss of over £800 million.

That huge amount of money simply isn't relatable for the vast majority of people. Therefore, most people would just dismiss the event, as if it's some sort of extravagant horror story.

However, the reality is that the things he did, and the thought processes that led to them, came from the exact same root causes that lead to 'ordinary' traders losing vast sums of money as well.

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When I first started trading, it took me a long time before I realised my errors were due to something far more fundamental than I first imagined. I always focused on the superficial aspects of what caused my losses...

"Oh, my stop loss was too close... damn!"

"Oh, I closed the trade early but if I left  it open, it would have been a good profit... typical me!".

But once I realised what was really behind these mistakes, it changed everything for me. This is when I could really start making the improvements and discoveries that eventually led to us creating The Duomo Method, along with studying other greats from within the finance industry and from completely unrelated fields.

The problem with famous investors and traders is that we often hear about their huge successes and not so much about their failures. But these triumphant stories usually just offer inspiration for the ordinary trader, rather than actually being something to learn from.

Instead, we need to see these experiences, both good and bad, as a goldmine of potential lessons that we can use for our own improvement.

This is something Michael Batnick has done in his new book 'Big Mistakes: The Best Investors and Their Worst Investments'. He has taken some of the most famous market operators of all time and analysed their worst investment decisions.

Although I have not yet read the book (it hasn't been released yet, but I have pre-ordered it), I have read many articles from advanced readings of it. We featured one of these articles in our Daily Picks Wednesday, since the writer had summarised the book into ten overall lessons.

What some people may find surprising is, just like the Nick Leeson points in our video above, the lessons are things we all know and almost all have to overcome at one point or another.

We're talking about: overusing leverage, relying on one approach regardless of the market type, assuming we know too much to fail, having position sizes that are too large, not understanding the asset, thinking about an asset differently once we're in the trade, focusing on making money rather than protecting our capital, comparing our trades to other people's, putting all our eggs in one basket, not trading in a way that suits our personality/strengths and overtrading.

Even if you aren't affected by all of those points, I'm sure you can relate to at least a few of them. Therefore, if the greatest traders and investors have suffered from the same problems as ordinary traders, what does this tell us?

That the greatest market operators are human too. What sets them apart is that they learned from their experiences and persevered.

To quote a CNBC article about Batnick's book:

"The next time you take a big loss or sell too early or try to get back to even, remember, we've all been there," Batnick wrote at the end of his book. "The difference between normal people and the best investors is that the great ones learn and grow from their mistakes, while normal people are set back by them."

And guess what... The learning never ends!