Transcription
[Music] So let's take a trip down memory lane about trading. You see, when I started trading, you were enjoying the Dax and the Footsie and currencies at extremely tight spreads. Back then, when I traded, do you know what the spread was in the Dow intraday? You know, you can trade the Dow at a 1 1/2 point spread. Do you know how much I had to pay in spread in 2000-2001 when we started trading them? Any any takers? Eight points. Someone has done their homework. Yes, intraday you paid an eight-point spread. Can you imagine trying to make a living trading the Dow with an eight-point spread? In today's market, if you wanted a quarterly contract, you had to pay a sixteen-point spread and a dollar, which is today's trading. I don't know what CMC's spread was, but it's probably about at point five, point six, they're about. Back then, we paid three, four points to get into Eurodollar, and dollar yen was a five-point. I mean, this was this was you're thinking, "Holy Smoke, how did you how did you not blow up?" A measly...we did blow up immediately because we paid all our money away in commission and spread. But not only that, we don't have access to what you have access to today. I heard—I think his name is Aired—he was talking about that. We see him seeing markets. You have pattern recognition programs; you will have news; you'll have level two data; you will have extremely tight spreads. We didn't even have any of that.
I spoke to an old colleague of mine who used to work with me in City Index, and we discussed when did City Index actually get their charting packets, and we agreed it was probably around 2005 that we actually got a fully working charting package. Yeah, can you imagine trading with a broker today that doesn't have a charting package? No, of course not. Yet, even though that you have far better spreads, you have access to news, you have access to data, you have access to pattern recognition programs that tells you it's a double, double, double pardon, or head and shoulders and a match and an independent at such and a flag. Even though that you have access to way more information in any shape or form, can you trade? No, you're losing as disastrously as we did 20 years ago. And so, with the greatest of respect to CMC Markets, but you're not going to become the trader you want just because your relationship manager at CMC Markets is a great guy or girl, nor are you going to become a great trader because the CMC Markets platform is great and award-winning. I don't care if it's NASA themselves that has decided; the trading platform won't make a blind bit of difference to your long-term results until you learn to think differently.
So what's normal behavior when you get into trading? Oh, let's do some let's do one of those weekend courses with one of those gurus, you know. Oh, he talked so elegantly, and he's really good-looking, and his smile is from here to here. I want a bit of that. Surely he must know; no one could be that good-looking and not know what they're talking about. I'm gonna learn about candlesticks; I'm gonna learn about RSI, MACD, RSI. Oh, have you heard about that Bollinger Band? It is amazing. That's that Fibonacci thing. I've got a ratio for every season: 38 percent, 50 percent, 61 percent, 78.6 percent, 88.4 percent. You ever heard about the secret ratio of 94.6? It's just between you and I and 2,000 pounds of your money. Thank you very much. Unfortunately, it's still not going to make you a penny. Am I annoying you now? Bored? Are you thinking I'm...what? Technical analysis? I don't want to be told that I am rubbish at this, but you are, statistically speaking, you are doing what everyone else is doing, and if you continue to do so, you're just going to continue with the inevitable. And I would like to give you an opportunity to get off that path and start thinking differently. See this book here? It's called *The Bible of Technical Analysis*, not the King James Bible for Christians, but the Bible for technical analysis. Richard as are written by Edwards and McGee. Were Edwards and McGee traders, ladies and gentlemen? Were Edwards and McGee traders? No, they were not traders; they were journalists. More than a million copies of this book have been sold. Normal leads to broke, following what the brokers are saying, not the advice, and the brokers, they're well-meaning; they want you to do well. Why does a broker want you to do well? Well, the better you do, the more you're going to trade; the more you're gonna trade, the more commission you're gonna place. It's logic, of course. The brokers want you to do well, CMC included. I'm not knocking CMC, but CMC are not traders; City Index are not traders; Capital are not traders; they are not the ones where you should be getting your guidance from.
Sure, by all means, learn about technical analysis, but technical analysis have never made anyone anything. You're not going to get rich from trading by learning technical analysis. In short, your problem is not that you don't know enough about technical analysis. Will you trust me on this—that you don't need any more technical analysis? You need a serious review of how you think when you're trading. So let's try with that. My argument is that if 80, 90 percent of people are losing when they're trading CFDs, this is not a product problem; this is a human problem. And particularly, I think I mentioned it before, I believe that those 80, 90 percent are perfectly rational people, intelligent, good-looking, smiling, good mums, good dads, good students, good everything; they're just rubbish traders because they haven't learned to think properly; they haven't learned to deal with fear. So what I would like to do, what I would like to propose is, if everyone's normal, please show me what not normal looks like. Please show me what a 10 percent trader or 1 percent trader looks like. And I suppose that's why I'm invited tonight. So here's a normal person, according to Google. How does a normal person think? Well, if you ask Rodriguez from FXCM, the broker, he did a research on 25,000 of their traders who had executed 43 million trades over a 15-month period. Here's the shocker: those 43 million trades hmm actually had more winning trades than losing trades. Yeah, the FXCM, the FXCM traders, they were good traders; they had a hit rate of 62 percent. That's not bad. The problem is that when they won, they won on average 48 points, and this is all trading currencies, but when they lost, they lost 82 points. You see, if this had been an analysis of my trades or your trades, and we could say, well, you probably had a bad week or a bad month, but when you investigate 25,000 people and their behavior, it's no longer bad luck; that's a sample space that is worthy of an investigation. And if it had been a couple of trades, 10 trades, 100 trades, you can argue, well, it's a small sample space, but 43 million trades, of which the majority of them were executed in Eurodollar, one of the most liquid instruments globally—that's a pattern.
I am proud to say that I have written a book that will be published next year. I received an email back from the publisher to say it's excellent. Well, that's good news. Actually, a word of warning to those of you who like to write a book: writing a book for me was an incredibly cathartic exercise. I had something that was just boiling up inside me like Vesuvio, and it just exploded down on paper, and I just wrote and wrote and wrote for two months before I knew it, I'd written 60,000 words and 200 pages. But they never tell you, those publishers, that writing a book is actually only half the battle; then comes the editing, and then you have to do this and that, and before you know it, you're beginning to regret you ever wrote the damn thing. But the title, *The Muscles*, is telling a lot about my mindset. Normal is a loser; show me pain. Do you have a trading philosophy? Everyone's a chart expert; everyone knows charts. To be continued in March next year, I've been told. So, on the face of it, I was interviewed by CNN in 2005, and they wanted to know how do your traders, your clients, trade, and I said, well, the problem with—and at that point I'd only worked there five years; I have another five years of experience since then—God, it's horrible to look at yourself fifteen years ago. Anything. Oh geez, I wish I looked like that. People love to find the low in a bear trend; people love to find the top in a bull trend. There were people when I walked in here saying, "When do you think the crash is coming?" What crash? I don't know if there's a crash coming. What crystal ball is it that you're looking at? Because I just see a market that keeps making all-time highs. Sure, let's talk about a crash if the market is in a downtrend. Let's not talk about a crash when the market is setting at its all-time high. People think every reaction in a trend is the beginning of a new trend. I would be sitting there night after night watching the market fall or rise, and our clients, sure as hell, the moment the market just ticked in the other direction by a little bit, they would pile on as if the trend had now changed. So my argument here is that people are generally fearful when they're hopeful, and they are hopeful when they're fearful. Then I will explain that momentarily. Now what is normal behavior? I am letting my losses run. Why am I doing that? What am I telling myself? Well, I'm telling myself that I hope that this market is going to turn around, but the real reason is I would like to avoid pain. We have a brain which is millions of years old, and it has one primary function: that is to keep you alive at all costs, and by the way, also love to make sure that you never experience any pain. Some people, in particular psychologists, refer to this as the ego; it wants to make sure that you maintain your ego preservation, your state of mind where everything is rosy and good, so you will do anything to avoid pain—not you, but this thing up here—and it doesn't matter what scenario I throw at you. I'm letting my loss run because the intercase says so or the Fibonacci says so, but actually you want to avoid pain. I'm taking my profits because, hey, you can't go broke from taking a profit. Still, it's still you avoiding pain. Why? Well, because you hate the idea that the market is going to take back some of your profits. In a moment, I'm going to show you one of my charts after the fact—not with I bought here, I sold here—but how much I made and how much I lost. I am winning, so I'm reducing my stake size. Why would you do that? Well, because I want to take it easy now. Nope, you want to avoid pain; you can't bear the fact that you made 400 pounds for the day, and God forbid that those 400 pounds would disappear.
Now, let me ask you a different question. It's gonna come out here on the floor for a second because I'm tired of standing there. Imagine that you made a thousand pounds on the day versus you lost a thousand pounds on the day. Who is most likely to carry on trading—the person that has made a thousand pounds or the person that has lost a thousand pounds? The person who has lost a thousand pounds is far more likely to carry on trading because, God forbid, that he carries on that pain into the night, and he will do anything to get rid of that pain. But when he's made a thousand pounds, he'll do anything to protect that because it feels so good to have made a thousand pounds, so I don't want to jinx it. I could carry on and on and on. I think you should see it for yourself. You're more than welcome, ladies and gentlemen, to have a copy of this presentation; more than welcome. If it can help you, then you can have it. Now, I've been told that I have five, ten minutes left before you have a well-deserved break and some food, so let's carry on this for the next 10 minutes or so. You'll be happy to know that I'm on slide 48 out of 157. It it doesn't bode well for the second half, does it? Did you have plans on going home? Then you may want to call the people at home, saying, "Might be a little late." People are fearful when they're hopeful, and they are hopeful when they should be fearful. What do I mean by that? Imagine you are sat in a position that is making you, the aforementioned, a thousand pounds. You're no longer hoping that that thousand pounds is going to turn into two thousand pounds or or three thousand pounds; now you are fearful that thousand pounds is gonna be taken from you. And if you are losing a thousand pounds, you're most likely gonna sit there thinking, "Wouldn't it be great if this position turned around?" You're not you're not fearful that that position is gonna get even worse; you're hopeful that it's going to turn around. And if you want to have a fighting chance of making the markets your ATM machine—and there's not a sales pages bit; I'm a cliché, I admit that—but if you want to have a fighting chance of making the markets the place where you take money out on a fairly regular basis, you need to turn this around. How are you gonna turn it around? Well, I have my own ideas. So let's take a look at not so normal; let's take a look at how I operate and people who are what we call the 1 percent.
I'm talking about me, which is something I'm not that good at doing. I prefer to throw the attention to some some some truly great traders. One in particular is someone who I wish I could have met, but he's no longer with us. His name was Charlie D. An excellent book called *Charlie D: The Legendary Bond Trader* is something you can buy through Wiley. Here he says, "The time you know you've become a good trader is that day you're able to win by holding on to a winning position, and rather than taking half profits, you're adding to your winning position. Rather than beginning to think, 'Where should I get out?' you're beginning to think, 'How can I get deeper in? How can I commit more?'" He says—and he is a floor broker, sorry, a floor trader at Chicago Board of Trade—he says, "There are many people in here in the pit that have traded for a long time who have never added to a winning position." Have any of you ever added to a losing trade? Sure, we have, of course. We've added, you know, you bought at 20, and then it goes down to 10; you're thinking, "It looked good at 20; it looks even better at 10." But how many of us have bought at 20 and then bought more at 30 and bought more at 40 and bought more at 50? Now the raised hands are becoming few and far between. Sure, there will be people who have done it, and and good on you, but it's very difficult emotionally to add to a winning trade; it's a lot easier to add to a losing trade because, hey, you feel like you're getting that back, and you feel like you're buying something which is cheap. And hey, when we started learning about trading, what were we told? We were told, "Buy low and sell high"—quite possibly the most expensive piece of advice ever dished out in the history of mankind—because every single time I bought low, it always went lower, and every single time I tried to sell high, it always seemed to know that I was in, and it would go even higher. No, I prefer to buy high and sell even higher, and I sure do like to sell short low and cover even lower. So Charlie, he goes on to say that it's in our human nature to want to cut our winnings. You bought at 16; you can get out at seven; get me out; I'll take that profit. That's just human nature; that's who we are. So he says, "If you want to be really good at this, you need to accept that everything you do when you're profitable hurts; it feels uncomfortable. If you're on a position and it doesn't feel uncomfortable, you're probably not betting big enough." I want to repeat that: when you're a good trader, everything you do hurts, and I'm not talking about a smack in the hand kind of hurts or smack in the bottom kind of hurt, right? You know, if it doesn't feel uncomfortable, you're probably not pressing the position big enough. There's a snapshot from an open trade; this is equated to being a hundred thousand pounds in profit; this is not the result of normal thinking. See what I'm doing here is see if I can navigate this gizmo—that's two strands over here. My first entry, the market is trading at 135, 25,000, 135, but my first entry was at 25,458. But as the market fell, I keep adding to my winning position. What do most people do when they are in a winning position? Now I know the answer because I sat and watched this for ten years. When you're on a winning position, what do you do? I mean, humor me here: take half profit, nip a little bit more, move the stop-loss down so it is almost meaningless to have a stop-loss because you're going to be stopped out by the slightest movement in the other direction. People are great at taking half profits; they're just not great at taking half losses. We love to take a bit of a profit home because it feels good; it feels like we're doing the right thing. Why on why on earth would I risk losing some of my open profits? You can't go broke taking a profit; that's what this the books are telling me. Now the amount of time that I have had 10 or 20 thousand pound open profit positions that will then turn into a zero—a countless. My trading philosophy, ladies and gentlemen, my trading philosophy is that I will never get out at the maximum profit potential ever, and that is the only reason why I am still running this position. Not actually—that would be disaster stuff—I'm still running it because 1,000, 29,000. But in this case, where did I get out? Did I get out at the absolute maximum profit potential? No, I most certainly did not. Now it's come to the point where I probably need to take a break, so I think I'd like to do that with this slide here, and then we'll carry on after the break. The mental foundation for profitable trading is: are you prepared to do what the ninety percent are not doing? And of course the answer is, "Yeah, of course I'm prepared to do that; I'll do anything for profit." But actually, you don't really fully understand what is required. It takes a lot of introspection, which I'll cover in the second half, but I am aware of my worst habits; I am aware of my weaknesses, and I have a routine to counteract those. I am constantly pushing myself. You never get to trade 100, 200, 300 pounds a point unless you constantly push the envelope. There are some people in here who are well past 50 years old, including myself. Now, interesting story to set you off for for your dinner. I assume most people in here have a driver's license, and I assume that many people in here have driven for many years, and we all consider ourselves good drivers, and I thought I was a good driver. I mean, I've been driving since I was 17, which is a miracle because you're not allowed in too much to drive until you're 18. Don't ask me how, but that's the fact. And now I'm 50, and so I've been trading—I'm sorry, I've been driving—I've been driving for what, 32 years, 33 years? And then a friend of mine decided he wanted to give me a present for my birthday. He was one of those red-letter days where you go out on a racecourse. It could have been any red-letter; it could have been anything, but this was—you get to drive some very fast cars. And then I realized just how bad a driver I am, because when it really is a matter of putting—what do you say in England?—pedal to the metal—of yeah, is that is that the right saying? When you really do press that accelerator, and you're not just driving straight ahead down the M6, but you have twists and turns—that's when you know how bad a driver you truly are. So we can do something for 30 years without actually being particularly good at it, and you can continue down this path of trading for the next 30 years, but there is an enormously high probability that you're never going to fulfill your maximum potential unless you begin to, shall I say, stop staring so much at the chart and begin to cultivate a very different mind. [Music]