'Existential Traders', Don't be one

There is one consistent issue with Traders who are existential.

The ones who get a high from taking all their money out the bank and making a single trade, rather than many trades. The problem with this is that it doesn't go inline, whatsoever, with how markets actually work at all. There is always going to be a time where the Market swings viciously against you and you have really got to be able to do something about it. If you aren't prepared, well, you've already lost all your capital, you just can't see it yet.

Think of it like this. If you took 10,000 and put them in a room, measuring them all by height, most would average out at 5ft 3 inches - 5ft 10 inches. The majority of the time, if you picked them at random, you'd get someone within these ranges statistically. Occasionally, however, you may pick one person and they have inherited the tall gene. They may be abnormally tall compared to everyone else, but undoubtedly, if you kept picking people, you'd soon enough pick a Peter Crouch. 

So why is this analogy so important and why are we now talking about famous Soccer players?

Its simple; Variance. Variance concerns the deviation of data from an average and occurs in many different scenarios in life, like rolling a dice, playing a casino game, practically everything has an element of consistency and inconsistency. 

Markets, are absolutely no different and this simple fact is what naturally causes Traders to lose money. The Market and their Trading strategy may be consistent, all the way up until there is a large Market Swing and suddenly you are way above or below average price. If you cannot handle this, you are trading existentially'. That means, you are trading in a style which ultimately will lead to you being unprofitable, because although its rare, the market swing will be large enough to dissolve your trading account.

Going back to the height example, you'd be willing to bet your dollar that the person you picked at random had an average height. But lets say you had amassed $10,000 and you bet it ALL on someone you picked being an average height. You might be right and right, and right again. But eventually, by fact and logic, you'd be wrong and lose everything. It is not an argument of if, it is an argument of when. It is a natural mathematical fact that the distribution of results has to at some point include an anomaly. In this case, if you did not have any risk management for what happens when you pick several tall people, you'd soon lose all your capital.

This happens amongst practically all Traders who lose money. I did this myself trading Cocoa Futures as a 16 Year Old. I made money initially on various commodity future markets, compiling every single profit, before finally overleveraging and using everything I had to short everything I could. Ultimately, they went up, and I went out. I repeated this many times in my very early stages of learning before I understood and developed concrete trading plans later on. Its just a concept people do not consider at all, because they are too focused on making enormous wins. This is not at all how money is made in Trading, it is a long term process of consistency.

The variance structure of long term successful traders includes the smallest deviation in equity figures at any time, with planning for all markets. There are no enormous swings in win and loss and there is always consistency in their plans. Inside the BeProfitable Academy, that is the sole focus. Planning for when you are seeing tall people by reducing, hedging and taking off any entries nearby if necessary. This is the only way, along with considerable diversification and small sizes that you can eradicate and sustain the issue of the swing in your variance structure.

So next time you see an enormously tall individual, just thing, I wouldn't bet my whole account on that person!

Will Sebastian

Founder Of The BeProfitable Trading Academy