You’re awesome because you’re a trader! You’re going for what you want in life, and I respect that…. I’ve also been reading the emails from forex traders around the world (awesome! keep em’ coming!), and getting caught up on Facebook messages, and thinking about my trading regrets…
(I have a few regrets, as I spent 4+ years learning dozens of ways to lose money in the markets… which was weird, cause it was damn easy making money as a stock trader in the 1990’s… may have had somethin’ to do with the old Dot-Com bubble, not sure….. go figure).
Here’s what I wish someone told me – I didn’t have a mentor, instead I took the “path of most resistance” – I read a bunch of (stock) trading books on technical analysis (there was one forex book back in 2001 and it sucked) and thought I’d figure it out…
It wasn’t a fast track to trading success.
Here’s hoping you discover these 7 lessons sooner than I did, because each is critical to your success…
So, here’s the first thing I hope you’re using in your trading:
It doesn’t matter how you trade.
You can use the MACD, RSI, DragonTrend Finder (I just made that up, but it could easily be an indicator), whatever…
You can use fundamental analysis (aka: Funny-mentals… thanks to Ed Seykota for that one), Renko Charts, or even plot a moving average or two on Point-And-Figure Charts (don’t laugh, I actually did that by hand for a few years).
It really doesn’t matter – because the system doesn’t make money. You make money from the markets.
This is precisely why high frequency algos can make money, 4-hour chart swing traders can bank enough pips for a quick jaunt to Bali, and scalpers can take 4 months off to go sail the Med…
The method doesn’t matter, what matters is how you manage risk, so if you’d like to make money at this racket, you gotta understand risk… which brings me to your “thing two”:
Trading is a game of risk.
If you don’t spend hours upon hours fretting over the best way to manage risk for your trading system, that’s cool… but it either means:
(1) You’re a kingpin fund trader who enjoys mincing with models and tearing off to Vegas in your Lambo… because you have a team of traders doing the hard work for you…or, (more likely):
(2) You are a bit green behind the ears and still scouring the internet for the perfect trading system…
(Don’t worry if your searching for the Holy Grail, we’ve all been there… 12 years ago I had my “Beautiful Mind” moment staring at a calculator in a food court in a crowded mall… after hours of punching the buttons in search of Gann’s secret code to the Universe I decided to come up for air, the quiet still caught me by surprise and I decided there was a very good chance I’d be staying the night in the food court since everyone had gone home and all the stores were closed…)
Once you dive head-first into risk management and probabilities, you’ll see you’ve got 3 choices:
(Choice 1) You are gonna win big.
This means you probably won’t win often, but when you taste the sweet nectar of victory it cleanses you from the most recent losing streak and tastes oh-so-good…
You like trading this way because you have supreme confidence in your abilities and don’t waver after you suffer through another 8-trade losing streak, you know you’ll hit the jackpot soon enough…
This is an easy choice to make (but not-so-easy to stick with) because nearly every trading book you’ve ever read tells you how your winners have to be huge compared to your losers.
(These same books don’t tell you how difficult it is to lose more often than you win, but you’ve come to grips with this reality.)
(Choice 2) You are gonna win often.
The idea of suffering through a terrible losing streak makes your gizzard turn blue – you’re a winner. You also probably have a martial arts/military/high-level athletic background… you’re disciplined and you know you can execute time and again, with precision.
You also have balance in your life, you probably do some difficult physical activity every day… (beer bottle lifting doesn’t count).
You don’t “win big”, but you win often. At times your stung by a hurtful loss – these losses take a big chunk out of your profits, but because your win rate is so good, you manage to live with this equity curve.
(Choice 3) You don’t mind throwing back a ton of fish.
You take risks by adding to your winning trades, really piling it on… but sometimes the market comes back and tips you out of the game before you cash out. You get more than a few losers and too many “break-even” trades to mention, simply because you like to hit The Motherload time and again.
And boy do those Motherload trades feel good. Like lucky lotto numbers… but better because you’ve got skills.
It really doesn’t matter which choice you make, but if your choice isn’t one of the three above, you probably haven’t spent enough time working out the kinks in your risk model.
Speaking of kinks, if you’re anything like me, there’s probably one thing that’s smacked you right up the kisser after you’ve traded for about…oh… maybe 24 hours or so… which brings me to:
Trading means working on you, not your system.
Successful traders are self-aware, responsible and mindful.
You understand how trading forces you to confront your faults. It’s as if the market is holding up a mirror and saying “Hey! Look at that ugly wart right there!! Whaddaya gonna do about it!?!?”
The fastest way to improve your trading efficiency is to become aware of your psychological pitfalls… the mistakes you keep making.
This means introspection, reflection and journals are much more useful trader tools than the ADX, Moving Averages or Momentum indicator.
The best traders are almost Zen-like – they understand the importance of being in the moment, executing with precision and practicing detachment from the outcome of the current trade.
This is because experienced winners think about trading in a particular way… which brings us to:
Think of your trades in terms of probabilities.
You understand the importance of the big picture – what is your win rate over the past 200 trades? How does your reward-to-risk ratio look this year?
You don’t worry about minor fluctuations in the average size of your winner… instead you simply look at the aggregate data, and interpret batches of data, rather than individual trades.
This is precisely what casinos do… you know, those giant buildings that burn through a few hundred thousand dollars every day in operating expenses (all them lights, all those people workin’ there…). Hmm. Those casinos may be onto somethin’…Keeping score is a dynamic process, not a discrete action. Just as you never really become fully self aware (see Thing Three, above), you never really know for sure what the next trade will offer you… but win, lose or draw, you know it matters very little because you will still make money in the long run.
But, surprisingly, money isn’t the focus of your trading, which is why the next critical thing:
Focus on the process of trading your rules, not the results of executing your strategy.
When your focus is on avoiding mistakes with your trading system and applying your rules as you have written them in your trading plan, you have no real reason to pull the plug on a trade because “that’s a lot of money sitting there, waiting for me…” or because you think “you can’t go broke taking a profit.”
You will remind yourself that it’s not such a good idea to finagle your way out of one of your system rules because you are focusing on the money.
Taking money from your winning trades won’t make you a professional trader, but executing your system like a savant can (and probably will) bring you more freedom and profits than you can imagine.
That’s it for now, I will post the last 2 Things (about spanking, and… believe it or not, sex) in my next blog post, soon. In the meantime, Happy Trading!