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Diary of a Trading Loser

Circa February 1998

It's True Confessions time! This is where I admit to all of the bonehead things I did when I started my career as a futures trader. If anything, it's good reading for somebody who is about to do some of these things. It probably won’t prevent anyone from making mistakes, but maybe somebody will feel better to have some company.

Back in 1992, I took a look at an ad for Welles Wilder's "Delta" system. The ad demonstrated how, based on past market motion, one could predict future turning points. I thought that sounded pretty strange and I had never looked at futures before, so I decided that the whole thing was just too weird for me. But the ad sat on my desk at work, week after week, and I finally decided, "Hell, it's a ton of money for a scam, but I can afford $200 for a book. Worst case, I'll look like an idiot and get on with life." So I sent away for the book.

Now, this in of itself isn't a bad idea; it's just a little pricey. My current rule is that if somebody offers to sell me their system for around $50, I'll buy it just for the fun of it. Anyway, the book arrived and I tore into it to see if I'd been conned. I was completely blown away. The method worked exactly as described. He had all kinds of charts showing the mechanical predictions of future turning dates, and how the market just jumped up and down exactly as expected. It was weird. I couldn't figure out why it worked, but it looked pretty convincing. So I found a local futures broker and wandered over to see what he had in his office. I figured I'd better take a look at real market motion before I committed a bunch of money to trading for real.

The broker (full service, nice guy, very helpful, not a sleaze merchant at all), had newswires, fundamental trade papers, live data feeds, a computerized analysis system, and most important, charts and a copier. I copied off a bunch of charts for Sugar and Cotton, because those were the ones I could guess at the Delta solutions for. Guess what? Delta still worked, in both of those markets. Incredible, no? I then set to working with paper trading Sugar, Cotton and Live Hogs. After just a short period of time, I had made over a thousand dollars on paper. This was great.

Where are the mistakes, you're thinking? Be patient. If you've been through this, you are grinning from ear to ear because what you're seeing is a novice who is pedaling in the air above the deep ravine, just like Wile E. Coyote, unaware that he has run completely over the edge. If you haven't done this, I promise that all will be clear eventually.

Well, I had seen enough. A couple of months, and everything was working like Delta had (in my mind, anyway) said it would. Why wait to get rich? I grabbed $12,000 and took $2000 of that and bought the specific Delta solutions for all of the commodity markets. I took the remaining $10K and threw it into an account with the local broker, and got ready to go. Fortunately, it wasn't $10K that I was planning on using for anything else... I took a look at the T-Bond market, saw that a short-term turning point was due, saw that the market had seemed to stop in its upward motion, and shorted the market. Put the stop above what looked like the top.

Two days later the market resumed its uptrend (yes, I was trading against an established trend without paying attention), took out my stop, and I had $9000 in my account. Boy, was I crabby, and really embarrassed, because this Delta thing was (I thought) supposed to be this infallible prediction tool. Actually, "embarrassed" is a pretty mild word. I felt like I was back in high school, had just got up to make a speech to the class, and accidentally wet my pants. I understand that lots of people feel this way when they lose money for the first time. It gets easier... So, I went back and looked at Delta's market solution, and discovered that the top had occurred on time, but the upcoming low had arrived several days early because of the strength of the uptrend. It hadn't really sunk in that this would be very likely to occur.

I got my account statement. $150? What was this? The broker gently explained that $75 was the single-side rate, and that it was $150 for a round turn, enter-exit trade. Per contract. I gently explained to the broker that while I really appreciated his help, and while I felt bad about using his resources to paper trade, that there was no way I was going to pay that kind of rate for making my own decisions. He was very understanding. I pulled my account and put it in with a discount broker who charged $30 a round turn. Five times less. It was one of my first smart moves (a full-service broker isn't bad unless you don't use his services, at which point you're wasting gobs of money for nothing).

So I tried again, n Orange Juice this time. Got a Delta indication that the market had turned and was heading up. So I went long. Guess what? Market dropped, my position lost money. Really grouchy, I called the broker and reversed the market, going short. Dumb thing to do without a reason, but I got lucky. It sat for a day, and then tanked, all the way down to the next Delta turning point, and I got out with $1000.

It probably would have been better in the long run if I had lost on that trade, too, because it gave me a false sense of confidence. I then spent the next several months plotting turning points, making trades, losing money. Sometimes I would win, but not very often, and not enough to balance the losses. I started to read more about different trading methods, but hadn't figured out why I was supposed to be reading. I discovered options. I discovered that by using options, I could trade the S&P500 market, which was Delta's most reliable arena. I discovered that Delta didn't predict magnitude, just turning points, and that if you bought options in the S&P and the market went sideways for weeks, you'd lose there, too.

Finally, after Christmas in 1993, my brain started to seat itself in my head. I realized that I was wasting a huge amount of money and time on a system that for some reason was not working. It dawned on me that it would be much cheaper and less stressful to test out ideas on paper than in the market. Interesting, isn't it, that I started out committed to that idea, but after six weeks of paper trading successfully I got excited and impatient and forgot. And it took me more than a year and a net loss of $15,000 (not including the $8K that I won and gave back) to come to my senses and start over.

So, before I go on, let's review the mistakes, shall we? Some of them aren't fully explained here, but you can poke around in some of my other pages here for more details.

  1. I read about a system, and looked at it from the point of view of an optimist and not a skeptic.
  2. I didn't test/paper trade for long enough to let the market run through a complete series of tricks.
  3. I spent money on a very expensive broker (even for full-service, nowadays) whose services and help I didn't need, though only for one trade.
  4. I didn't stay with a single methodology, system or trading approach.
  5. I took positions in which the potential losses frightened me, instead of defining risk.
  6. I did a whole bunch of things that I didn't discuss here, like listening to other people's opinions and deciding they were right; not getting out of bad trades; placing stops for financial reasons, not systematic ones; getting mad instead of curious when a trade went against me; and abandoning potentially good strategies at the first loss (except for Delta, which I persisted in using even when it continued to fail).

So, at the beginning of 1994, I decided that it was time to shut down my trading and just do research until I had a better idea of what was going on in the markets. And to see just how well some of these indicators and systems and methods actually worked. And how much truth was really in advertising. I won't go into details here; you can get my opinions of the trading systems I've looked at in my system review section. But Delta went down in flames. So did moving averages. So did stochastics, and the Commitment of Traders report. And volume. And open interest. And MACD, and other moving average oscillators. And Elliott wave counting. I am pissing off 90% of the technical trading community right now, and they will flame and scream and disagree with me, but I don't care. A technical indicator that "works unless it doesn't" is useless by itself, without help from the trader or other rules.

I was completely surprised at how poorly the standard technical indicators worked by themselves. I shouldn't have been, since if stochastics were the Holy Grail, or if it were an 18/40 day crossing moving average set, then 90% of the traders wouldn't be losing money. I was surprised at how badly so many of the trading advisors seemed to be doing, and how poorly the canned systems seemed to work. It was like there had been a complete turnaround in the world of futures from when I had started, where at first it was a cakewalk to guaranteed riches, and then it became a hopeless mess, where nothing worked except the advertising for the latest book and system.

What I finally came to realize is that there are a few kinds of things that work pretty well for me, and that every successful trader will find a small set of things that work for them and use them. My system works for me, and it will work for anybody that thinks about markets the way I do. The trick, I've learned, is first to figure out how you look at markets, and then develop your own system (or get lucky and get one that fits you perfectly from somebody else) to fit how you approach trading.

But that's for another article to describe; this one is about my history of trading. I spent from the beginning of 1994 through the Spring of 1995 doing research. I ran automatic simulations against dozens of markets. With continuation contracts and without. I tested every technical indicator I could find. I bought and evaluated a whole passel of systems. I tried out new ideas of my own. I tried combining some of the typical technical measurements to see if they would work better together than apart. I learned a lot of interesting things, and have around another ten years worth of work that I'd like to do. That is, it would be ten years of full-time work if I could do it full-time. I figure, I'll have a hobby when I retire, whenever that will be.

I found a limited set of things that worked, and one really great idea with one major deficiency that made it worthless. Now, I’ve finally settled on rule-based systems that enforce my behavior and compliance. I don’t think anyone ever "becomes" a trader; I think it’s a perpetual evolution, a journey, but now at least I’m trying to improve on something that works.

And that is where things stand today. Now you know where I've been, and where I think I'm heading. I'm not a market wizard, but I think I understand things a lot better than many folks slogging around in the market. I am intimately acquainted with losing, and I have identified lots of ways to do it. Far from being a liability, I consider it an asset that I have been a more creative loser than a lot of people I know; I don't repeat my mistakes, and I'm starting to feel like I'm running out of ways to screw up. That's a joke, folks. And I now have a healthy suspicion for folks hawking this program or that system or so-and-so's newsletter, because 95% of it can be demonstrated to be junk.


by Troutman, Defender of Sticks
Jonathan Matte, President
Defender Capital Management, Inc. (CTA)

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