Why I Stopped Trading

French Spiderman by nadiology

08 Oct Why I Stopped Trading

I have been making good returns from options trading since the unfortunate blow up in Jan.

I restarted the account with US$10k capital and the track record was as such by the end of Sep 14:

  • No of trades = 29
  • No of wins = 20
  • No of losses = 9
  • Win Ratio = 69%
  • Loss Ratio = 31%
  • Total Amount Win = $8,820.32
  • Total Amount Loss = $6,332.43
  • Av. Amount Win = $441.02 
  • Av. Amount Loss = $703.60 
  • Expectancy = $85.79 (or +0.12R)

It is very important to track your trading records in this way so that you know if the strategy has a positive expectancy. Traders have losses and winners, and summing them up over the long run should give you higher winnings. As you can see the expectancy is positive in this case, it means I would make $85.79 for each trade based on a capital of $10k.

In percentage returns, the portfolio gained 25% in 8 months. A pretty good returns I should say. The natural response to this is to scale up. Increase the number and size of trades and I can trade for a living. Key in a few trades and enjoy the rest of the day at Bahamas.

We know that trying to pick stocks can be very frustrating. Skip that frustration, get 21 ideas to finding profitable stocks in an instant. 

But I have decided to stop trading. Before I go on to explain, let’s rewind back in time to understand why I started trading.

Why Do I Want To Trade In The First Place?

I knew I wanted to make more money and trading seems to have a low barrier to do it. I just have to dump some money in a trading account and press a few buttons to edge out profits from others. Overconfidence bias told me that I am better than most other traders. I can win their money. Haha, fat hope.

As a young guy, I wanted to make money fast and investing, being associated with buy-and-hold, was deemed too slow and boring. That’s for old folks. Trading is fast and you see instant gratification or pain. We all like to know the results fast and today’s trading platforms enable us to do it. It creates endorphins and dopamines in our brains and the feeling can become addictive. The kind of trading done by most people is no different to gambling. They trade or gamble for excitement, and not focusing on honing their art and discipline to do it well.

So there I was, started out gambling in the stock and forex markets when I thought I was trading.

Of course, the market didn’t make it easy for me. I made money and I lost money. Over the years, the results made little difference to my net worth. I began focusing on honing the art and I know losses are part and parcel of the game. I roughed it out, tried various types of strategies and I found that most of them do not have positive expectancies. Some have positive expectancies but they do not suit my personality so I didn’t pursue. In the end, I found options trading to be both profitable and suitable.

The funny thing is that I decided to give up trading when I found a profitable strategy, and not during those years of unsuccessful results. It bewildered my friends.

The Next Blow Up is Very Real

The blow up in Jan left me a very profound insight to trading. Many people see options selling as a very risky endeavour. But what I saw was deeper than that and people were learning the wrong lessons from my lesson. We see what we want to see perhaps.

Trading in general is a very risky activity. It doesn’t mean it is less risky when you trade forex and stocks. They are equally risky. Let me explain why.

Every trading strategy has rules to keep us sane and rational when we buy and sell. Hence, the mantra is always follow the rules and then follow the rules and still follow the rules.

But we know that we have mood swings. Somedays we feel upset and some days we feel happy. And our moods can also be triggered or exacerbated by the gains and losses in the financial markets.

A married couple knows that arguments are usually irrational and they need to be objective and control their emotions so that they would argue less. It is easier said than done because when the emotions runs amok, we say the worst things. Likewise, we know that trading requires us to be rational ALL THE TIME, but we know it is impossible. A trader cannot vow that he can remain emotionless in every trade he makes. We are humans and fallible. We let emotions hijack us more often than we think.

We think we follow rules well. We actually follow our emotions better.

Emotional State in Trading

Think about this, you were rationally following the buy and sell rules for 9,999 times and you have been making good money. In the 10,000th time some how the emotions get the better end of you and you decided to forgo your rules. Do you think the market will forgive you since you have been very nice in the past 9,999 trades? This is what could happen in this faithful day: You put on a size that is bigger than normal. Market moves against you. You tell yourself this shouldn’t be because you traded this way for a long time and you know it works. You wait and watch your position goes deeper into the red. The dreaded margin call comes and ask for more capital to be put up. You either throw more money after the bad, or you just give up. This is how blow up happens.

It doesn’t matter how many good trades or how much money you have made in the past. The market has no memory. You are only as good as your next trade.

Regardless of stocks, forex, options, or futures, you stand a good chance to blow up as long as the instrument is leveraged. The table below shows the ‘margin of safety’ you have when you leverage your trades. The day you cannot follow the rules to cut loss and the effect of leverage will get you.

Leverage and Blow Up

Why Not Just Trade Small?

One way to reduce the emotional swings is to trade a small capital. I talked about knowing your Psychological Capital (PC) previously. You should be trading a capital that you have no problems cutting losses. The art is to know how much is your PC. You need to figure it out by trial and error.

The downside of this is that if you feel nothing about the losses, you will feel worse than nothing about the winnings (lack of dopamine). We have loss aversion bias. If the pain of loss is small, the joy of gain would be three times smaller. This has a major implication. If the rewards are too small, we will most likely give up trading after a while even though it is profitable. Or we increase the capital beyond our PC and risk blowing up one day.

If most of us can only trade small to remain rational and thus profitable, how can we make a living out of it or grow our net worth meaningfully? Shouldn’t we put our capital and time in more worthwhile activities?

All is Not Lost, How to Make It Big In Trading

Who can make it big in trading then? Don’t we see successful traders by the millions they have made in the markets?

Do you know Alain Robert? He is known as the French Spider Man who climbs buildings around the world with no climbing equipment. In 2010 he scaled the Singapore Flyer. In the following year he scaled Burj Khalifa, the world’s tallest building with the help of a safety harness in part of the climb. Can everyone train hard and be like him? The answer is no.

Trading is daredevil sports. Few people have the aptitude to make big money from it. That explains why the mantra is true, 95% of the traders lose to the top 5%.

Tom Yuen, whom I have interviewed for my book, said that ‘it is all about size’. I cannot agree more. The best traders in the world who can make millions are few and far in between. Their Psychological Capital is enormous and they trade big sizes without flinching. He also told me stories of these traders blowing up millions as well, and how they make the money back. I knew my personality is not suited for extreme sports. I couldn’t take this kind of ride.

Why I Stopped Trading

I will summarise in the next few lines why I have stopped trading in case you have not understood by now.

I am an emotional creature and I cannot vow that I can trade emotionlessly. I cannot battle a mind that has evolved for millions of years. If so I will face many blow ups in the future because I will continue to be fallible. There is no point trading a small capital to manage my emotions better, because it won’t make a big difference to my net worth. I can make better use of my time and capital in other ways.

Knowing my limits and vulnerability is liberation.



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20 Comments
  • Why I Stopped Trading - Personal Financial Investment Seminar
    Posted at 10:20h, 08 October Reply

    […] By Alvin Chow […]

  • Patrick Lee
    Posted at 10:37h, 08 October Reply

    You made the right decision to stop trading.
    The market is controlled and manipulated by the big boys.
    Insiders are the ones that make the big money.
    It’s not a level playing field.
    The cost of trading is too high.

    • Alvin Chow
      Posted at 11:14h, 08 October Reply

      Yes Patrick. You have mentioned that in the interview too that it is worse than a zero-sum game. The institutions make money from winners and losers through the transactions.

      I understand you have stopped trading too?

  • Richard Ng
    Posted at 10:53h, 08 October Reply

    So, you are officially an investor and not trader now! ;-)

  • Createwealth8888
    Posted at 11:39h, 08 October Reply

    So you decided to retire from trading for a living and investing for wealth or net worth building e.g. sitting on portfolio of mulit-baggers for cash flow coming from dividends?

    • Alvin Chow
      Posted at 16:07h, 08 October Reply

      Investing yes. Not solely for dividends. More for capital gains.

  • My 15HWW
    Posted at 14:25h, 08 October Reply

    Hi Alvin,

    To be honest, I am a little surprised. =)

    I always thought it was going to be hard to take out the “trader” in you. But well…

    Guess it’s a logical choice since the cost-benefit analysis (time vs income) isn’t really worth it and scaling it up could potentially lead to a blow-up like what you had experienced earlier.

    I have never tried trading and I doubt I ever will. =p

    • Alvin Chow
      Posted at 16:08h, 08 October Reply

      Haha. Maybe it is part of growing old and it is time to retreat to the mountains and do CNAV

  • David A.
    Posted at 15:29h, 08 October Reply

    Boo hoo. Cry wolf. What a way to attract eyeballs.

    Seriously. I think u r very super comfortable in the progress you r making that made it senseless to risk.

    You have forgotten your goal. You have forgotten the vision that started this blog.

    Regards
    David

  • NinjaGromit
    Posted at 21:56h, 08 October Reply

    Hi Alvin,
    I was one of those who attended Dave’s course with you at TRT. You probably don’t remember me. I respect your decision to stop trading. However, I hope it is not because of a fear in losses. If a person trades for the adrenaline rush or he trades solely for the purpose of getting rich quickly, without any absolute interest in the financial markets then yes I agree he should stop trading immediately. But if one treats it as an intellectual pursuit akin a chess game and more importantly enjoys the game, I believe by playing the game well, the money will come naturally and is secondary. The size of the account does not matter in my opinion (but of course a bigger size account do certainly improve your odds)

    I won’t say I am a successful trader yet. I’ve not lost money though I have not made much either. I’ve enjoyed the game and I am getting better at it. The /NG trade is past and I hope you will not dwell on it too much. I’ll leave you with this quote which I’ve read somewhere:
    “We should be careful to get out of an experience only the wisdom that is in it – and stop there; lest we be like the cat that sits down on a hot stove-lid. She will never sit down on a hot stove-lid again – and that is well; but she never sit down on a cold one any more”
    Take care!

    • Alvin Chow
      Posted at 22:05h, 08 October Reply

      Thanks for your thoughts. I didn’t stop trading because of the NG trade. I would have stopped long ago. I continued to trade profitably for another 8 months after that incident.

      I am not a good trader and I think you will be better. I wish you all the best.

  • Jeremy Ng
    Posted at 01:39h, 09 October Reply

    Interesting post you got there. Although I didn’t really fully read and digest it. Nobody know that some unfortunate thing can happened to a traders or investors like I do. Although I had totally stopped trading by Contra for the past seven years. One unfortunate thing is when the server platform failed and the investor can’t sell-out or buy-in through the internet to cutdown losses or gain profit.

    Even the broker can’t even help you to sell or buy manually stating the reason known to him which is absolutely a bull. Bank will still call to investigate but without a proper recording on what’s going on as investors don’t expect this technical defect. Investor would’ve lost their hard earn salary.

    I would rather use my money and buy lottery. I struck lottery twice this year. I uses the money to donate to the temple and spend ten thousand dollars winning for my Maldives trip.

  • Mike
    Posted at 02:38h, 09 October Reply

    I use to work in a fx brokerage for about 6 years. The truth is that 90% of traders lose money and it would be prudent to stay away from trading especially leveraged products

  • coconut
    Posted at 11:45h, 09 October Reply

    thats a progress and realisation. your decision is a correct one.

    people who trade for money alone will not be able to last very long, even if he is winning, in the current market enviroment. you did not found the real joy of trading.

    sometimes we need to break our own trading rules to safe our ass, or in your case, stop trading.

    • Alvin Chow
      Posted at 07:51h, 10 October Reply

      Thanks for sticking around coconut. Although we have never met, you have always been a great company in my trading journey on this website!

  • tham
    Posted at 23:46h, 09 October Reply

    I understand that u dun trade anymore but would it be possible for me to understudy u for a period of time.. Need to see someone live in action to find the right setup that would work for me. I trade forex and am easily satisfied with 5 to 10pip gains resulting or like 5 dollar 10 dollar profits. I really enjoy trading and view trading as an enjoyable past time and am currently working damn hard to be fininacially free so I can not work anymore and turn my attention to trade fully at my leisure for pleasure, enjoyment and coffee money. Would appreciate if I could hear from you. Many tks

    • Alvin Chow
      Posted at 07:53h, 10 October Reply

      I am sorry tham. I won’t be able to do that. I guess there are many more trainers or coaches available to help you trade.

  • SupersedeTrader
    Posted at 00:47h, 10 October Reply

    Hey Alvin, thought that was a good read. I trade the futures and like anyone who has started out did so through the stock market. I thought it would be a waste that you let go of what you have learnt on a bad draw down, I have tide through that part of emotions too but had never let down.

    What I feel is important to hone that discipline of yours and stick to your trading plan, never let emotions get a better of you.

    Maybe you can use a small pot of capital and try out futures. Who knows it might suit you better. Safe trading!

    • Alvin Chow
      Posted at 07:52h, 10 October Reply

      It is easy to say follow the rules and don get emotions get over you.

      But in reality, are we really that emotionless? I don want to kid myself.

  • florence
    Posted at 18:22h, 08 June Reply

    another way is to trade in shorter time frame. Like you, I was a student of Dave foo and suffered huge losses in NG trade just like you did. I came back trading beginning of this year and results have been good, obtaining 8-10% return on my margin. The time frame I using is just a week, compare to last time have to endure the pain and stress for 30+ days.

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