The majority of readers of blogs and forums are relatively new to trading, in as much as they’ve been trading for less than five years. During that time they’ll have experienced just about every market condition the markets can create. In fact since 2008/2009 we’ve witnessed incredible ‘once in a lifetime’ turmoil in our markets. We’ve had the Western Hemisphere banking collapse, in the USA we’ve experienced QE1 – QE3 and countless bailouts – some secretive others not so, and interest rates following a ZIRP policy for close on five to six years.
In Europe we’ve had other bailouts and versions of QE through the ECB, which circumnavigated the strict rules on ‘money printing’; they also followed a zero interest policy on interest rates. In the UK the BoE bailed out banks by way of re nationalization and indulging in QE up to the level of £375 bn, likewise base rates in the UK have stayed at record lows for a record period. And eventually all the global economies felt the ill winds of the fall out, with Japan in particular still failing to recover from its two lost decades of growth and performance, whilst having a massive debt versus GDP of circa 220%.
All the aforementioned policy edicts and extremely high impact events affected the price and movements of the currency markets, indices and commodities considerably. In fact we’ve witnessed the creation of massive trends and counter trends over recent years. In many ways it’s been a terrific time to be a trader, irrespective of making money (or not) the last few years have been a truly fantastic (in the true meaning of the word) time for traders, as we really have seen it all. However, with that experience came the added issue that personal mistakes may have become amplified, particularly during times of intense market activity and extreme change.
The past few years have also offered up an incredible opportunity for us to consider the lessons we’ve learned during the years and moreover consider which lessons have been the hardest hitting and which took the longest to finally sink in. We’re going to look at five distinct lessons, which constantly crop up as barriers for success. In highlighting them and offering up potential solutions we’ll hopefully shorten our learning curves dramatically.
“The lesson of money management I found to be the hardest to learn”
It can be an impossible task advising new traders that their likelihood of turning their initial $300 into $30,000 is negligible. Encouraged by tales of success on forums and blogs, from fantasists who claim to have turned $1,000 to $1,000,000, many new traders refuse to accept the reality and it’s not until they begin trading, initially gambling up to perhaps 10% of their account per trade, that the reality begins to set in. Losing half the account with five losing trades in series, if day trading off lower time frames, is not unusual. And only the stark comparison that the loss should really be only 5% maximum will shake the new trader from their beliefs. It really is the hardest, yet should be the simplest lesson to learn.
“I finally learned that fundamentals drive the FX, indices and commodities markets forwards”
No matter how many times we’re told as traders what really moves this market there is a stubborn enclave that exists out there in ‘trader land’ that refuses to accept the reality, which is that fundamental policy decisions and high impact news events drives these markets forward. Interest rate changes, tapering of quantitative easing being two of the biggest.
“I learned my lessons that technical analysis lags market information”
Price does react to major SMAs such as the 200 SMA, price does exhaust and retrace to what might be the self-fulfilling prophecies of the key Fibonacci levels, but for the most part price reacts to the fundamental policy decisions made by central banks and governments. Price does not react to the MACD, or other lagging indicators and no indicator leads, other than arguably price, visible through price action.
“I have finally accepted my limitations.”
There is some degree of comfort to be had by finally accepting that we are not a supreme being who’ll draw down profit from the markets at will. After we begin our relationship with the markets we rapidly begin to accept our limitations, both in terms of what we are capable of as a human being and what we’re capable of in terms of the relative profits we can regularly take from the markets. It’s important that we take on board that the attrition rate in our industry is massive and if we are consistently profitable, over a period of perhaps one year, then we truly are in amongst a fairly elite bunch of individuals who have solved the puzzle that trading constantly offers up.
“I now know I can grow my account by a realistic margin.”
Setting ourselves realistic targets is a theme we’ve run through many of our articles, the immediate ‘pressure relief’ we enjoy is significant if we know that realistically we can aim for yearly profits limited to perhaps two figures in terms of percentage gains per year, as opposed to 100%+. It’s worth repeating that the majority of profitable traders swing and or position trade and their decisions are made off daily charts and above. In simple terms we should consider trading less and making more. We should not fight the markets and we should constantly think in terms of averages. If the intelligence that we are delivered suggests that swing traders are the most successful traders and that they risk on average 1% per trade, that they stay in trades an x amount of time and on average make x amount in terms of account growth, then our realistic financial aims should be fairly obvious to strive for.
“It took me ages to separate the truth from the myths peddled everywhere.”
There is no short cut to bypass the substantial personal knowledge base we need to accumulate as part of our learning process. It takes time to absorb all the right material we need to operate successfully and it takes an equally considerable length of time to separate the wrong material. We are bombarded by adverts for our industry at every turn, especially if our browser stores our history after we constantly visit the main trading forums, or trading blogs. Moreover, we are cleverly bombarded by sophisticated marketers on forums where we decide to involve ourselves and these skilful marketers are generally poor traders looking to supplement their income, or what’s worse failed traders who have developed an uncanny knack of being able to deliver exactly what their audience requires. Unfortunately there is no quick remedy for identifying the truthful from the scammer, it takes experience, however, we are now fore-armed and fore-warned.