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The erroneous notion of trading

January 31, 2012 By 2 Comments

While starting out as a trader, you have likely read most of the classic books on trading, technical analysis, money management, or psychology. You might have even executed a few trades with meager success. From a theoretical experience you are not a newbie but from a practical standpoint you still are.

Being a trader is commonly associated with an erroneous picture of freedom. You may be drawn to the flexibility of lifestyle, not having a boss, and having geographic independence. That’s like saying you want to become a racing driver because of the high salaries and traveling around the world. But to be a good racing driver you need to love racing. Not everyone loves racing. Similarly, to be a good trader you need to love markets. Showing “passion” may be overrated for this business, but strong interest coupled with the right approach does correlate with performance. Committing to doing something brings with it the duty to do what is required.

Someone who ponders about making $1 million per year with no boss, and getting out of a job which he hates, is definitely looking at trading for the wrong reasons. Trading doesn’t work like that as it is not a consistent income. Furthermore, it is not a steady progression like most careers. Success (if it comes) is rather unpredictable, comparable to the evolution of an entrepreneur. You can have great periods and you can have dead periods. A great method can suddenly stop working after years of success, and you may have disasters where you lose a lot of money.

If not pursued earnestly, trading can offer excitement for the time being and serve as a big dream of a glorious life in riches. In reality, chances of prosperity in this case are as likely as with playing the lottery.

Those who claim they wish to be traders but are secretly unwilling to do the work, will never get there. As a mentor, I am honest and blunt to aspiring traders, just as the professor is to an aspiring medical doctor. They won’t be told that due to the hard work in their profession of healing it would be better done in a country where there are less medical regulations with worse tools and technology than you find in the West. If you kill a few poor patients along the way, it would not matter because you are unlikely to be sued or prevented from working further. That is not the discipline you want to see in someone. Becoming an independent trader must not be taken lightheartedly either. Education is of utmost importance in this business, and working with a competent trader can be easier than being self-taught. Those who are relentless in figuring out a methodology are more likely to succeed. If you find investigation, research, problem solving, and frequent setbacks tedious, you would be well advised to do something else.

Regardless of assistance, you should be fairly comfortable with experimenting on your own because even a personal mentor can only go as far as showing you the path. A strategy still has to be based on your very own decisions to be able to trade with confidence. Start with a $10,000 account and trade part-time outside your normal working hours. Set maximum drawdown goals by losing not more than $3,000, for instance. The point of this is not to make money, but to learn trading with real money without taking excessive financial risks. If by the end of year one, you managed to make a profit without losing 30% of your starting capital at any point, then you have some potential. Take your time and put more emphasis on gradual growth with a sound strategy than sudden wealth.

What remains to be said about the brutal reality is that the vast majority of retail traders fail even to break even over their trading careers; let alone make a living from it. Those that do, tend to have an unusual aptitude and passion for markets and trading. Therefore you are generally better advised to keep your job until you have figured out a time-tested strategy. Not being able to watch the market during regular trading hours is not an excuse.

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Little hope for the little trader

January 21, 2012 By 2 Comments

Traders that are new to the industry are too easily scammed into dubious trading products or subscriptions. So-called trading gurus permeate our society to exploit the starry-eyed eagerness of a trader trying to learn. It is marketers and their never-ending sales pitches like, “You need this system. This one will make you the star trader you’ve always dreamed of. The new and improved version is guaranteed to double your money instantly or you get your money back.”

Gossip tabloids exploit readers that crave sensational news. Did you hear the latest on Brad Pitt? The National Enquirer tells me so. What will your car salesman, who needs to achieve his quota for the month in order to pay for his new house, tell you? “You look successful. This car will represent you perfectly in your next business meeting.” You try on clothes in a fashion boutique and ask the salesgirl whether it suits you, “Fits perfectly.” Whatever you try on, it always fits perfectly. These people just want to sell you stuff! The sooner you understand it, the better. What will a politician tell his supporters? “If you want change, then vote for me. I will deliver change for you, my friend.”

We live in a capitalistic world where people will always inevitably seek to exploit the ignorance of others. The original intentions may be good, but trading products are often marketed in a way as to guarantee positive performance. A guru is under no obligation to disclose his profit and loss column to you or anyone.

It is pathetic to hear traders complain how gurus are out to extract money from them. It is up to them to separate the wheat from the chaff and some unfortunately are horrible at separating fact from fiction until it is too late. Usually money is lost as a penalty for not being properly informed. There is a learning curve involved in this business of trading and struggling traders are repeatedly seeking a quick solution to their problem that typically requires months or mostly years to reach proficiency.

Just because a trader can show proof that he can make money does not insinuate that he is also a good teacher, and vice versa. The very best thing to do is apply common sense while learning as much as you can (ideally with the help of a trusted mentor). Every trader is individual in his personality, so you need to find out what strategy, time frame, market, or position size suits you best. A mentor can only provide advice. You have to continuously test and improve while risking the least amount of money. This will increase your chances of emerging financially unscathed and start a profitable trading journey.

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Word of advice to an aspiring trader

January 9, 2012 By Leave a Comment

Message boards offer a great pool of information as well as opportunities to socialize with like-minded traders. Sometimes I post my advice on threads in which aspiring traders seek advice. Upon one post of mine, a trader messaged me this:

There will come a time where I will need to try to figure out my personal plan to be a trader and taking things into my own hands. Could you lend any advice to someone who has the ambition but has yet to even paper trade a “system” or “edge”?

Here was my reply to him. I would like to share it as I find it relevant for many traders:

Before you learn trading through painful mistakes, I suggest that you make printouts of charts and study them vigorously before testing your theory (either in paper trading, or with minimal amounts of real money). I personally printed out the continuous 1H chart of the ES from the last few years.

Know that experienced traders tend to be passive and ride out trends for as long as possible. Be objective in whichever approach you pursue. This is easily said, but what I mean is that you only enter a position when the market tells you to, not sooner and not later. Don’t trade what you expect, but merely according to what you see. You need to be able to clearly pinpoint the reason why you did something the way you did one month or a year from now. Only then will you have an objectively executed trade.

Last but not least, know when a trade is a failure before entering it in the first place. It means that you need a stop, or a risk limit. Decide based on what you see in the chart, not some 1% or 5 point distance rule relative to your entry. That is subjective. I hope this can help you with finding a smooth entry to becoming a good trader!

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Finding the ideal trading mentor

December 6, 2011 By Leave a Comment

If you adopt other people’s trading strategies, you are likely having a tougher time than figuring out a strategy on your own. Why couldn’t I simply signal my entries and exits for you to follow along? The strategy works for me after all, so why not share it? It seems to be the easier path, but you are mistaken.

According to discussions with fellow traders, many who have shared their methodology complain that the partner frequently messes up when mirroring their trades. This is not because their strategy did not work, but due to something entirely different. Emotions overwhelm a trader’s decisions all too often. The beginner makes many foolish mistakes behind the scenes which impacts his sensitive performance. An easily attained profit with the help of an experienced trader is jeopardized with several losses produced by the beginner.

Another obvious problem is of statistical nature: two traders with the same tactics might not be watching the market at the very same moment. While a trader takes an opportunity, the other one misses out on it. The next opportunity is then taken by both traders, which happens to end in a loss for the two of them. The first trader is still ahead, while the second is licking his wounds and questioning the strategy. The more often this happens, the more likely it is that one of them will call it quits.

Trading someone else’s strategy makes you fully dependent on the person who taught you, even though its signals have been explained to you numerous times. Yet, you need to ask for advice repeatedly because the market conditions appear unfamiliar and make it a challenge for you to handle.

Instead of asking for signals, a beginner is much better advised listening to the thinking of an experienced mentor. The actual trades taken can then serve as samples.

Let me give you a word of advice. Find a mentor who understands your needs and is already proficient in teaching traders, not a guru who sends signals. Based on the theories and mindset of a mentor, you will then find yourself developing a trading strategy on your own which serves you many years to come. This is the whole purpose of being mentored. Finding such an individual is not an easy task, however, the group of potential candidates can be narrowed down once you know what approach is most suitable to you.

  • Pick an instrument that you feel comfortable trading with. Be it equities, derivatives, currencies, or something else.
  • What is your budget? Are we talking about a few hundred dollars or several ten thousands that you want to deposit in your trading account? Is it really money that you can afford to lose? Be aware that you are risking money and can actually lose some or most of it.
  • What amount of time are you willing to dedicate for trading? Are you a student who can observe the market in real-time day after day, or do you have a full-time job?
  • Think about the leverage and maximum risk per trade you are willing to work with. For example, if the ES with its ~$60,000 market value per futures contract is too colossal for you, think of trading the highly scalable SPY.
  • How do you handle failure? You will encounter difficult times. Are these moments in which you feel like giving up or do you sit down and recapitulate your mistakes?

If you have a give-up mentality, then you are wasting your own and your mentor’s precious time. Mentoring a trader and learning trading goes in tandem alongside each other. The beginner needs to be able to communicate his difficulties openly, while the mentor should be experienced enough to detect false trading behavior and present solutions to such dilemma.

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How to trade trends in a profitable way

November 14, 2011 By Leave a Comment

During my trading journey I regularly encounter very interesting people from various fields. Their unprofitability in trading is what often unites them, however, which is why they are seeking advice. Aspiring traders are unable to reap consistent profits off the financial market despite having been involved for many years and having tried various approaches. I assert that this is due to the lack of a fundamental understanding of trends, which is why my attempt is to demonstrate how price action is interpreted correctly.

I personally had the luck to be taught by a mentor myself, and forged a trend trading strategy on top of this precious teaching. The nature of trends is the first thing an aspiring trader needs to fully comprehend. Trends do not stop from one moment to the other but last for a significant amount of time. A trend evolves in a sequence of support and resistance levels along its way, and reversals always take place after breaking an aforementioned level. Hence, there will be enough time to recognize a reversal and to adjust your position accordingly.

If you look at the 1 hour chart of the ES for example. You will notice a repeated pattern of uptrends (higher highs and higher lows), downtrends (lower highs and lower lows), as well as support and resistance levels along the way. A break of such a level is taken as an entry opportunity to catch a reversal and follow a newly established trend. You never do anything prematurely and always wait for the market to tell you what to do. By doing so, you will avoid entering and exiting positions based on gut feel.

That is all you need to boost your chances of becoming profitable. Let us think back to our childhood when we got our first bike. Our parents might not be particularly good cyclers but they knew one thing: to ride the bike we must be able to balance. Consequently, they do not bother teaching us which gear to use, or how to do dirt jumping. They leave it at the basics. But this is precisely what aspiring traders venture into. They start off with the most challenging stunts like scalping and picking tops without knowing anything about chart reading. Seeking answers in indicators is one of the major mistakes they succumb to.

Whenever an aspiring trader comes to me, I will ask him to turn off all indicators, then give him the basic understanding he needs to start trading profitably. This includes price action, understanding the battle between bulls and bears, and trends. After that we go into more details such as risk management by using stop loss orders properly.

To my surprise, many are able to find entries and manage positions with a bit of assistance within a few weeks, or have developed a totally new strategy with the help of the basics I provided. Most importantly, they do this without looking at any indicators that they used to love so much.

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