This is Why You Lose Money

Thursday, 9 January 2020
Melbourne, Australia
By Murray Dawes

What a difference a day makes.

Yesterday, gold and oil were flying and stocks collapsing after the Iran bombing. A tweet from Trump that ‘all is well’ and an admission by Iran that they have no interest in escalating things and the markets have completely reversed course.

As I said to you yesterday, my line in the sand to remain short-term bullish on the E-mini S&P 500 was a weekly close above 3,206.75. A close below there would confirm a weekly sell pivot and that would be enough to me to start considering my options for a short trade.

One day later and the E-mini S&P 500 is trading at 3262 having made a new all-time high during the session!

Amazing stuff. And a great example of why you need to have clear rules to follow that direct your actions, so you aren’t being tossed around like a little rowboat in a storm.

Now that the E-mini S&P 500 has made a new all-time high this week, I need to see a weekly close below the low of this week’s trading before a weekly sell pivot will be confirmed.

So my new level to watch is 3,181, which was the low created in the overnight market just after the Iran bombing occurred.

If we see a weekly close below that level I can consider lowering the risk in the portfolio for Alpha Wave Trader members further. But until then the short-, medium- and long-term trends remain up.

I don’t need to second guess myself or create stories in my head about what might happen.

I don’t need to look at the current P+L in the portfolio and get fearful that the profits might disappear if we don’t get out.

I just have to trust in the model and let things take their course.

The model isn’t the market. It’s a model.

It will never be perfect because it is impossible to build a model that reflects 100% of the markets moves.

In other words, the map is not the territory.

The map guides you in the right direction, but if you walk along with your head buried in the map you will headbutt a tree.


Overnight the Dow Jones leapt 161 points to 28,745, reversing the previous night’s falls.

The S&P 500 was up 15 points to 3,253, creating a new all-time high during the session.

In Europe the Euro Stoxx 50 index closed up 13 points to 3,772, the FTSE was up one point to 7,574 and the German Dax rose 93 points to 13,320.

In Asia, the Japanese Nikkei 225 is up 435 points to 23,640 and the China A50 is up about 1% at 14,445.

Gold and Oil had a wild ride over the last day with gold peaking at US$1,611 before plummeting back to close at USD$1,556 once the market realised World War III wasn’t on the horizon.

WTI Crude jumped to US$65.62 after the Iran attacks but has since fallen back to US$60.00.


The markets are the true Wild West. There are no rules that will stop you from losing every cent you have ever earned in your life.

The promise of riches and the excitement of watching the dollars roll in will unleash every psychological weakness you possess. If you don’t build a wall around your weaknesses you will be on the rollercoaster.

The rollercoaster leads to euphoric trading and then kamikaze trading as I mentioned the other day.

The weird thing about trading is that to succeed you often need to be like George Costanza and do the opposite of everything that your urges tell you to do.

You have to enter some trades when things ‘look’ bad. You may have to take profits when you don’t want to. At times, you have to sit on your hands despite the fact you are itching to put a trade on.

Building a model that reflects market behaviour so I can create rules to follow that keep me out of trouble is important for my trading. Perhaps you are different and you’re happy to put a few bucks in a stock and then hold on for dear life and hope you end up making some money at some point in the future.

I think we all have a few dogs in the bottom drawer that were once the hot stock until the music stopped. The losses get to a point where you write it off and think to yourself it might come to life one day, so you leave it there. A constant reminder of how you dusted $5,000 on a drunken tip from a friend.

A few such experiences and you say to yourself that the stock market is rigged, the little guy hasn’t got a hope and blah blah blah poor me.

But it isn’t the market that’s at fault. It’s our own psychology that trips us up. We think we know more than we do. We want to make as much money as we can, and we hate to admit that we were wrong.

It’s a potent combination in an environment without rules. You are free to let your psychological weaknesses run riot.

Double up in a position that’s going backwards? Go for it!

Hold on to a loser even though you’ve lost far more than you ever thought possible? Sure, why not.

Leverage up massively in a volatile stock so you can make heaps of money? Knock yourself out.

If you see yourself in any of the above then it’s time to put the breaks on. A couple of my favourite trading books will help to put you on the right path.

The Disciplined Trader and Trading in the Zone by Mark Douglas offers a great insight into the psychology of trading.

They were written many years ago, but they’re still in print.

I’ll leave you with a quote from The Disciplined Trader to drive home the point about the need for structure in trading:

One thing you will learn as a trader is that the mental resources you use to get what you want in your everyday life will not work in the trading environment. The power and control that are necessary to manipulate the markets (make them do what you want them to do) are beyond all but a handful of individuals. And the external constraints that exist in society to control your behaviour don’t exist in the market environment.

The markets have absolutely no power or control over you, no expectation of your behaviour, and no regard for your welfare.

If, in fact, you can’t control or manipulate the markets and the markets have absolutely no power or control over you, then the responsibility for what you perceive and for your resulting behaviour resides only in you. The one thing you can control is yourself.

As a trader, you have the power either to give yourself money or to give your money to other traders. And the ways in which you choose to do this will be

determined by a number of psychological factors that have little or nothing to do with the markets. And this will be so until you acquire some new skills and also learn how to adapt yourself to suit conditions as they exist in the market environment.

To operate successfully in this environment, you will need to learn how to control yourself in ways that may be completely alien to you.

You will also have to learn how to grant yourself the mental freedom to shift your perspective to notice alternative possibilities to getting what you want in the trading arena, regardless of your expectations of how you are going to get it.

There are only a few traders who have come to the realization that they alone are completely responsible for the outcome of their actions. Even fewer are those who have accepted the psychological implications of that realization and know what to do about it.

Rarely do any of us grow up learning how to operate in an arena that allows for complete freedom of creative expression, with no external structure to restrict it in any way. In the trading environment, you will have to make up your own rules and then have the discipline to abide by them. The problem is, price movement is fluid, always in motion, quite unlike the highly structured events that most of us are accustomed to.

In the market environment, the decisions that confront you are as endless as the price movements you intend to take advantage of. You don’t just have to decide to participate, you also have to decide when to enter, how long to stay in, and under what conditions to get out. There is no beginning, middle, or end – only what you create in your own mind.


Murray Dawes,
Editor, Alpha Wave Trader