So I was at my circuit training class on Monday and during the warm up (a few laps around the gym and some stretching) I got talking to a guy I hadn’t seen for a while. Last time we spoke he was looking for a new direction. Having been an accountant he felt he’d become stale, he wanted a fresh start and a new challenge. We got onto the subject of trading last time we spoke due to him having a temporary assignment at a subsidiary of Deutsche bank, a former very reputable FX broker I’d used in the past.
On Monday he proceeded to tell me about his foray into the world of spread betting, he had been ‘punting’ on the UK FTSE 100 primarily based on his fundamental views and pattern recognition. We didn’t have too much time to dwell on the subject, (believe me this training session taken by an ex services guy leaves you little time to breathe, let alone talk), but during our few laps he told me he’d wiped out his account. Perhaps impolitely I asked how much? He said he’d rather not put an exact figure on it, but I was relieved to hear him say that it wasn’t in the thousands. I had this overwhelming compulsion to offer help and advice, but where do you start given my belief is that it takes 2-3 years of full time total immersion and dedication in our industry to become consistently profitable? And my belief is steadfast; there’s no such thing as shortcuts, short cuts will leave you SHORT and there could be death by a thousand CUTS.
“Books!” was my first thought, he needs books. Mark Douglas’s, Trading In The Zone and the Jesse Livermore classic, Reminiscences Of A Stock Market Operator. Why these two? Well firstly TITZ hits most new traders right between the eyes; it’s not method it’s money management and your mind that’ll win through. Secondly the biography on Jesse I always recommend as a test of a potential trader’s overall level of intellectual market curiosity. It’s not about whether or not you ‘get it’, Jesse’s methods and technique had very little in common with how a retail forex trader would operate today, it’s more a test as to how (and if) the book stimulated you.
Whilst we can all hold subjective views on a book’s relative merits Reminiscences is, in my humble opinion, a ‘gift’ to the trading world we inhabit. I mentally debated whether or not I should lend him my two copies of these books, I’m a generous person so I was inclined to do so. But then I remembered how important these two books were on my journey, even to arrive were I sit right now in typing out this advice. One summer I often took Trading in the Zone and ‘reminiscences’ to a secluded beach surrounded by huge rocks shaped by the power of the Irish sea and sat there sheltered for hours devouring their content. These books are individual and ( I realise this sounds a bit ‘sad’) precious to me. Whilst I’ll gladly share and discuss the content I couldn’t possibly hand them over.
It’s essential that he buys the books or conveniently (given the time of year) asks for them as Xmas presents and makes his own decisions and discoveries. He could put his feet up, whilst the same old yearly tat is on tv over the Xmas period, and become absorbed into the worlds of Douglas and Livermore, what bliss..
But what other tips would you give someone making their first tentative steps into our industry as a retail trader? How could you possibly strain, sieve and produce a concentrate of everything you’ve learned over perhaps decades of private investment and speculation into bite sized chunks without making them appear to be soundbites? In no particular order I thought I’d assemble a few short tips, most needing very little explanation. Please feel free to add to those by way of email or the comments section.
Look after the bottom line and the top line will take care of itself. Make sure your money management is sound, perhaps risking no more than 2% of your account balance per individual trade.
Construct a comprehensive trading plan. A thorough article on this subject is already on this blog. Diarise a journal early days and refer back to it from time to time to realise how far you’ve come over a relatively short space of time.
Luck plays as much a part of trading success as ability, but probabilities are everything. The luck of discovering trading can often arrive by being in the right place at the right time, the more you put yourself about in this industry the luckier you’ll get.
You’ll probably be successful if you stick to to your backtested proven technique than dipping in and out of others or bailing at the first sign of failure. You have to measure any strategy and edge’s returns over a significant series of trades, perhaps fifty on one currency pair if swing trading.
Engage in and with fellow traders on one trading forum only, without losing sight of why you’re there; to absorb as much trading. info as possible, perhaps create ‘real’ relationships with like minded traders and to be made aware of new market developments. Be aware that many of the regular members are sophists with agendas and tools for sale.
Patience and humility. After a few dozen trades I thought I knew how to trade. After a few hundred I thought I was a trader. Now, after a few thousand trades, I know what I must still learn in order to one day be a trader.
Win pennies consistently before you win pounds. Use demo accounts with the same level of discipline as you’d give a live account. When live use an amount that will annoy you if you lose it, but won’t critically affect the quality of your, or your family’s life.
Traders who don’t make mistakes don’t make money. You will make thousands of mistakes during your trading evolution. Embrace that inevitability, it’s part of the learning curve.
You have to discover your own way of trading, there is no point in attempting to copy somebody else’s method.
Buying ‘black-box’ forex systems is a waste of time and money. You have to learn this business by doing it yourself, all of it.
Buy trading books that have been recommended to you, particularly recommendations on trading forums.
The road to profitability can be quicker and less costly if you accept from the outset that you know very little and prepare to put in the time to do proper research, including only paper trading at first and then only committing real money when profitable on paper.
Ignore people who say if you have determination and perseverance and you are committed you can make it, this is wrong. Neither of those two (arguably laudable) characteristics will make you successful in trading. Whilst cultivating a winner’s mindset is essential it won’t make you a successful trader. Many people study “the markets” ten hours a day for years with all the help, advice and tools to succeed at their disposal and are not profitable. You have to find the right path (for you) out of the infinite number of possibilities. There is an element of luck in this. Once you have found the path you have to stay on it and that is a skill in itself.
Technically speaking, price action provides the biggest clues as to where price is headed if you can learn to read it. You have to learn price action by way of candlesticks and or bars and I state this as a ‘hard core’ technical trader who uses indicators constantly, but cements and underpins each trading decision with price action.
You really don’t have to know what will happen next to make money, it really is a question of playing your trading edge, whatever that highly personal edge for you is.
Having an edge, understanding your edge and playing your edge requires different skills. Consistently profitable traders are those that have, understand and play it.
Trading is a marathon not a sprint although we all start out hoping it’s a sprint. Prepare yourself from day one that it’ll take years to become proficient and profitable, can you fund yourself during this time?
Consistency is key, many successful traders relate to how they find the job a drudge, boring, they’ve simply reached a stage were they’re no longer trading by the seat their pants. But they’ve all put in the hours and taken a highly disciplined, professional and respectful approach, to what is a highly complex profession, in order to view their profession in such a way.
Trading doesn’t have to take over your life although to get to the stage of being a consistently profitable trader it probably will.
Once consistently profitable you may get parts of your life ‘back’ that you sacrificed getting there. Perhaps you’ll discover new life enhancing benefits or things about yourself in your trading journey. Time is something that you cannot get back so enjoy the trading journey, don’t wish it away, embrace it.
Realise that learning how to trade should be free, or at least very inexpensive other than the funding yourself cost until you begin to make money. You can trade for a very long time with a small amount of capital. In that time, you can learn a great deal at little or no cost.
The trading business can often be a question of simply staying in the game as long as your initial accounts will last. You can’t continue your learning process if you’re out of the game.
You can trust in this business. Your broker wants you to win, don’t buy into all the negative horror stories constantly regurgitated on trading forums. Communicate with your broker, ask questions, if they’re in the UK why not take a day out for an office tour, you may be surprised at where that ‘open door’ can lead. Get out of your comfort zone meet people.
It is a very difficult task to learn this business ‘part time’ while still doing the day job. If this is how you intend to learn and then trade you must be prepared to spend double the average time to be become profitable.
It’s a long hard road (thousands upon thousands of hours screen time) to find out what works, and more importantly what doesn’t. When you do find something that works you need to develop it into some kind of repeatable method that makes more money than it loses in the long run and keep doing it over and over.
Nobody knows what is going to happen next, not the guy on Bloomberg, not traders on forums claiming to be the bees knees, your coach/mentor doesn’t know. Anyone who claims they do either has inside information, is the ultimate decision maker at the Fed, ECB or Bank Of England or is quite simply delusional.
The ‘mind issues’ far outweigh the importance of a strategy/system. Whilst it’s impossible to place an exact percentage breakdown I’d hazard a guess that your edge in this game is 70% psyche and money management (strict MM helps support a healthy psyche) and 30% method.
Always be looking at the ‘big picture’, be able to quantify what is actually ‘going on’ out there due to the fundamental macro economic picture and as a result tie this all together in a strategy instead of solely trading entry on indicators on a certain timeframe.
Always view trading as a probabilities game, and understanding the importance of taking all your trades. If you don’t take all the trades according to the system then the probabilities will become skewed.
Never trade full time if you are on an unsure footing financially, stress about loans/rent etc will only be played out in your trading decisions, which will ultimately kill your account.
For months and months I studied charts, looking for Dojis, Hammers, Shooting Stars, engulfing patterns, black crows, you name it, I’d read and tried it. On a chart, I could pinpoint a lesser spotted tripled-eyed green leopard sitting on a fairy’s toadstool, ( I just made that up, no such pattern exists) Then there were trend-lines, MAs, s/r, Fibs. In my opinion it’s often meaningless without looking at volume.
I’ll close with perhaps my main advice, slow it down, all of it. Slowing down translates to ‘working off’ higher time frames. Slowing every aspect of trading down, taking trades off higher time frames, thinking every decision through helps to eliminate noise from every angle. You’re very unlikely to be able to replicate what the ‘big boys do’ from the comfort of your home office. Part of your edge is realising where you sit in the food chain; hoovering up the crumbs brushed from Deutsche Bank’s table. As retail traders we find the gaps they create, we don’t make the market, we don’t alter the market. We trade with the trends they create in their wakes when they turn their massive tankers.