Trading Wisdom Of William Eckhardt

¹²Trading Wisdom Of William Eckhardt

By Chas. Kirk | 30 September 2010

Recently I had the pleasure to read an in-depth interview with legendary commodities and futures trader William Eckhardt. William is perhaps best known for the big bet he lost with Richard Dennis of Turtles fame in which he argued that successful trading cannot be taught. In that old interview, William shared the following observations that are helpful for all of us to remember.

• "If a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you'll gravitate toward the majority and inevitably lose." • "It's much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies." • "One common adage on this subject that is completely wrongheaded is: 'you can't go broke taking profits'. That's precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. [[Old Wall Street adage: cut your losses short; let your profits run.: normxxx]] The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance." • "The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. BUT— they are also able to feel the pain of losing. If you don't feel the pain of a loss, then you're in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will burn off. There is no way to survive in the world without pain. Similarly, in the markets, if the losses don't hurt, your financial survival is tenuous." • "I know of a few ex—multimillionaires who started trading with inherited wealth. In each case, they lost it all because they didn't feel the pain when they were losing. In those formative first few years of trading, they felt they could 'afford to lose'. You're much better off going into the market on a shoestring, feeling that you can't afford to lose. I'd rather bet on somebody starting out with a few thousand dollars than on somebody who came in with millions." • "In many ways, large profits are even more insidious than large losses in terms of emotional destabilization. I think it's important not to be emotionally attached to large profits. I've certainly made some of my worst trades after long periods of winning. When you're on a big winning streak, there's a temptation to think that you're doing something special, which will allow you to continue to propel yourself upward. You start to think that you can afford to make shoddy decisions [[that you can 'cut some corners': normxxx]]. You can imagine what happens next. As a general rule, losses make you strong and profits make you weak." • "If you're playing for emotional satisfaction, you're bound to lose, because what feels good is often the wrong thing to do. Richard Dennis used to say, somewhat facetiously, 'If it feels good, don't do it.' In fact, one rule we taught the Turtles was: 'When all the criteria are in balance, do the thing you least want to do.' You have to decide early on whether you're playing for the fun or for the success. Whether you measure it in money or in some other way, to win at trading you have to be playing for the success." [[Remember, successful trading/investment is usually also the least exciting— like watching paint drying. Much trading and turning over your investments may be exciting, but is rarely profitable.: normxxx]] • "Trading is also highly addictive. When behavioral psychologists have compared the relative addictiveness of various behavioral 'reinforcement' schedules, they found that intermittent reinforcement— positive and negative [rewards] dispensed randomly (for example, the rat doesn't know whether it will get [food] or [nothing] when it hits the bar)— is the most addictive alternative of all, more addictive than positive reinforcement alone. Intermittent reinforcement describes the experience of the compulsive gambler as well as the trader. However, as with most affective [[ie, emotional: normxxx]] aspects of trading, its addictiveness constantly threatens ruin. Addiction is the reason why so many players who make fortunes leave the game broke. [[It is also a lesson in the fact that successful trading is more about money management than about finding successful trades. The successful trader can make money even though more than 60% of his picks are losers!: normxxx]]" • "Don't think about what the market's going to do; you have absolutely no control over that. Think about what you're going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there's nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be." — William Eckhardt

If you don't think these principles are true, you haven't been trading very long. Print these out and refer to them often!

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Normxxx    
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