Book Review: Best Loser Wins by Tom Hougaard

I recently finished this book on Audible and it's been giving me mixed thoughts, even as I'm writing this post. The full title of this book is "Best Loser Wins: Why Normal Thinking Never Wins the Trading Game – written by a high-stake day trader."

It will likely be found on Audible, Amazon, or at your local bookstore. If it's accessible to you, I believe it is worth a read.

In terms of the mixed thoughts I've been having about this book, general observations, and my takeaways, I'm listing them below in no particular order.

What I liked:

• Unlike most trading books out there, Tom focused less on technical analysis, displaying historical charts, and mentioning any strategies or systems that can beat the market. He even called this out in his book.
  
  Authors tend to cherrypick historical charts that work perfectly or near perfectly when explaining a chart pattern or technical indicator. Tom explained that you can learn every single chart setup and technical indicator and still not make any money.
  
  His stance is that most traders fail because they focus too much on trading systems or technical knowledge rather than the psychological elements.
  
  
• My initial reaction while listening to this book was that I did not agree with a lot of the points made. However, to the author's credit, Tom did a great job backing each statement with research and statistics. Even if I disagree with a statement that he made, I do appreciate that he derived these statements from some kind of due diligence as opposed to repeating one of the many cliche sayings out there.
  
  For example, rather than making a bold claim that 95% of traders fail, he quotes broker-published information on the percentage of unprofitable traders. If you go on IG.com, you will see a statement showing that 70% of retail client accounts lose money with this investment provider on a top banner.
  
  Whether or not you agree with this statistic, it is founded on a source of truth at least.
  
  
• I've been on the fence about this one - the book is a little bit prescriptive. For example, the author mentions never setting a take profit as he believes in letting the trades run. If his position gets stopped out at breakeven, he won't think too much of it and move onto the next trade.
  
  That said, he does back up this point with a different survey research. The survey indicated that traders close out their profits too quickly while being hopeful and letting losers run. I don't have the exact numbers in front of me at the moment but this is the high-level takeaway.
  
  For beginners, I can see how this can be beneficial to get into the right mindset. You absolutely should avoid being hopeful for losers to turn into winners and being overprotective of winners.
  
  That said, this also leads to some things I'm not a fan of with this book. Points below.

What I'm not a fan of:

I'll preface by saying I recognize this book is the author's point of view and his collective experiences and research. Keeping my thoughts constructive, I do think there is a more optimal approach by offering considerations and additional factors to think about.

Using the previous example of not setting take profits, the author backed this point by referencing the fact that nobody knows what will happen in the future. While true, I don't believe that not setting a profit target is rational.

As part of your broader trading strategy, you need to define entry criteria but also exit criteria. Moving your stop loss to breakeven and then trailing it to ride the trend is a bit problematic. This is because of trade efficiency:

• Tom Dante talks about this in one of the few videos he's uploaded onto YouTube. In a snippet, he mentions how beginner traders bragging about riding an insane move of, say, 1,000 pips are either doing it on a demo account or taking on a really small position (paraphrasing).
  
  While it might look sexy on paper/on-screen, the efficiency of the trade relative to the position size, holding costs, and commissions, don't make it worthwhile. I'll share a chart later down below.
  
  
• Tom Dante also has a video on the use of the Average True Range (ATR) that completely blew my mind. Although you only know when a trend has ended in hindsight, this doesn't mean you can't leverage any statistics to your advantage.
  
  This is one component of the book that I'm not a fan of. When I trade FX, I target a take profit of 2x the 10-period ATR. This is because, from my observations, price has a tendency to pullback or go into a short-term range after it makes a strong move that's two-times the average daily movement.
  
  In this case, why should I hold through the pullbacks or reversals in hopes of capturing a larger trend that may or may not come? After all, we only know the trend strength in hindsight.

While the author provided his stance along with the supporting stats, I think a point missing is the fact that traders should be using stats to optimize their trading. In my case, it's using ATR to identify profit targets when making momentum plays. This helps ensure my trading efficiency by not holding positions longer than necessary.

From my own experience, trailing stop loss to ride trends was not optimal for a few reasons:

• The larger the trend, the less likely they'll appear. Probabilistically, how often can you find currency pairs that cleanly move 100 pips? Probably more frequently than currency pairs that move 1,000 pips.
  
  While riding an aggressive trend and capturing 950 pips out of 1,000 pips is very satisfying, I would rather target 100 pips knowing I can capture that if the average momentum play leads to an 100-pips movement. This way, I'm playing a stats game.
  
  
• Holding trades through range-bound periods, no matter how temporary, causes efficiency loss. Not only are you paying holding costs, you're also locking away margin that could've been used to capitalize on other momentum movements.

I'll close off this post with two charts. The first chart is what happens if you enter a trade on a neckline breakout and trail it as long as the moving averages do not cross over.

EURUSD D1 - Trailing

Each white box represents a pullback period where you'll be holding the trade through in the grand scheme of riding this downtrend. There are 10 periods where you incur holding costs as well as opportunity costs due to margin that can't be used towards other trades. This is not the mention the mental exercise you go through to remind yourself to let profits run.

EURUSD D1 - Optimized

If you set take profit targets based on the observed ATR, you're getting in and out of positions a lot more efficiently without having a long holding duration. The trade off, of course, is that you're not maximizing the profit potential. However, nobody can consistently maximize their profit potential unless they can see the future and pick the absolute tops and bottoms to exit. 

When that information is missing, my preference would be to collect data and rely on stats on probabilistically likely movements.

*Note that these two charts are not intended to cherrypick datapoints to make a persuasive argument; rather, they illustrate the importance of using data to optimize your own trading.