Logic verses understanding.

I was 18, surrounded by guys I did not know, in a city I was unfamiliar with, away from family and friends for the first time. The coach that recruited me had left almost immediately after I decided to play football there.  I knew the coaches and I knew some of the guys from All-Star game and from playing against them in High School but it was different. Not saying the coaches were not helpful but they become less helpful after you have committed and if they didn’t recruit you.

I was out of my comfort zone. When my coach asked me if I understood while we were in the class room I would nod my head, we all did.  When I got to the field it was clear I did not understand.  I couldn’t do what was asked of me.

Logic vs Understanding

I had played football for a long time and what he said made sense and it was logical.  It was a new way to do something  but it made sense, in the classroom. When I got to the field to execute what we learned it was obvious I did not understand.  Logic is a thought.  Understanding allows an action.

Today when I talk to people about trading, need an employee to do something, or just generally explaining something I often fall into the same mistake as my coach.  I mistake the nod for understanding.  That nod means it makes sense, it is logical.  It does not mean they can do what I ask them to do.

After being more embarrassed about not being able to DO what my coach was asking me to accomplish, than asking a question in front of my teammates, I made a change.  I started to ask questions.  Yes it took a little longer but I could now do what was asked of me.  Not always right away but much quicker than before. As the roles are reversed today, I see the nod and I know to make the point again.  If they do not ask any questions than I repeat it again.  I don’t think people want to fail, but the gap between it making sense and doing is huge, especially if it something new.

How this applies to trading.

You find out what not to do in trading very quickly but there is a big lag in not doing it anymore.  I will make an attempt at explaining one of the mistakes. If you have any questions please ask.  This is where you can help me.

Mistake:  Risking too much.

Logically this makes sense.  If you risk too much you are eventually going to realize that risk.  If I keep running through traffic eventually I am going to get hit by a car.

Why it is hard:

In the heat of the moment, every risk seems like a good one.  If you have already loss 15k what is another $500?  When you are in the moment nothing matters but opportunity.  Your mind is fixated on the loss and getting it back as soon as possible. That is your single thought and motivation.  The thought that should never leave your mind is to make money. But there are several ways to always make money.  How can you make money?

  • Not risking any more than is necessary to execute your plan. If you do not have plan and a reason for every action you will never understand what is working or how to improve.  “If I had just taken more risk on that trade, I would have made $100 instead of losing $100”.  If you continuously have that thought is a strong indication that you do not have a plan or know how to improve your plan.  You should quit trading till you figure it out, you will fail because you do not have  plan and a way to improve.  You are a gambler not a trader.  It would be more productive if you just burnt the money.
  • Not losing more than your budget.  I want every trade to work out but when it isn’t working, it is not working there is nothing I can do but lose less.  The situation is not optimal for me to make money. But it has been proven to me that for every time there is a shitty opportunity there is a good opportunity.  The problem for most people is they can’t see past that moment.  You have to shift your thoughts from making a trade to making a good trade.  It is hard in the beginning because you do not have a long enough time horizon (you want to be the CEO the first day at your new job with no or limited experience) and you lost too much on the shitty trades. The less money you lose in shitty trades the more you will have when it is good.  HAVE BULLETS WHEN THE FISH SHOW UP IN THE BARREL.
  • Learning. Trading requires relentless learning, that is where the real pressure of trading comes from.  Things are changing all of the time.  If you do not have a process to adapt, learning is too hard.  But those adjustments can save you a lot of money and will make you a lot of money.  Anyone can make money on a trade most do not know how to keep it.
  • Execution. The last way you can make money is through profits.  This is the obvious one and the one that many traders only think about.  Until you figure out how to lose you will never get to keep the money.  There are three types of profits.  Money you borrow (you made it from taking a trade that is not repeatable or can be learned from. You will eventually pay that back with interest at an interest rate that a loan shark would consider unethical), money that pays down debits (this money goes to paying for your past mistakes or figuring out what you did not know), and money you keep (money from executing a trade that is repeatable and can be learned from after you paid off your debit).
Trading is like any other business, the less you spend the more profits.  The more capital you have to deploy when it is good and it is money you keep the easier it is to have a longer term view.
How you correct it.
So now you know what the mistake is.  You know why it is important to not make that mistake and understanding why.  Do it once.  And know that there is no such thing as a bad trade.
For those that are already in a deep hole. 

If you have spent a lot of money learning what you do not know the following tips are for you.

  • Divide up the mountain.  If you are down 15k it is impossible to feel good about making $200.  If you have lost that much, without ever making money before, anything but making 15k will be a disappointment.  When you are in a hole that is the worst time to think about it that way.  What you need to do is divide the mountain into hills, specifically 15, 1k hills or 30, 500 hills.  This not only makes you feel like you are making progress it forces you to realize how much a dollar is worth.  Lets say your goal is to make the first hill in two weeks.  Now the next time you are tempted to doing something stupid, that wont be 1k it will be two weeks.  Losing money is a stronger motivation than making money.  Retrain yourself.
  • Get time on your side. If you are down to your last bit, you are almost always going to fail.  This is because the margin for error  is really tight.  You are going to have a blow up.  Hopefully it is small but it wont be, your account will be gone. Your goal is to last as long as possible, this will teach you a lot. The next time you have money to trade again you will need those experiences and lessons. (I am not trying to be a downer that is just what happens.  It happens because you did not respect trading in the first place or you would not have risked too much in the first place.  You would have made the adjustments earlier. This is an extra warning.  Now is time to have a sense of urgency instead of being resigned to failure.)
Conclusion
Logic is a thought, understanding allows you to take appropriate action, change your behavior or eliminate a bad one.  If you have been losing, let it digest. Give yourself more time.  Do not battle the money battle time.  Do not give up, this is what builds character.  You will leave this experience with great confidence even if you ultimately fail. You will have learned what you did not know you didn’t know.  Once again, I do not want to depress anyone.  I just know that it took too long for me to understand why I was losing money.  When I was in the process of blowing out I did not realize how soon my last trade would come. I did not have the sense of urgency I needed.  I hope this post helps.
This post is a longer than most, if you found it helpful please let me know, share it, leave a comment, etc.  Anyone who writes will tell you it is about quantity not quality.  Prove me wrong and I will at least sprinkle in longer posts. 

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  • Ben

    Great insightful post. I am going through a lot of the stuff you discuss. Long posts are good too. 

    • thank you for commenting and reading. If you still have some questions let me know. 

  • LawrenceReport

    Eli, great post. I’ve had employees that nodded and had no clue what I ask for. I’m sure I’ve done the same thing, many times. Thanks for the thought provoking post.

    • I hate employees. ha ha. Thanks for reading.

  • Delta

    Thanks for the post.  It’s incredibly timely for what’s happening with my trading right now.

  • John

    Thank you for both the quality and length of your post. I really appreciate it.  Again, no problem with long posts; after all as traders we should not be without focus and concentration for long time.

    • Yeah for me it is not finding the words it is about getting a message across.  Also I am horrible editor which gets much worse the more words there are. 

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  • Drjancy

    Hey. Great post. I wouldn’t worry about the length. You just take how ever much time it takes.
    Thank you for your thoughtful works.
    Cynthia

  • David

    When I started actively trading in 2007, I had the luxury of taking it slow. I read extensively before starting. I sliced off 20 percent of my savings for the endeavor, knowing I might lose that amount but not planning to. Since my immediate goal was only to learn and maybe make a little supplemental spending money in the process, I was deliberate about my trades. I started making a little money, but I didn’t know enough to build up much of a stake despite a generally favorable environment.

    Then the recession hit. I still had my day job, but its longevity was suddenly uncertain. I now felt the pressure to make something tangible with this new thing I was spending so much time on, to build up a bigger cushion before I lost my job. Having read so much (books and online) and having logged a mounting number of trades, I was confident I could make it happen, in whatever market condition prevailed. I felt that I could only build on the experience I’d already gained.

    It didn’t go so well. I was still deliberate about picking trades, but I put ’em on with bigger size — too much size, it turns out. Some of my goriest wounds came from trades that set up almost ideally for my strategies as I understood them. 

    I didn’t blow out the account, but I wasted it down to a point at which my survival instinct overcame my greed, and I paused, and I started again much more carefully — dividing the mountain into hills, as described in the blog post above. It was enormously frustrating; it tried my patience, but it worked. I had bullets when the fish showed up. (And, luckily, my day job survived.)

    My trading account built up through mid-2011. It reached a level that, dangerously, made me feel like I could press again. I knew how to go long. I knew how to short. I knew how to trade a range. And, don’t you know, I drew down that account to half its size in a matter of months, and had to circle the wagons once again.

    If you read even a little about trading, you’ll quickly find lots of contradictory advice. For instance, on one hand, you’ll hear about the need to always manage risk. On the other, you’ll hear how the really successful traders got that way because they pressed at the right moment.

    That one spectacular trade must work — for someone. Probably not for you. Certainly not for me. But even typing it now, I’m struggling to accept it.

    • Sounds like you have an advantage over many traders that start.  One of the things that it is important is that once you decide to take a trade you do it with intensity.  Every dollar made trading is hard earned.  

      Also have a plan B, there are trades that I would take a 1000 times that did not work out.  It is called probability for a reason.  It works both ways, usually to the positive. 

      Yes trading is a contradiction in a way.  There are times to be big, to be small, and to do nothing. Learning those times is the key to trading, if you have a reason for every action you can learn.  Intuition is a real thing and can be learned. 

      The hard part about trading is that one day or trade can make your week or month.  But you are defined by what you do in between.  If I have my best trade and it is a huge winner but I did stupid things before it was useless. 

      Thanks for the long comment, I appreciate it. 

  • Acidni321

    Excellent post. It summarizes the psyche of most of the wannabe traders including me. 

    • every trader starts as a wannabe.

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17 Responses to Logic verses understanding.

  1. Ben says:

    Great insightful post. I am going through a lot of the stuff you discuss. Long posts are good too. 

  2. LawrenceReport says:

    Eli, great post. I’ve had employees that nodded and had no clue what I ask for. I’m sure I’ve done the same thing, many times. Thanks for the thought provoking post.

  3. Delta says:

    Thanks for the post.  It’s incredibly timely for what’s happening with my trading right now.

  4. John says:

    Thank you for both the quality and length of your post. I really appreciate it.  Again, no problem with long posts; after all as traders we should not be without focus and concentration for long time.

    • Eradke says:

      Yeah for me it is not finding the words it is about getting a message across.  Also I am horrible editor which gets much worse the more words there are. 

  5. […] Eli Radke, “If you risk too much you are eventually going to realize that risk.  If I keep running through traffic eventually I am going to get hit by a car.”  (TraderHabits) […]

  6. Drjancy says:

    Hey. Great post. I wouldn’t worry about the length. You just take how ever much time it takes.
    Thank you for your thoughtful works.
    Cynthia

  7. David says:

    When I started actively trading in 2007, I had the luxury of taking it slow. I read extensively before starting. I sliced off 20 percent of my savings for the endeavor, knowing I might lose that amount but not planning to. Since my immediate goal was only to learn and maybe make a little supplemental spending money in the process, I was deliberate about my trades. I started making a little money, but I didn’t know enough to build up much of a stake despite a generally favorable environment.

    Then the recession hit. I still had my day job, but its longevity was suddenly uncertain. I now felt the pressure to make something tangible with this new thing I was spending so much time on, to build up a bigger cushion before I lost my job. Having read so much (books and online) and having logged a mounting number of trades, I was confident I could make it happen, in whatever market condition prevailed. I felt that I could only build on the experience I’d already gained.

    It didn’t go so well. I was still deliberate about picking trades, but I put ’em on with bigger size — too much size, it turns out. Some of my goriest wounds came from trades that set up almost ideally for my strategies as I understood them. 

    I didn’t blow out the account, but I wasted it down to a point at which my survival instinct overcame my greed, and I paused, and I started again much more carefully — dividing the mountain into hills, as described in the blog post above. It was enormously frustrating; it tried my patience, but it worked. I had bullets when the fish showed up. (And, luckily, my day job survived.)

    My trading account built up through mid-2011. It reached a level that, dangerously, made me feel like I could press again. I knew how to go long. I knew how to short. I knew how to trade a range. And, don’t you know, I drew down that account to half its size in a matter of months, and had to circle the wagons once again.

    If you read even a little about trading, you’ll quickly find lots of contradictory advice. For instance, on one hand, you’ll hear about the need to always manage risk. On the other, you’ll hear how the really successful traders got that way because they pressed at the right moment.

    That one spectacular trade must work — for someone. Probably not for you. Certainly not for me. But even typing it now, I’m struggling to accept it.

    • Eradke says:

      Sounds like you have an advantage over many traders that start.  One of the things that it is important is that once you decide to take a trade you do it with intensity.  Every dollar made trading is hard earned.  

      Also have a plan B, there are trades that I would take a 1000 times that did not work out.  It is called probability for a reason.  It works both ways, usually to the positive. 

      Yes trading is a contradiction in a way.  There are times to be big, to be small, and to do nothing. Learning those times is the key to trading, if you have a reason for every action you can learn.  Intuition is a real thing and can be learned. 

      The hard part about trading is that one day or trade can make your week or month.  But you are defined by what you do in between.  If I have my best trade and it is a huge winner but I did stupid things before it was useless. 

      Thanks for the long comment, I appreciate it. 

  8. Acidni321 says:

    Excellent post. It summarizes the psyche of most of the wannabe traders including me. 

  9. […] I traded with logic. Didn’t always […]

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