The author Jim Paul has been engaged in futures trading for 25 years and has served as a proprietary trader, market trader and research director. He quickly rose from a small town in northern Kentucky to hold important positions such as director of the Chicago Mercantile Exchange and first vice president of Morgan Stanley's International Energy Department at a young age. He attributed his success to his own Extraordinarily smart. (Sadly, Paul was killed in the 9/11 attacks in 2001.)
He went from being a dirty country kid to a millionaire trader, until he lost all his $1.5 million in profits. After paying off a lot of debt, he collapsed, and then he realized that his previous invincibility was just a matter of chance and luck.
The lesson Paul learned from his losses is that instead of studying making money, he should study losing money and failure. It is more important to know how not to lose money. Although everyone has their own way to make money, there are only a few ways to lose money.
Jim Paul shares his own experience candidly and unreservedly, trying to tell readers that as long as they recognize human psychological biases and establish simple investment rules, they can identify, confirm and avoid some traps buried on the road to trading, thereby avoiding leading to catastrophic losses.
Get good cards, only stay
It is unwise to break the rules before learning to obey them.
Hollywood movie star Steve McQueen starred in "The Cincinnati Kid" (The Cincinnati Kid) in 1965, which is the most classic poker gambling movie in history. The climax of the film is the final battle between Steve McQueen (playing the Cincinnati boy) and Edward Robinson (playing the gambling king). At that time, the gambling king battle had been going on for several days. After other players had lost, McQueen was the only one who wanted to win over Robinson, the gambling king, by relying on the winner-take-all stud card.
When three cards were dealt, McQueen's two revealed cards were a pair of 10s, so he bet $1,000 at once. Robinson's two cards were the Queen of Diamonds and the 8, which were pretty bad cards, but he followed up and raised $1,000, as if the covered card in his hand was also the Queen, or he thought he would get a straight flush. Maybe he's just bragging. The next card was the 10 of Diamonds for Robinson and the Ace of Clubs for McQueen. McQueen bet another $3,000, which was a great move, and Robinson followed up by adding more money.
I think Robinson wants to bet on a flush. After all, the current situation is not one that can be won with a pair of Qs, otherwise he is bluffing. Robinson's fifth card was the nine of diamonds, and McQueen's was the ace of spades, so McQueen bet all the $3,500 in front of him. Robinson said: "Boy, you must be very happy to get that Ace. I will follow up your $3,500 and add an additional $5,000!"
Now, if you can't follow up, you have to pack up and go home, unless your opponent accepts it. Your chips IOU is for you to owe first. At this time, McQueen had no money. If he wanted to continue, the IOU had to be pledged to Robinson. So McQueen pledged it to Robinson as an IOU for $5,000. Robinson's only hand that could defeat McQueen was the Jack of Diamonds. McQueen asked Robinson to reveal his trump card, which was really a jack of diamonds. McQueen looked like he was about to vomit. He lost everything, and although McQueen had a full house, three aces and a pair of tens, he still lost to Robinson's flush.
The dealer who dealt the cards couldn't believe that the hand was played like this. She said to Robinson: "You only got three flush cards at that time, and you dared to keep adding more money?" She was right. Robinson made it up at that time. The chance of a straight flush is very slim, so you shouldn't bet like that, and McQueen has a pair of 10s in front of you. And even if you just make two pairs, it is difficult to win, not to mention the opponent's card type is a full house.
" I guess, it's like life, sometimes you make the wrong move at the right moment, but it ends well in the end, right? " Robinson said to the dealer.
The risk for poker gamblers is that they don’t know what cards they and their opponent will draw.There are two strategies when we play poker for money. You may want your opponent to know what cards you have (disciplined player); you may not want your opponent to know (loose player), or you may want to mislead your opponent into thinking you have what cards (also a loose player). ). A great poker player can pretend to be a pig or a tiger. In other words, clever use of the inconsistency between these two strategies is the key to victory.
A well-disciplined gambler will not continue playing until he has a good hand. He may place a bet and then stop when he sees that the situation is not right. Then everyone will know that if he continues to play, he must have a good hand. If everyone thought he would always play with a good hand, then he would occasionally be able to bluff and succeed.
For example, I am playing five-card stud, and there are two cards in my hand. The one turned over is a J, and the one covered is a 3; and among the cards turned over by other players, some of them have old K. . The other party bets $5, and I follow up and add $10. If people thought I only kept playing when I got a good hand, now they must think I have a pair of jacks. So now everyone is playing against a pair of jacks, even though I don't actually have that good hand. Because everyone thinks you will continue to play only if you get good cards, so you have the opportunity to bluff. To do this, you must have folded and folded many times before, and if you continue to play to the end, you will definitely win, or at least your cards must be good enough.
To establish this kind of image, you must fold your cards in the middle of the game much more times than in the end. As long as you stay, you will definitely win. This kind of play will save you a lot of money, because you will leave the game early when your hand is not good, but you will also have the opportunity to bluff occasionally. In addition, loose players often take advantage of the situation to bluff, perhaps deliberately betting small bets with good cards, or deliberately betting heavily when the cards are bad. So if everyone knows that you often brag, then once you have good cards in hand, you may Can take advantage of the opponent to let down his guard and kill him.
Like poker players, investors risk their own money without knowing how individual companies, the stock market the broader market or the economy as a whole will perform. However, although gamblers use inconsistent strategies to win, the key to successful market trading is actually disciplined consistency. Although making a plan and actually following it does not guarantee success or foolproof, if you want to control losses consistently, you need a plan. We don’t have to learn how poker players bluff, but disciplined players can learn a lot. Which part is it? The way he builds his reputation: stay with only when he gets good cards, and leave when has bad cards.
What actions you should take have been planned in advance. When the market position is in good condition, it will continue to be executed, otherwise it will be stopped and exited as planned. You can accept the loss and there is nothing to worry about. You just follow the plan and strictly abide by the rules. If the situation is favorable, you will stay. Otherwise, you will accept the loss and exit. If you abandon discipline and try to bluff, you may end up losing everything.
took advantage of the opportunity to bluff, and it was more momentum than substance. If you deliberately break the rules and bluff the market, you will be the one who loses big money in the end. You may break the rules many times and still get away with it, but if you hold on to a losing position and wait for changes, and the market really makes you want to come back, what will you learn? What you learn is that there are rewards for doing the wrong thing, so you do it again in the future. The problem is, you can't tell when breaking the rules is safe and when it's dangerous.
Yes, sometimes you can still make money by breaking the rules. Doing the "wrong thing" can be rewarded; doing the "right thing" for the wrong reasons can also be rewarded. I did a lot of things like this in my early years. But if you continue to get rewards for doing wrong things in the market, these profits have nothing to do with the plans or rules you actively set, but become what psychologists call a random reward plan, which is also the most likely to make people make repeated mistakes. A plan for a specific behavior.
Let's say a psychologist wants to make a monkey repeat a button, so it gives the monkey a food reward after it presses the button a few times, for example, every fifth or third press.This experiment can also be set to a variable number of times. For example, five times should be pressed in the first time; seven times in the second time; and then three or twelve times. When the reward conditions became fluid, the monkeys became more enthusiastic about the button, thinking that if they kept pressing it, they would get food.
One of the best trades I have ever made in my life was when I lost $8,000 shorting gold. At that time, the price of gold rose to $875 per ounce, and I took the loss at $350. One day in early August 1979, the price of gold exceeded US$300 per ounce for the first time in history. At that time, I thought this price was too ridiculous, so I placed two short orders at US$310. After placing the order, I handed a stop-loss order to a friend and asked him to help me cover the price when the gold price reached $317. Then I left the trading floor and ran to my accountant to complete the 1978 tax return before the August 15 extension deadline.
Later that day, while I was busy with my accountant, I received a call from my secretary saying that the Chicago Mercantile Exchange (CME) was convening an emergency board meeting (I am a board member). At that time, the U.S. gold market had closed, but the Hong Kong gold market jumped by $50 after opening, so the board of directors had to vote on whether to increase the price limit on the Chicago gold market from $10 to $30 per day (of course, this vote I recused myself from the vote).
Regarding that trade, you can say that I did the "right thing". I planned the trade, set a stop loss, entered the market, and then left the stop loss conditions unchanged. But I didn't change the stop loss conditions. Actually, it was because I asked a friend to handle the order, so I was too embarrassed to ask for cancellation. So, I was actually doing the “right” thing for the “wrong” reasons. However, I did not learn the right lessons from this experience.
In fact, I don’t like to set a stop loss, but since I have set one, I have to say: "I am too stupid, I want to cancel the stop loss order and continue to maintain a short position." I can't say it. What I learned from that experience was that I would rather not make any money than embarrass myself so much. Therefore, I am like the monkey in psychology research. Because sometimes I make money and sometimes I lose money, I press the button as hard as I can, but I don’t know why I make money and why I lose money.
If we are rewarded for doing the "wrong thing" (i.e. breaking the rules) in the market, we will keep doing it over and over again, which may or may not be related to profitable trading or investing. If you don't know what makes a trade profitable, and therefore don't know what actions you need to repeat to create a profit (or avoid a loss), you will always get into bad luck later on, at least once.
But is it this time, next time, or any time in the future? You won't know, but you're bound to have bad luck with it. If you still want to bluff the market and think it will be afraid of you, you will lose all your money sooner or later. If you deviate from your own plan, you will ignite the exploding fuse . In this or that battle, the bomb may not detonate, but as long as it has not left the battlefield, it will explode in front of you sooner or later.
What if ⋯⋯?
When Robinson talks about "making the wrong thing at the right moment," he means "deviating from the plan and making decisions based on hunches, feelings, or intuition." It's like a multiple-choice test in school, where you don't know the answer, so you go with your gut. It's like Conrad playing baccarat, and he feels like the time is up and he's about to start a winning streak, so he doubles down on his bets.
But the market is not a place where you "do the wrong thing at the right moment." Once the plan is not implemented, potential psychological factors will be triggered, resulting in huge losses. I cannot stress enough the importance of everyone sticking to your plans. If you don’t gain anything, you must remember that you need to make a plan, so you will always notice when you deviate from the plan.
But you cannot ignore one thing: will definitely deviate from the plan and break the rules of at some point in the future. Even though the following may seem contrary to what this book advocates about planning, I would be remiss if I did not offer one final piece of advice.Because I know that you are all human, so you will definitely deviate from your plans at some point.
Here is a tip. If you have strayed from your plan and broken your own rules, just follow your gut instinct. Everyone should remember: Speculation (including investment and trading) is the only behavior that humans engage in. It is the only thing that makes you feel happy, and it happens to be the right thing to do.
We all know that we shouldn’t smoke, but many people still smoke; we all know not to drink too much, and many people drink as much as they can for three meals a day; we all know not to drive fast, but many people still can’t help it. We all know these things are not good for us, so why do we still do them? Because it feels so good! Smoking, drinking, and driving fast are all because they feel good! But we are taught from a young age not to do things just because they feel good.
But when it comes to behavior in the market, we just do it when we feel happy. If you deviated from your customized plan and then the market started going against you, what would you say if I asked you, "How was it? Does it feel good to you?" You will definitely say: "No! It's not fun at all. It's so exciting to watch the price drop straight down!" At this time, you have to do what makes you feel happy, which is to exit.
In the market, pain and success are opposites, so if you are in pain, leave the market as soon as possible. If you are long and the price is going up, that feels great, right? What should you do at this time? Of course, hold on tight to your position and keep having fun! If you feel comfortable with a position, continue to hold it; if it starts to feel bad, exit it. When you're in a bad mood, it's impossible not to feel anything. So when you feel bad, just stop. It's that simple.
Jim Paul related articles to read:
- "From making more than a million a day to losing 10 million in 3 months, a loss confession of a gold medal trader: If you want to make money, you must first learn not to lose money"
- "Loss of 1 million US dollars at a time Later, he wrote a trading wonder: What Did I Learn After Losing a Million Dollars? 》
