“Best Loser Wins” By Tom Hougaard - Book Review and Cliff Notes

 

 

It really worked out perfect that I read “Trading In The Zone” first then “Best Loser Wins”. I feel like that is the perfect way to go about it. This is such an amazing book on teaching you how to have the ideal trading mindset. It’s always frustrating when you have patterns that work and you see them work, but you can’t seem to execute them and I really know that is where the psychological part of trading comes in. This is my cliff notes from the book:

 

 

“Technical analysis is rather pointless unless it is combined with behavioral response training.”

 

 

“What 99% of people do not realize is that when you win, there are things happening in your brain chemistry, which if left unnoticed and unchecked will have a detrimental effect on your decision-making”.

 

 

(Tom and CEO conversation:

 

Tom: how can you tell whether someone knows what they are doing?

 

CEO: … five most important factors it would be:

1. Account size
2. Trade frequency
3. Ratio of time spent holding winning trades versus losing trades.
4. Adding to winning or adding to losing trades
5. Trading with a stop loss

“Someone who trades everything and anything i.e. overtrading will eventually lose their money”

”Anyone who is unable to hold on to their winners, but hold onto their losing trades will eventually lose their money.”

“Anyone who adds to their winning trades will catch our attention positively, but anyone adding to their losing trades will with near certain lose their account deposit at some point”

“Anyone trading without a stop loss will follow the path too. We sadly see it all the time.”

“As you can see as brokers, we do everything we can to help people make money, but people are people which means they will find a way to self sabotage.”)

 

 

“Reading a book like technical analysis of stock trends is a must, but please don’t think that it will make you a professional profitable trader any more than reading a manual on tennis will enable you to compete with Rafa Nadal.”

 

 

Normal trader cycle, trade well = we’re happy, discipline weakens = we lose money, we strengthen our resolve get more education. We trade well for a while. We lose money we stop we repeat.

 

 

“Failure is one of our greatest learning tools.”

 

 

“The brain will have as its prime objective- I repeat prime objective- to avoid you experiencing pain, a losing trade equals pain.”

 

 

“When you can act and perform without any fear of consequences and repercussions, you are trading from an ideal state.”

 

 

“You must be patient with yourself. You must be able to let your knowledge settle and mature within you if you trade small size now, but you want to trade bigger size in the future than that journey will most likely be anything but linear. It will be a journey of progress and setbacks. It will be a journey of progress and status quo. I can guarantee you that you have to grow into the trader you dream of become. You must be patient with your trade entries. You must be patient with yourself. If you can bring those two qualities to the table and the rest will solve itself in time. You will grow your trade size at a pace, where your mind will not be alarmed or fearful.”

 

 

“It is not what you know that kills you. It is what you think you know, but which just isn’t so, that kills you.”

 

 

“It is as if we consciously need to stop the brain from jumping to conclusions. This is an important trait in trading because we often see things that are literally not there….. if you struggle with that after a few failed trades then that is your brain trying to protect you against pain. You will begin to second-guess your signals and you will sabotage your own best interest. I have been there. I have done it and I have the cure.”

 

 

The stock market is not a supermarket…. we have all read the axiom of ‘buy low and sell high’. I changed that to ‘Sell Low and Cover Lower and Buy High and Sell Higher’.

 

 

 

Reasons we Lose and why:

Action	Conscious Reason	Subconscious Reason
I am letting my loss run	I am hoping	Avoid Pain
I am letting my loss run	Indicator/Fib/Etc.,Says so	Avoid Pain
I am taking my profits	You can’t go broke taking profit	Avoid Pain
I am winning, so I am reducing my stake	I want to take it easy now	Avoid Pain
I am losing, so I am increasing my stake	I trying to get back to where I was	Get rid of pain
I made my points for today, so I stop	I am afraid to lose what I made	Avoid Pain
I am trading without real conviction	I am bored/scared of missing out	Avoid Pain of boredom or pain of missing out

 

 

“If my free mind argues for a position and my fear mind argues about the consequences of failing on that trade then I am essentially arguing with myself. The posh term for this phenomenon is cognitive dissonance. My trades need to flow from a point of freedom of expression, trades conducted from a perspective of fear or greed, will not lead to good decision-making. My advice: stop trading and start contemplating. What is going on? When I experience cognitive dissonance, it is for one or both of the following reasons:

1. I have trading fatigue or physical fatigue- ever heard the saying ‘fatigue makes cowards of us all’.
2. I haven’t done my preparation well enough.”

 

 

“My basic aim with this book is not to rid you of these fears. Fear will always be part of our lives. My aim is to make you understand why you feel that fear and how to process it so you can take the trade. I accept that I am a human roll by emotions. I understand that I can’t escape emotions and nor should I try to escape them rather I want to help you understand your fear why it is there and how to become friends with it.”

 

 

“We lose money because we refuse to accept what is right in front of us. My basic premise is that people think the wrong way before they get into a trade and think the wrong way when they are in a trade”.

 

 

“I argue that people are fearful when they should be hopeful, and they are hopeful when they should be fearful. ….. People are hopeful when they are losing money. They are fearful when they are making money”.

 

 

(Charlie DiFrancesca says, “ the time you know you become a good trader is that first day you were able to win by holding and adding to a winning position. There are many people here that have traded for a long time and who have never added to a winner.”)

 

 

“Adding to winning trades is an absolute key trait of a successful trader. It reinforces correct behavior. It serves as an antidote to the temptation of wanting to take profit”. (Of course have a systematic way of raising your risk.)

 

 

“The purpose of adding to winning trades is at its heart an attempt to fight your normal human behavior. In the beginning it is not about adding to your profitability, that will come later. The purpose is to stop you from taking half profits…. In trading, consistent winners, “think differently from everyone else”. When you start to think, “Where can I add to my winning trades?” you are beginning to think differently from then onwards, it becomes a matter of habit. You have built a new neurological pathway in your mind or at least taking meaningful steps in the right direction”.

 

 

“How do you control risk when you add to winning trades? The answer is the same whether you are adding to a winning or losing trade you place a stop loss.”

 

 

“The normal thing to do is to close half your position for profits and let the other half run that is what the 90% are doing and I don’t want to do what the 90% are doing no matter how logical it may seem they are wrong overtime and I want to be right overtime”!!!

 

 

 

“The basic premise is that the majority of people who trade end up losing money that is our starting point now we observe what those people do I have been doing this for 10 years. Here is what I observed:”

1. They don’t add to winners!
2. They don’t use a stop loss!
3. They add to losing trades!
4. They take half profits!

 

 

“I have two fundamental arguments against taking profits:

1. The market agrees with you, let it ride!!!
2. Since I don’t believe in the risk to reward argument, because no human being can know in advance what their reward will be without limiting themselves. I don’t believe that taking half profits is the right way to trade.”

 

 

“I have come to the conclusion that setting a limit on your profits is not the way forward”

 

 

“I don’t belong to the brigade of traders who believe that “you can’t go broke taking a profit”. I don’t think you can go broke taking a profit if it means you never have really big profit days because you are unable to let it run”.

 

 

Why do we add to our position? “Because by adding, I am actively combatting the brains proclivity to scale down risk. Our brains want to take profit. I am doing the opposite. I am adding to my position”.

 

 

Very Important:

“ I urge you to contemplate how you can introduce the element of adding to winners into your trading. I’m not interested in rewriting your trade plan. I am not interested in turning you into a copy of me. I am interested in trying to make you understand the value of pain and trading as a barometer for adding to positions. If it is uncomfortable then it is probably the right thing to do. I will repeat something I mentioned earlier, I think you should give serious contemplation to the question of why people in general find it easier to add to losing trades than a winning trade”.

 

 

The battle between our two brains: “My conscious mind has a stop-loss, but my subconscious mind wants me to remove it. It doesn’t want to lose. It could be the position is going well. Now my subconscious wants me to take my profits. It loves the gratification of a good profit. So, I am battling it whether I am winning or losing on my trades. The key to victory starts with being mindful of the existence of two brains. The ability to anticipate your enemies next move is crucial. The subconscious brain is the rather simple beast. It just wants to avoid pain”.

 

 

“Buy high, sell higher; sell low, buy back lower. Will I miss the absolute turning points? Yes, I will!Top pickers and bottom pickers soon become cotton pickers”.

 

 

“Emotionally, a loss is clearly felt much harder than a win. Otherwise, there would be no reason for this anomaly. Human beings postpone making decisions that will cause pain. It is the reason why we let losing trades run. We want the instant gratification, but we want to delay the pain. Hope dies last. As long as the losing position is open, there is hope”.

 

 

“My own motto is: control your mind - control your future. Doing so requires constant vigilance. You have to own your life. If you don’t own it, you are not the boss. You have to take full responsibility for everything that you do. You must be the master of your own kingdom”.

 

 

“What get a person to finally commit to a goal is reaching the point of discussed I got disgusted with my trading over a long period of time. The pattern was always the same: trade like a wizard, become overconfident, blow up the account. I became sick of it. Positive intentions, sticky notes with mantras on my trading monitor and self-help exercises don’t possess nearly the motivational force of physical disgust with oneself”.

 

 

“I had to face up to the fact that I was actually an awful trader. I was like the guy who could recite the entire technical analysis syllabus for the master technician exam, but I could not stop myself from:

1. Overtrading out of boredom.
2. Overtrading out of anger and desire to get revenge.
3. Impatient trading - jumping the gun.
4. Trading against the trend - trying to catch the lower the day.
5. Fearful trading - by cutting my winner short out of fear the profit would disappear.
6. Constantly averaging in lower and lower, i.e. adding to losing trades”.

 

 

“You have to take possession of your life. It would be nice if you could rely on your friends and family but when it comes to your life‘s journey, you are on your own. It is your responsibility. Part of that journey, including your trading journey, is to discover your weaknesses. You have to know where your mind lets you down. For the vast majority of people in the world. This will include their minds tendency to wonder…. our minds need constant guidance and direction…. Our profession is a mind game like nothing else…. We can’t afford to go into trading without being 100% mentally prepared. …. You have to hold yourself accountable and make sure you understand that exposing your weaknesses will be a good thing”.

 

 

“Losing and failing might be a knock to the ego, but it is rocket fuel for growth”.

 

 

“I want to dedicate time to trading well, to combat my natural inclinations that stand between me and successful trading. I want to prepare my mind every morning through a series of meditations and visual exercises. To achieve this I will train my mind to act calmly through visualizing myself in difficult situations. I will focus on my breath. I will calmly put myself through stressful situations to ensure I would react how I want to react if the circumstances were real…. All I have done is you fear and disgust as my protagonist - my major motivator”.

 

 

“If you don’t know how to handle a losing trade, and then a winning trade, you will not go very far in this arena. It is for this reason that I tell people to spend less time on technical analysis and more time on self-analysis”.

 

 

“There seems to be an inclination to describe trading as the venue for making untold riches. Yes, the potential is always there, but with bigger reward comes bigger risk. You can’t catch big fish and shallow waters”.

 

 

“ I want to make sure you realize that a pauses from trading is not the end of trading the markets will always be there”.

 

 

“Could trading not just offer you a good income, where you are working on your own terms and perhaps doing something that you find immensely interesting? Does it have to result in owning a beachfront property in Barbados”?

 

 

“What my slump taught me was to slow down if you do not slow down and let the knowledge mature, then you will take a huge loss which will dent your confidence….. Everyone has setbacks. Kobe. Rafa. Federer. You. Me. And - all slumps end. Slumps are inevitable. You are bearish and the market goes up. You are bullish and the market goes down. It happens to us all. Every one of us. Is there a key to escaping a slump? No”.

 

 

“I am simply following the process I always follow. I am a process-oriented trader. The markets determine the outcome. I have little control over that. I have faith. I believe that my process will carry me through the highs and lows of training”.

 

 

“A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do”.

 

 

“Only through a dedicated approach to practice, with a specific attention to finding your mistakes, will you improve. Otherwise you are just cementing your unprofitable behavior”.

 

 

“How do you feel about failure will to a very large degree defying your growth and the trajectory of virtually every aspect of your life…. A significant part of your success as a trader is correlated to your relationship with failing. If you see failure as the endgame, then you won’t make it as a trader. I have colleagues who will stop trading if they have three losing trades in a row! What kind of attitude is that? You think Kobe Bryant - the absolute Superman of basketball - had that attitude? You think during a game he would have three misses and then ask the coach to be replaced by someone else”?

 

 

“Babe Ruth, the All-American baseball player held the home run records for decades. At the same time he went by the nickname “King of strikeouts”. He wasn’t afraid of failure. He befriended it”!

 

 

“I tend to only feel hope when I am in a trade. I hope my position will come good. I hope the market will move in my favor. Fear, however, is felt in more situations. I can feel fear when I am in a trade. But I can also feel fear when I am not in a trade. That is the subtle but important distinction between hope and fear”.

 

 

“Don’t be outcome oriented. You would benefit immensely from shifting your focus to being process-oriented”.

 

 

“I have no secrets. I have no special abilities with the possible exception of one. Do you want to know why I am so good at trading? I am exceptionally good at losing. When speculating in financial markets, the best loser wins. Don’t underestimate these four words”.

 

 

“They were fearful when they should have been hopeful they were hopeful when in fact, they should have been fearful”.

 

 

“Your subconscious reptile mind has only one function and that is to protect you. It does this whether you want it to or not. And this is a problem because to be successful as a trader you need to be very good at losing. This means constant conflict with your built-in subconscious protection system, a system that protects you from death, guarantees you will not survive as a trader, unless you can learn to overcome it and overcoming it begins with accepting pain”

 

 

 

“It is exhausting to feel joy and pain many times a day. I prefer not to feel anything at all rather than going through that emotional roller coaster. I win. Move on. I lose. Move on”.

 

 

 

“If you want to be successful in a field, where 90% or more fail, how do you think you should approach this task? The road to consistency, success, and enlightenment in trading begins in the last place you would ever think to look. Inside yourself”.

 

 

“If you are not as successful as you want to be sooner or later, you need to change your behavior. The 90% fail because they interpret the pain messages received automatically from our reptile brain without any modifications. You need to learn to re-code your brain‘s message when pain comes knocking. Instead of reacting and running away a small group of consistent traders, the 10%, whole fast and run towards the danger, not away from it. The 10% succeed because they have learned to flip the switch”.

 

 

“Flipping the switch, will feel very uncomfortable, but it is a discomfort you must accept and embrace if you want to succeed in the game of trading. The paradox of trading is this: by doing what the 90% cannot do you will become successful. In other words, I expect to be uncomfortable. I expect my trading to cause me anxiety. I am waiting for it. I can sum it up in a few sentences:

1. I assume I am wrong - until proven otherwise.
2. I expect to be uncomfortable.
3. I add when I am right.
4. I never add when I am wrong”.

 

 

“I will assume that I will quickly have to get rid of a losing trade. My confidence in this action is not centered around my ability to select the right set up. That is what the 90% will do instead. My confidence is centered around trusting I will get rid of a trade that is not performing. I trust myself to know that if this trade does not work out, there will be another one coming shortly. Do you see how I have flipped the switch on my thinking? I think differently than the 90%. I assume I am wrong until the market proves me right”.

 

 

“I am subject to the built-in automatic pain receptors as everyone else, but the difference lies in how I handle the pain. Instead of giving into it, instead of being ruled by my emotional responses, I have flipped the switch. I have trained myself to expect the pain. I am aware of the pain. It is there. It is real, but I accept it. I have encountered it in training over and over. It no longer acts as a debilitating force in my life. I have trained the fear out of my decision-making”.

 

 

“I think it is perfectly possible to be uncomfortable, while enjoying a challenging process. As a trading position grows in profit instead of giving into the fear it will be taken away from me. I flip the switch using my mental warm-up, my training exercises and visualization of trend days where the market just goes higher and higher all day. I flipped the switch in my mind from negative mental imagery to positive mental imagery. I see myself riding this monster momentum wave. I see myself being at the forefront of every tick higher”.

 

 

“I don’t entertain the idea of compounding my mistakes by adding to my losing position. I have trained that trait out of my mind. It doesn’t even enter my mind anymore. My mind knows I want to be big when I’m right and I want to be small when I am wrong”.

 

 

“Emotions kill trading accounts. It isn’t the lack of knowledge that stopping you from winning big. It is the way you handle yourself when you are in a trade. After reading this far if you remember only one thing, remember this: in trading, unlike Life, the best loser wins”.

 

 

“There is an ideal way to think as a trader. There is an ideal mindset - one that is flexible to the extreme. It does not care about winning. It does not care about losing. It is a carefree state of mind, but it still acts in your best interest. The ideal trading mindset has no fear. The ideal mindset may have no fear, but the ideal mindset is still acting in your best interest. The ideal mindset might be fearless, but it is not reckless”.

 

 

“The ideal trader mindset does exist, and you can train yourself towards this state of thinking and believing. When you arrive at this state, it means you are able to perceive information from the markets without feeling threatened or fearful. You will have losing trades just like everyone else. However, the ideal trading mindset is at peace with losing trades as it is with winning trades. Neither will impact your ability to unemotionally and dispassionately perceive market information in a non-threatening frame of mind. Your emotional state will stay in balance”.

 

 

“The ideal mindset does exist, but few traders have it consistently. The issues we face largely fall into two categories: 

1. We associate this moment with another moment, whether we are conscious of it or not.
2. We have a mind wired to avoid pain”.

 

 

“There is randomness in the outcome of one, but there is order in the outcome of 100”.

 

 

“The market will do what the market will do. It does not care about you or your position. It does not care if you are in the market or on the sidelines. If you have 15 winners in a row, it does not care. If you have 15 losers in a row it does not care. Every moment is unique. However, while you may understand this academically and even logically, there is a good chance you will not understand this emotionally especially if you just had 15 winners or 15 losers in a row. They’re in lies the difference between the trained mind and the untrained mind, I will steadily guide you towards the trained mind so that you do not have to succumb to fear”.

 

 

 

“Information on its own has no power over us. It is our belief system and the energy we give to the information that decides its potency”.

 

 

“Our beliefs determine how we react to information”.

 

 

“Creating a mindset that always acts in your own best interest. It is a mindset that allows you to see opportunities. It knows your weaknesses and what to be mindful of. It allows you to receive information without being threatened by the information. You can operate from a carefree state of mind”.

 

 

“The old way of thinking is still in our mind. It will always be there. It is part of your personality, but the old belief has no charge anymore. It is faded diffused. Just because you have said goodbye to an old belief does not mean it isn’t still in your memory”.

 

 

“ I recommend you read my assessment of my own trading and you repeat it on your own trading. It is a vital step and understanding who you are and how you interact with the markets once you have done that you will create what I call the book of truth above all be honest with yourself as I was. If you are not honest with yourself, you will not be rewarded with consistency in trading the courage to be honest with yourself is its own reward. Tom’s Book of Truth example:

1. I have periods where my wind rate exceeds 85%
2. My average profitable trade was less than my average losing trade
3. I was a winning trader, but my big losses were seriously Denning my overall PNL
4. I trade well in the first half of the day
5. I trade well in the first 3 to 4 days of the week
6. I often give away much of my profit from the morning session when I trade in the afternoon
7. I often gave away much of my weekly profits on Fridays
8. I would do very well on range bound days
9. I would almost always miss trend days, and I would often fight them
10. My biggest losses came from fighting trending moves”.

 

 

 

“Reviewing my book of truths every morning is part of my process”.

 

 

 

“If you don’t prepare your mind ahead of the game and you experience adversity during the game, your mind will most likely work against your prime objective. Your prime objective is not to make money. Your prime objective is to follow the strategy you have developed. More importantly, your prime objective is to follow the process you have designed for yourself. If you follow the process, the outcome will take care of itself”.

 

 

“Trust! Trust Yourself! You have to trust that you already have all the tools you need to make a living from trading. I continue to study technical analysis and I do so to improve my understanding of the ever-changing nature of the markets I trade, but it is not technical analysis that will make me money. It is trusting that I already have all the skills I need to make money consistently. Your technical analysis ability has to be matched by an emotional maturity. You need to trust that you already have all that you need. Otherwise you will not bridge the gap between what you know you can achieve and what you are achieving you need to believe the belief comes from doing”.

 

 

 

“Trust the Markets! Trust is a vital part of the journey to making the market your playground, trust and believe that the markets will give you opportunities”!

 

 

“Boredom and impatience lead to poor decision-making”!

 

 

“Patience Needed! Patience is a skill set that can make the difference between being an object failure or a wizard. I use the word skill set because I believe that patience can be developed. I developed my patience in using two methods. Both are practical in nature, but they are very different in their application. One is proactive exercise. One is a reflective exercise”.

 

 

Not Tom’s, but my personal proactive exercise for patients is at the end of the day to review the big winner and look at how I would trade it and see the opportunity. This helps me to see that there is opportunities every day and I just have to be patient. The reflective exercise that Tom mentions is meditation or visual imagery. He does this to calm his mind. He also does it by doing breathing exercise exercises.

 

 

 

Belief conflicts are an issue with trading and Tom uses a system called “Ask for Help” and it is a back to front idea of how to address his beliefs. “Unfortunately beliefs do not have the power to dismantle themselves, all beliefs, demand expression, desire, and willingness to ask questions from a sincere space with a sincere mindset will give you answers.”

 

 

 

 “It is important for me to remind you that money is a byproduct of the ideal trading mindset. You are creating a process that will guarantee an optimal mindset for your trading life. The essence of good trading lies squarely in how we think and perceive information about the markets. It has everything to do with how we think and how we live our lives”.

 

 

 

“I don’t believe anyone ever achieved. Anything spectacular without putting in a massive amount of effort. I know I have put in the effort. I know that everything I do on a daily basis is the result of grit and determination. I am not talented. I am hard-working. I am not gifted. I am determined. I am not lucky. I am persistent”.

 

 

 

20 trades exercise: “It has at its core the idea that if you can execute 20 trades without any kind of conflict, you are trading from a carefree and fearless frame of mind. This means you are trading from the perspective that:

1. Anything can happen - and you are emotionally detached from the outcome.
2. Every moment is unique - and you are no longer drawing associations between this moment and another moment. You are pain-free.
3. There is a random distribution of wins and losses - you accept the outcome as if it were a coin flip exercise
4. You don’t have to know what will happen next to make money - so you trust the process, and you focus on controlling the only variable you truly can control, which is how much you want to risk on this trade.

The purpose of the exercise is to add energy to your beliefs. Until you can do that without conflict and unresolved thoughts and conflicting energy issues. The negative charge will not dissipate. How do you know when you are successful? When you can trade without any conflict or competing thoughts”.

 

 

 

“My training involves accepting pain and making it part of my existence through habit and repetition so that my degree of pain tolerance is expanded. I also have to train my mind about expectations and how to deal with unrealistic expectations. This requires a tenacious effort, through journaling, mental energy, and asking for help”.

 

 

“Mind Loop: My trust in the markets and in myself supports my patience. My patience that a set up will materialize feeds my confidence. My confidence that I will win dictates my inner dialogue. My inner dialogue, what I tell myself while I’m trading, supports my process oriented mindset. The process enables me to stay focused in the moment”.

 

 

 

“Ideal Mindset, Trust>Patience>Confidence = Inner dialogue that is focused on the process and in the moment without Fear, greed or hesitation”.

 

 

 

“This is what lies behind the process. I never expect to be comfortable when I am training. If I am comfortable, I know I am not pushing the boundaries of what I am capable of. I know that to get the best out of myself I need to be a little uncomfortable”.

 

 

 

“I have come to the realization that the gap between where traders are now and where they know they can be, can only be bridged by a better mindset….. Therefore, the focus now needs to be on the actual steps I have taken and still take to ensure I stay on top of my game, that is where You are headed now”.

 

 

 

I believe that beliefs are defined by one’s own desires and needs. As a result of my desire to be a profitable trader, and my need to create financial stability in my life. I have acquired beliefs that are consistent with this goal”.

 

 

Hope you enjoyed my cliff notes they really have helped me and I hope they help you as well.