'An unfortunate thing about this world is that the good habits are much easier to give up than the bad ones…"
We published a frank admission by our losing trader earlier in the week. If readers recall the admission dated back to 2006 and revealed all the deadly 'trading sins' our trader had committed. So what advice could we offer so that he could quickly remedy his bad habits and become proficient and profitable given his failing trading issues consisted of; lack of discipline and money management? Surely the remedies can be easily implemented? Unfortunately it's not that straightforward and as many experienced retail traders will testify overcoming these two critical barriers to our trading success is one of the hardest obstacles to overcome.
I've seen many polls on trading forums over the years that have broken down (in percentage terms) what traders believe to be the key to trading success. The very 'best' have figures of 50-60% for money management, discipline and trader psyche, the average is sub 50%. The fact that less than half of retail traders currently engaging with the forex markets fail to recognise and rationalise the critical success factors of: MM, discipline and mind indicates just how poor trader education has been over the past decade.
There are countless methods (or strategies) that 'work', but as a unique human being re-engineering your 'trader DNA', in order to accommodate what's necessary to enjoy success, can be a step too far for many. The statistic and received wisdom, that only 20% of trades placed in the market are 'winning trades', gives a clear indication of the probability of success for an individual trader and no matter now many times you repeat the fact that "MM and psyche outweigh the importance of method" many simply close their mind to that reality.
If trader A has a strong technical knowledge base and a weak psychological profile for trading, and trader B has a much weaker technical knowledge base with an excellent trading psychology, who would you back to stay in the game the longest?
Advice is what we ask for when we already know the answer but wish we didn’t.
Losing Trader Advice
Assume you are wrong not right
The reason many traders lose is because when placing a trade they do so assuming they are correct and then let the market prove them wrong. If they changed just this one aspect when placing a trade to assume they are wrong unless the market proves them right then a lot more traders would lose less money.
Trading the plan comes after planning the trades laid out in your trading plan
The most important aspect above all else is the overall strategy; developing your own highly personal and optimised trading 'edge', containing the 3 M's, and sticking to these self imposed rules no matter what events unfold is essential.
Automation is not an automatic route to profitability
Until a trader has developed a trading edge that has survived years of fundamental market conditions any thoughts of automation should be ignored. You automate your successful strategy, you don't gain success by plugging someone else's MT4 script into your platform. There is no expert advisor (EA) that works both in ranging and trending markets. If it's an untried trading method and solution, personally developed by the trader, the temptation to tweak is often irresistible. At the first sign of failure with an 'out of the box solution' traders resort to blame the creator as they feel powerless to change.
Pick a method and stick to it
There are countless methods that work, I've never seen a bad one designed or published and we all know what we'd do if we saw a method that had 100 failure rate don't we? Many of us traders suffer from trader specific cognitive dissonance, a subject too complex to tackle in a short article, the basic definition being a feeling of uncomfortable tension which comes from holding two conflicting thoughts in the mind at the same time. One day the holy grail is a XX period moving average, the next day it is MACD or an oscillator. One day it's a 30-minute chart, the next day it is a 5-minute chart. One day it is buying the break of the first inside bar, the next day it is a pullback from the high…
Looking for the Holy Grail
Fledgling traders often hop from strategy to strategy when they find their latest chosen one doesn't work. It's a natural part of most traders development and evolution to try out most the different indicators and pattern recognition tools and it would be surprising if a retail trader, who has eventually made it through the various pain barriers, hadn't experimented with many methods to discard many and arrive at the one they feel most comfortable with.
There's many traders who simply don't get price action, or they fail to recognise certain patterns. There's many traders who abhor Bollinger bands and ichimoko clouds, feeling they're too random, not precise enough. Is it a left side/right side brain issue that encourages certain trader preferences that are a complete anathema to others, one side creative the other side practical? Whatever the reasons we all have preferences, but once we've found a method that appeals it's essential to experiment with it long enough to establish if it works. This is were a cold analytical approach reaps dividends, think like an actuary. Comparing a reasonable amount of data in order to establish the overall results is a must. If intra day trading off a fifteen minute time-frame what would represent a valid data set, 100 trades over a month? For sure it wouldn't be a handful taken over a few days.
Impatience is the antithesis of discipline
Fledgling traders often fail to spend enough time on a single method or technique before understanding and executing it properly. It's a child like statement but if you pick something and stick to it, you've a far greater chance of becoming successful at it. Once you've developed a strategy, arguably perfected it, then perhaps it's time to expand the horizons, but firstly you have to learn the set-up, your set up, 'inside out'. Traders also have to develop the patience to recognise just how many man hours it takes to really familiarise themselves with the complex business of trading. Traders who set out a trading plan in which they don't expect to be consistently profitable until year two and expect to lose x amount as an education fee along the way historically have a far greater chance of survival and prosperity. If traders start with this achievable goal in their plan then they're less likely to experience impatience and disappointment.
Set rules and be ruthless with the rules
Many traders ignore their rule set at their peril, for example, they may move their stop ten twenty pips as they become convinced the trend will turn. The importance of rules only becomes clear once they've blown their account. Rules instil good discipline which forms good habit. Good discipline is the hallmark of a successful trader. If you can't follow your rules then it's unlikely you'll be a successful trader.
FX trading is a unique business, as a self employed retail trader you'll experience countless emotions on the path to prosperity. However, there's very few other businesses that will test your belief system in the same manner that trading can and frequently does. I often liken it to putting a small trading bug device into your blood stream and asking it to discover all your frailties and insecurities, you can be sure that the trading bug will find and amplify them. Trading will test you emotionally in a unique fashion, it's therefore essential you know your own character and think how these characteristics, both the good and the bad, might affect your trading. Why not perform your own SWOT analysis; strengths, weaknesses, opportunities and threats and rationalise this in the context of trading?
All of the worlds greatest traders cannot agree about which trading method is best – But one thing they ALL agree on is that without sound money management, as the no 1 priority, you're not going to be trading long. Here's a few quotes to finish the article-:
- "My basic advise is don't lose money"- Jim Rogers.
- "I'm more concerned about controlling the downside. Learn to take the losses. The most important thing about making money is not to let your losses get out of hand."- Marty Schwartz.
- "I'm always thinking about losing money as opposed to making money. Don't focus on making money, focus on protecting what you have" – Paul Tudor Jones.
- "Rule number one of investing is never lose money. Rule number two is never forget rule number 1" – Warren Buffet.