“It is impossible to live without failing at something, unless you live so cautiously that you might as well not have lived at all, in which case you have failed by default.” — J.K. Rowling
I was recently asked; ‘What is the one piece of advice I could give to any trader or investor?’. My instant response was, adopt a mantra of ‘It’s Ok to Fail’. Not surprisingly this response was met by a look of bemusement.
In this article, I explain why I believe this is one of the best pieces of advice anyone can take with them into their trading career.
1) 'Fear of Failure'
This is one of the biggest obstacles to trading success. An ‘It’s Ok to Fail’ attitude enables us to face up to the possibility of failure and deal better with that ever-present aspect of trading.
Failure is an everyday occurrence in trading. Traders are dealing with conditions of near randomness, extreme complexity, and heightened uncertainty.
Failure will happen, it is not a question of if, but when. Some of these failures will be small, some larger, and one or two may be near catastrophic.
The feelings associated with failure in financial markets can be hard to describe. The pain and mental torture can be of an intensity which catches many by surprise. The pain and mental torture of trading is an intensity which catches many by surprise. I have had battle hardened ex-military who have described to me the feelings they have encountered in trading as being like nothing they have ever experienced before.. - That is how brutal it can be.
And it is this brutal set of feelings which you will have to deal with to succeed in trading. However, the real damage does not come from the feeling itself, but the desire to avoid having them. If you seek to avoid reoccurrences of those feelings, you will never try, never push beyond comfort zones, never grow, never take the risks you need to succeed. Thus the 'Fear of failure' becomes the cause of failure itself.
‘It’s OK to Fail’ is a mindset which seeks to remove, reduce, and lessen the stigma of failure. It reminds you to be willing to take risks and to put yourself out there into dangerous and uncomfortable situations. It is the facing of you fears and stepping into the discomfort where growth comes from.
Only by going through putting yourself in positions of risk, where failure is a real possibility, can you start to craft your own unique way of working that enables you first to survive, and then to thrive.
A few years ago, I coached a trader, with over 20 years in the markets behind him, who was regularly hitting the ball out the park for a major hedge fund. He was one of the most nervous, anxious and highly emotional individuals I had met in a trading role. and yet he had discovered a way of working, personal to him, which leveraged this aspect of himself to help him get into favourable situations on a daily basis. He had structured a process which avoided the parts of his character which undermined him, when taking risk, from interfering in a negative way.
It was being willing to be engage with risk which enabled him to craft this way of working over-time. He hated failure, and yet implicit within his mindset was the view that not only was failure a possibility, but that it was an acceptable price to pay to have a chance to succeed.
He did not ever say explicitly 'It's Ok to Fail', but I felt he endorsed this attitude it and I believe it was this endorsement that was a major factor underscoring his success.
When I myself worked as a trader, I used to keep a Babe Ruth quote glued to my trading screen.
‘Never let Fear of Striking Out, Keep You From Playing the Game’.
The purpose of this was to be a constant reminder of how I was vulnerable to falling victim to this negative safety thinking. It was in my own way, my attempt to endorse this attitude.
2) All trading models build ‘Failure’ into their design, so should your method.
When we look at successful trading models, we do not think of the losses as failures but as part of a larger process. Some models lose about 80-90% of the time, others lose about 10-20% of the time, with others losing in varying degrees in between. Yet when one trades in a discretionary manner, we are all too quick to see our losses as failures.
Adopting a mantra of ‘It’s Ok to Fail’ makes it easier to accept the idea that losses are a ‘necessary evil’ on the way to longer-term success.
In effect you become less loss-averse, and more accepting of losses. This helps you lessen the number of damaging actions such as pulling stops, letting losses get too big, or grabbing at profits.
3) A mantra of ‘Its Ok to Fail’ liberates you.
Making this attitude core to how you are, aims to help you to be less stressed and anxious. The desire to succeed, to get things right, to win is often what constrains you.
One of my most successful trades ever involved a trade I placed three times over a 6-week period. On the first two occasions the market never followed through. On both these occasions I booked losses to protect my downside. I never once viewed this as a failure. Had I seen it as a failure, as I may have done earlier in my career, I could have been gripped by fear and never re-entered a third time.
On the third occasion, when the market showed me its hand, I went for it again and it worked out spectacularly well.
4) Financial markets are ‘probalistic environments' where the 'Need to be Right' hinders rather than helps:
Most traders are fighting at least 2 decades of indoctrination which dominated their early years. Western values, philosophy and education systems are dominated by the need ‘to be right’. At school, college, university, ‘rightness’ leads to parental and teacher praise, rewards for coming top of the class, honours degrees and distinctions. It gets you a place at the top universities and business schools, and if you landed a great job at a Financial Market or Investing firm, then it is almost certainly a major factor.
In the world of education, getting things 'right' is the way forward. However, this 'need to be right' can be problematic in Financial markets. Financial Markets do not conform to laboratory/textbook conditions. You cannot learn to be ‘right’ in trading. There is no ‘best practice’ where the same input will always equal the right result. Financial markets are ‘probalistic environments'.
In my work, I have come across an extraordinary number of traders who have been successful poker players. Poker players succeed by thinking probalistically. They manage their pot, they know that a lousy hand can win and a great hand can lose, they know success is never a given. To be able to succeed at poker, you must learn to think in probalistic terms.
As a trader it is vital to develop probalistic thinking. However, this can be challenging when fighting the decades of indoctrination of the 'Need to be Right'. It is probably impossible to fully escape this. However, you can develop an alternative perspective and a set of attitudes which you can take with you to help you cope better with this. ‘It’s OK to Fail’ is the name of that ‘set of attitudes’.
i use this image to emphasise and highlight this point:
5) Resilience is one of the greatest gifts a trader can have.
Trading can be compared to walking into a boxing ring every day with thousands of other fighters, some of whom include the likes of Manny Pacquiao, Floyd Mayweather, Anthony Joshua, Jon Jones.
There are days where you will get a beating, where you will not survive, where your confidence and self-doubt will make want to give up and never enter that ring again. But you must!
An ‘It’s Ok to Fail’ mindset, enables you to step into that ring again, it helps you develop the resilience you need.
The quote at the top of this article is by J.K. Rowling. Rowling had a failed marriage, was a single mother living in a one room apartment, was failing to make any progress with her great book idea, and when she did, she was rejected by publishers again and again. However, Rowling persevered, and as of today, her books have been translated into 73 languages, sold millions of copies and accrued over $20 billion through movie adaptations and sponsorships.
6) They say there is no better teacher in life than failure.
If I was to tag on an extra sentence to ‘It's OK to Fail’, it would be ‘It's ok to fail, but it's not ok to not learn from failure'.
I used to think I was good at learning from my mistakes, but one episode taught me how far from the truth this was. As a trader, I kept trading journals. These were record of my thoughts, actions, ideas, and feelings about my trading. On one occasion I decided to take a detailed look back over a few years of my trading journals.
During the look back I came across a simple trade plan. It said, ‘Buy 10 EURUSD (EURO v US Dollar FX spot) at 1.2050 with a stop below 1.2020’. My upside target was 1.2150.
At the time the market had been trading around 1.2080 amid a corrective move lower. The plan was to buy EURUSD as it dipped toward a support area around 1.2030-1.2050. I would then look to sell it on a bounce to around 1.2150.
I looked at my trading record on the day in question, I had bought 5 EURUSD at 1.2120 and sold later at 1.2080. Quite a significant difference to my plan. I then looked at the price action for that day to see what actually happened. My idea had been perfect. The market had dropped in the morning, hitting a low of 1.2025 before rebounding to a high of 1.2130, it then closed back down at 1.2070. The next day it traded up to a high near 1.2200.
Had I been patient and stuck to my plan this trade would have worked perfectly. I would have booked a $100,000 profit instead of a $20,000 loss. When I found my old trade blotter from that day (different to a trading journal), it was clear what I had done. As the market dropped sharply towards 1.2050, either due to anxiety, or trying to be cute, I tinkered with my levels. I pulled the bid hoping to catch a better buy level. The market then quickly rebounded from the low that day at 1.2025. I ended up chasing the market higher, hoping to catch pullbacks, but was unable to do this. Eventually out of frustration, I paid up to at 1.2120, though in smaller size. After a further small move higher, the market dropped into the close, and I panicked, selling out at 1.2080.
I wondered if there more similar trades to this in my back catalogue. I took a detailed look through a couple of years of my trading journals. I found a similar example, then another, and another. These were just the ones I had written down (I did not write every idea in my journals). This was a behaviour I was doing repeatedly and yet somehow was blind to.
Had I been a novice, this might have been understandable. But by then I was nearly 2 decades into my trading career. Bizarrely, this was a period when I was putting in some decent trading performance. Just imagine how it might had been had I not been making these repetitive errors.
I know from working with others, that all too often we gloss over our errors in judgment and behaviour with ease. This is possibly connected to a need to maintain some self-constructed ideals about ourselves. To ensure these prevail, we engage in a degree of cognitive dissonance, excusing away uncomfortable truths. – However, this stops us from learning from our mistakes, and eventually perpetuating them.
A mantra of ‘Its Ok to Fail’, helps reduce the need to gloss over your failures. Failures are no longer considered a threat to your self-esteem but are something which can be faced up to and recognised far earlier.
A master of learning from failure is Ray Dalio. Dalio attributes the secret of his success to ‘Failure’. Learning from failure is a central tenet of his and Bridgewater Associates principles.
7) Combating ‘Excessive Ego’.
Your Ego Often Has A Different Goal to Your Conscious Self?
"Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money". - Ed Seykota, Market Wizards.
The idea of accumulating wealth as a measure of success is relatively new to us as humans. Success for our ancestors meant being accepted by social groups (tribe/community).
The more respect you had from those in your social group, the higher your ascendancy and the greater your chances of survival for yourself and your descendants.
By contrast, being ostracised from your tribe or community was tantamount to a death sentence. The prehistoric version of being ghosted on Facebook, but with real consequences.
Your ego has evolved over millions of years of evolution. For want of an analogy, it is part of your default operating system. It functions quietly in the background, out of sight and out of mind, driving you towards behaviours which increase your chances of safety.
Safety for the ego, means ensuring you are respected by your peers and thus remain within the social group. Your ego does not know that you no longer live in savannahs of forests, and that expulsion from a tribe or community is no longer a matter of life or death. Thus the ego still works to ensure we are respected by others in our world and that we act in ways which foster that respect.
In trading, success requires making profits and accumulating wealth. Whilst consciously you are driving forward to make profits, unconsciously your ego may be driving you in a direction of seeking to earn respect from your peers (and your self), and to avoid being disrespected.
Think of it like an invisible rudder steering your ship. Consciously you are steering towards a place called ‘profitland’, but unconsciously there is another rudder steering you to a place called ‘respectland’.
A stark example of this arose a couple of years ago: I was coaching a portfolio manager in a large Hedge Fund. This individual had three years of a strong track record behind him. His performance averaged close to 10% over 3 years, which was very respectable in this fund (or any fund at the time). During those three year, he had been one of their best performers and was rewarded well for it.
His trading style was a short-term liquidity driven approach. This approach worked perfectly for him, but within the fund he felt that it was not respected. He believed that longer-term macro driven approaches were preferred as a way of working. Thus, he told me that he wanted to adapt his style to an approach which looked to take advantage of longer-term moves, and which required holding positions far longer.
He was going to be abandoning an approach which had proved very successful for him, for one which he was not accomplished at using, and which, having carried out psychometric tests on him, would almost certainly been ill-suited to him. (See our article "How 'Risk Personality' Influences Trading and Investment Performance.")
As an analogy, it was like opting to ditch a car which had won three formula one championships in a row, because he felt his car looked ugly compared to his less successful competitors.
If I refer to Ed Seykota's famous enigmatic quote from Market Wizards, "Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money". I believe he is referring to their Ego winning, even though they lose in the real sense.
Ego is always there, always present, always lurking in the background.
I am glad to say that the portfolio manager in the above story saw sense and resisted the temptation to change his style, with continued good performance justifying that. But his thinking nonetheless highlights his vulnerability to this.
His story is not a one-off. I have had many conversations with traders in banks, hedge funds, energy firms, and private traders, which are echoes of that story, some with disastrous consequences.
There is a paradox at work here. What your ego is doing, is making you feel others are judging you, your decisions, and your actions. It is thus seemingly handling control of some your trading decisions to others.
And yet, paradoxically, it is not others who are really in control, it is you through the conduit of your ego, acting in a way you believe others will respect you, and seeking to ensure you are not being judged negatively.
Often, when we delve into these issues, the 'ego' belief is rarely even remotely true. If anything, it is more likely that most people are too worried wondering what you may be thinking about them, to be thinking about and judging you.
The challenge in trading is to harness the part of your ego which motivates and drives you forward, whilst working to eliminate the negative aspects, the self-judgement and the damaging self-talk that goes with this. By doing so, you will reduce the possibility that your ego leads you astray away from your goal.
There are few things which are more guaranteed to undermine your ability to succeed in trading than letting your ego take control and you losing touch with reality.
An attitude of ‘It’s OK to fail’ is a reminder to balance and contain your ego, and to ensure as much as possible you remain travelling in the right direction.
8) Cultivating a 'Growth Mindset'.
Growth mindset’ is a theory of learning put forward by notable Stamford professor, Carole Dweck. The theory is that we have two dominant mindsets, a ‘growth mindset’ and a ‘fixed mindset’. We pivot between these two extremes in varying degrees:
A ‘fixed mindset’ assumes that our character, intelligence, and creative ability are static givens which we can’t change in any meaningful way, and success is the affirmation of that inherent intelligence. It is an entitlement mindset.
A ‘growth mindset’, thrives on challenge and sees failure not as evidence of unintelligence but as a springboard for growth and for stretching our existing abilities.
Click here to hear a 'Podcast Episode' of the AlphaMind Podcast where we discuss 'Growth Mindset and Trading'.
A ‘fixed mindset’ perspective slowly closes your mind. That is when you stop accepting alternative views and cut yourself off from new insights and feedback from the market. On the other hand, a ‘growth mindset’ leaves you open to new insights, fosters curiosity and allows you to accept market feedback, including your own mistakes, which you can learn from.
In a fixed mindset world, ‘It is not Ok to fail’. Adopting a mindset and attitude of ‘It’s Ok to Fail’, keeps one pivoted towards a ‘growth mindset’.
It is having a growth mindset which is one factor in helping to combat 'excessive ego', and also to be able to recover from setbacks far more easily. In this sense, it is closely connected to resilience, and to being able to face up to failure and try again.
Finally, a growth mindset allows you to keep learning from your mistakes, rather than hide behind them or pretending they never happened.
Dweck uses many examples of people from history who have clearly displayed characteristics associated with a 'Growth Mindset'. Many have gone on to achieve greatness against the odds. - J.K. Rowling would be one example. Michael Jordon is another. Elvis Presley another. In this excellent youtube clip, Dweck talks about Growth Mindset. At one point she talks about her discussions with a world renowned Motor Racing coach, who saw a connection between a 'growth mindset and optimal performance'. The same is true of trading and investment.
9) ‘It’s OK to fail’ reminds you of your humanity and fallibility,
When I ask traders to list behaviours they would most like to address, they often mention, ill-discipline, impatience, failure to stick to plans, overtrading, etc. However, these behaviours are rarely the cause of your problems, rather they are symptoms. And as any good doctor will tell you, to overcome an illness, you do not target symptoms, you attack the cause of these symptoms.
The symptoms we see in trading. are in many ways the inevitable consequence of human nature and incompatible beliefs when confronted with uncertainty, volatility and ambiguity.
‘It’s ok to fail’ reminds you of your humanity and fallibility, and yet at the same time it aims to reminds you of your brilliance. Failure is painful, but it has a place in your story. By accepting failure, you can start to dig deeper into who you are and how you work. You can get beneath the surface and find out why you are making the repetitive errors you are.
This review helps shines a light on what you are good at helps you start to discover where your edge lies. It is not fixing errors that makes you successful, it is leveraging your edge most effectively which contribute to success. This is what the FX trader I mentioend earlier had done, he had found out how best to leverage his edge. In the above example, the trader mentioned was at risk of abandoning his edge.
One of the mantras I introduced, after reviewing my trading journal, was ‘Learn to love your losses’. This mantra is cloely related to 'It's Ok to Fail'. - 'Learn to love your losses’was an acceptance that to make money I had to accept losing.
Once I could accept losing and failing more easily, I started to then make better trading decisions, and started to make more money. I started to work better with uncertainty. I still had periods or bouts of ill-discipline, impatience, overtrading, but they were far less damaging than before. I was now able to recognise them far quicker and respond far more effectively.
10) As a reminder to honour the priciples of Risk and Money Management.
I have witnessed many smart and highly intelligent people crash and burn in trading because they suffered massive failings of money management.
Just when they most needed to accept ‘It’s Ok to Fail’, the opposite mindset comes into play, a ‘fixed mindset’ which said, ‘failure is not an option’. It is this attitude which causes people to do some crazy things: Doubling up (or Down) being the most obvious of these.
In my time in the markets, and I am in to my fourth decade now, though no longer engaging as a trader, I have seen some pretty spectacular failures. The one's that stand out for me were LTCM, Enron and Lehmans. In all these cases, they never thought failure was a possibility. LTCM had the world's best brains, Enron too went for a policy of hiring the smartest and brightest, whilst Lehmans was a lesson in hubris where the guy at the top thought he was infallibale. In all three cases, they ignored or overrode basic prinicples of Risk and Money Management.
Risk and Money Management exist because what you think is impossible can always happen. The best book written on the story of LTCM, 'When Genius Failed', talks about the stock market crash of October 1987 to help emphasise the nature of volitility in financial markets. It stated how economists looking back on that event, calculated that based on historic volitility, that the odds of that event happening once within the time span of a billion times the lifetime of the universe, were theoretically very 'unlikely'.
In my time in the market, and since 1987, I would say that I have now witnessed several of these once in the lifetime of billion universe type events. - That is why you have to always, always adhrere to the basic rules of money management if you want to have any chance of succeeding.
Everyone is capable of failure, failure is always a possibility and thus must always be an option. ‘It’s OK to Fail’ as a mantra, helps keeps you mindful of this to help ensure you always keep to basic rules of Risk and Money Management.
‘It’s OK to fail’ no matter what anyone else tells you.
Article by Steven Goldstein
Steven Goldstein is a Performance, Team and Executive Coach who focuses on helping improve the 'mindset' aspects of Risk and Financial Markets' people and businesses.
Core to Steven's work is the belief that everyone has the potential, often latent or hidden within them, to surpass where they are now and to grow into what they want to be. His work as a coach helps people to rediscover that potential, and to close the 'Output Gap' between their performance levels and their potential, which equates to a significant 'opportunity cost'.
Prior to becoming a coach Steven worked for more than 20 years as a Rates and FX trader at some of the world’s leading investment banks. See Steven's Full Profile.
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