As regular readers of our columns will no doubt testify we often have one eye on the new traders in our community when we pen our articles. Having seen so much erroneous advice offered to new traders, on various forums and through other brokers’ websites, we decided to take a stance and offer what we consider to be; clear, unambiguous, simple to read and more importantly extremely simple to act upon advice in our trading articles. Our “Between The Lines” section aims to educated our readership on all aspects of trading, ultimately helping our traders develop and define an edge to their trading.
In this article we’re going to explore what signs a retail trader, fairly new to trading and who’s currently struggling with the whole process, should look for in order that they continue trading as they know, perhaps instinctively, that they’re possibly very close to enjoying success…
There are many excellent one liner phrases/pearls of wisdom that traders have used down the years to describe trading. One of our favourites is that trading; “is the hardest way of making easy money” as it perfectly illustrates the simplicity of our mission; to take money out of the markets. But many of us are aware how difficult it is to master that seemingly simple process. In order to make accounts grow, by taking money out of the market-place, we have to be right more than we’re wrong, with a greater reward ratio (R:R) than 1:1.
We have a uniquely simple business proposition as retail traders. As small business operators we don’t have to source stock, find customers, match the stock to customers’ orders, deal with invoices, staff, employment laws, government forms, operate premises etc., etc. Our supposedly ‘easy’ method of taking money requires simple, basic skills that will eventually develop after time and considerable practice. It really should be ‘easy money’. But as we’ve alluded to many times, in this and our other columns, we tend to make that practice far harder than it need be, by over-complicating the whole process.
For new traders the process of reaching the supposedly ‘easy money’ stage can often appear to be a daunting and distant hope, particularly if they’ve recently experienced a bad run of losses in the market place. So are there any metrics and milestones by which new traders could gauge their performance to establish if they’re on the right track? Are there any personal development metrics that we could gauge our performance by, in order to justify staying in the industry until we’re consistently profitable? We think there are and we’d like to share them with you and as always we’d welcome any contributions or observations through our comments section which appears after the article.
Have you followed your rules?
Maintaining discipline, throughout intense and frustrating periods of trading drawdown, can prove to be incredibly tricky. It’s so tempting to alter the original blueprint plan when things aren’t going your way. You’ll close the trade when it’s just become profitable, you’ll widen your stops as you’re sure the trade will come back, maybe increase the risk on one or two trades as if “these next two are big winners” it will put you back level in your trading account…There’s many more discipline tests that we can be tempted by and surrendering to any (or many) can lead to the probability curve of your trading plan being severely compromised.
If you have stuck to your plan, through many of the temptations listed here then it suggests you have what it takes.
Have you blown up an account, realized why and remedied the cause?
There’s two schools of thought regarding the action of blowing up trading accounts; many mentors will suggest that it displays an ill-disciplined trader mindset and overall poor application to trading. Whilst others’ suggest that it’s a ‘right of passage’ that all traders must go through, similar to walking over hot coals in certain communities. It’s a painful but necessary ritual to become enlightened. The critical issue is that if blowing up an account it must only be a small percentage of the overall savings you’ve set aside for trading. There’s little point in placing all your savings into an account and blowing it up and that’s where the opinions on blowing up an account have become confused. If you have ‘planned’ for the eventuality that your small trading account may endure a margin call and it does, then that’s a world away from trading blindly until your account and savings are reduced to the point where you cannot recover.
Have you traded your overall system for a reasonable enough period of time and taken enough trades in order to make a reasonable assessment of its performance?
It always leaves experienced traders baffled as to why new traders fail to grasp this fairly basic concept. Perhaps it’s the thought that the trader is being too negative which prevents traders from addressing this critical success factor at the outset. Let’s accept that we’re a day trader. Firstly we must set a drawdown limit, let’s suggest 15%. Then we suggest a risk per trade, perhaps 0.5% account balance per trade. Therefore we’d need circa 30 losing trades (in series) before our drawdown limit is hit, which is a highly unlikely scenario.
Perhaps, more likely, we’d experience a 40:60 win loss ratio, therefore we’d need to judge our strategy’s performance based over circa 80 trades before we’d be in a position to judge its effectiveness. As day traders we may take three trades per day on average, roughly 27 trading days to reach our 15% drawdown limit based on the reasonable probability score we laid down earlier of 40:60. Therefore we’d need to trade our system for nearly a month before we could judge it to have failed. If you’ve maintained your composure to see your plan to the end, including the drawdown limits you set out at the outset before deciding to stop trading and address the issues, then you’re on the right track to becoming a consistent trader.
Have you identified your mistakes, what aren’t mistakes and learned from them?
How many of us really enjoy admitting that we were wrong? As an aside here’s a line from the play-book of the great economist John Maynard Keynes; “when the facts change I change my mind, what do you do sir?” It’s worth remembering that phrase the next time you’re confronted with a severe swing in the market that you (and millions of others) didn’t see coming. For example, an ECB or FOMC member may issue an unpredicted policy statement that dramatically reverses current policy. It’s not a mistake that you couldn’t spot, it’s an ‘outlier’ high impact news event that has fundamentally changed the value in certain markets, the facts have changed, the real challenge is how to react and adapt, calmly and precisely. Whilst you should note your mistakes and look to eradicate them it’s important that you don’t blame yourself for events outside of your control.
Are you still committed? Are you still enthusiastic? Can you still visualise yourself being profitable?
We’ve clustered these questions together as the resultant effect is one in the same; have you still got the same levels of commitment, enthusiasm and vision as when you began to climb onto this steep learning trading curve? And here’s the killer question, have your ‘levels’ increased? It’s not a trick question, it’s perhaps the most perceptive question we could ask in this article. If your levels of commitment and enthusiasm have increased then you haven’t caught a trading bug, you’re beginning to instinctively realise that you’re very close to making a breakthrough of sorts and to give up now would be a huge disappointment and one that you may come to regret.
