“Everybody gets what they want out of the market, some people seem to like to lose, so they win by losing money.”
These are the words of probably one of the greatest traders of all time, Ed Seykota. An MIT engineer who was up 250000 percent over 16 years on some of the accounts he managed. Even after hearing this answer, Jack Schwager also got a bit confused about what Ed is trying to convey here or is he joking(as Ed’s nature was a bit funny). But no matter how odd this sound, this statement has deep value.
To complete my argument, allow me to divert the subject a little bit to the basic human behavior and how it plays out in traders/investors life. Human beings are after all social animals. No matter how we hate our society or people around us, we are continuously looking for attention from people around us and from people we know.
So, some of you may ask that, there must be a reward(not necessarily monetary) for doing this activity often otherwise how one’s mind can pursue this habit cycle? Yes, there is, in most of the cases, our mind gets short term relief that people are caring about me (although reality is much different!), they are taking time for ME! Basically it satisfies the ego of the person.
Now back to our subject i.e. Trading. Let’s say Mr. Harshad(not Mehta of course!) has incurred a huge loss today due to unnecessary high leverage and trading big position size. Now he is a very social person and active on many trader groups/communities on different social media channels. First thing he will do is post a screenshot of his loss. And as you have correctly guessed, most of the people(there are some genuine though) active there will try to motivate him,convince him that it is not his fault and the market is too volatile and with other thousand reasons.
Now, Harshad at the end of the day will be convinced that, next time he may win in this game – it was not his mistake after all! So, instead of focusing on his mistakes or taking suitable risks he will try to play this Gambler Fallacy again just to wipe out his entire capital this time.
In this case, Harshad’s mind was convinced(at deep his mind is looking for exact same experience of getting good attention from people again) before he can figure out what is happening. This way he is losing money but his emotion will successfully manipulate his mind that he is winning.
So, if you have come this far reading, then I think you must have convinced yourself that control over thoughts, especially impulsive thought, is a must to win in this game. Because once our mind is up to something, knowingly or unknowingly our action will be directed towards achieving that thing/experience/goal.
That’s why maybe legend said, “Everybody gets what they want out of the market”. Huh! making sense now?
Now let’s look at some of the ideas to overcome this bad habit loop,
- First and foremost thing that any trader should have is laser like focus towards his/her goal.
- Define Risk(must be in terms of capital) clearly before taking any trade and ask yourself if you lose it all, will this matter to you? Will you act normal after your Stoploss is hit?
- Understand that losses are part of the game. Just keep them smaller, most successful traders(even including Jim Simons) are only right about 30-40% of the time but when they win, they win big.
- One thing is common in the people who have lost huge money, be it Harshad Mehta or any other people like us. It is that, they showed their ego to the market! They thought they were superior to Mr. Market.
- We are here to make money not to satisfy our ego. As a trader, we should remember and repeat it to ourselves almost everyday.
Until then Happy Trading!
PS. I would love to hear from you, if you have any good suggestions or ideas to overcome this fallacy.