2 Years of Trading - Lessons Learned (Part 1 of 3)

It has been about 2 years and well over 4,000 trades since I started trading full time in Q2 2011.  Over the past 20+ years, I've been involved with the markets on and off in one way or another.  But when I decided to return full time, I tried my best to be as humble and open with myself to start with a blank slate, just like a rookie or a freshman. 

Even though I wanted to restart as if I didn't know anything, when I first started learning about trading long ago, I could have told you nearly each of the lessons learned in these posts very confidently. 

I was like a teenager who "knows it all" only to realize decades later that the older you get, you really didn't know.  Experience has a way of doing that.  It's one thing to know, but it's another thing to truly understand and believe the words.

You will find nothing groundbreaking here in these mostly well known trading aphorisms, just views from yet another developing trader who has come to the realization that there are no secrets to trading -- except for passion, desire, hard work, and some luck. 

For readability, this post has been broken into 3 parts.

LESSONS LEARNED (Part 1 OF 3): TRADING FUNDAMENTALS

The concept of trading is simple

Trading is simple, just like golf.  Hit the ball with a golf club into the hole with the least number of strokes.  Conceptually easy, but as we all know who have tried, there's a lot of complexity involved with the details and execution.

Trading is similar.  However, there are many people trying to sell you a system or algo or model or "holy grail" with many bells and whistles, full of "proprietary" indicators, based on impressive statistical and mathematical formulas that can only be interpreted by ivory tower PhD's. 

But to goal for trading is to simply this:  Buy low and sell high.  Sell high and buy low.  Easy!  Right?

The entry method for most retail traders is based on 1) choosing a timeframe, 2) go with trend or counter trend, and 3) enter on a breakout or on a pullback.  Once you're on board, your trading plan should give you an idea of where you decide to take profit, or when to get out when you're wrong according to your risk and trade management parameters. 

For the most part, all systems are essentially a variation of the criteria above.  Learning the basics of trading is relatively easy.  There is no "holy grail" trading system, although I'm confident through my own analysis that there are certain trading setups that have enough edge for retail traders to make a very good living.  And when finding setups with edge, the point K.I.S.S. (keep it simple stupid) is also applicable.  This K.I.S.S. point is also something that makes more and more sense as time goes on.

However, I've realized that once you do achieve a basic nuts and bolts level of trading, the deciding factor between success and failure shifts drastically to your biggest trading obstacle -- your mind.

There is no right or best way of trading
When you follow or read many of the "trading gurus", many express the notion that their way is the best and only way.  That is completely, unequivocally false.  There are trading strategies and timeframes that work best for you.  We're all different.  I believe Dr. Brett Steenbarger's books explained it best.

Whether you're a macro / Fibonacci / chartist / volume profile / Market profile / volatility breakout / Elliot wave / DeMark / trend follower / channel trader / scalper / swing trader / or whatever type of model / system / indicator / methodology you prefer, successful traders have a certain setup that resonates for them (i.e. aligns with their strengths).  

I've found that the successful traders tend to have a way to "tell a story" about the market based on the construct that works best for them.  And more importantly, they have the discipline to execute their methodology consistently over the long term.

Finding your "style" is key, it's only a matter of time and/or luck
As rare as it is, some are fortunate to meet and marry their high school sweetheart and live happily together for the rest of their lives.  Some will be unfortunate to never find their better half.  Many think they found their soulmate, only to eventually get divorced.  I found this analogy similar to trading success stories.  The Market Wizards book series gives great examples of how successful traders all took different paths and approaches to become successful traders.

There are a very lucky few who find a trading method that suits them from nearly the beginning of their careers, and end up as successful traders for the rest of their lives.  Most do not (or can not) continue to put in the enormous effort hitting brick wall after brick wall, trying to find that trading strategy which ultimately suits their personality.  They end up as part of the 90+%, quitting before they find what works for them, with enormous psychological and/or financial deficits.

I've been there, chasing success by looking for one trading method after another, seeking a shortcut to a hot streak of winning trades that will finally help me get out of the psychological and financial hole, to vindicate me as not just another loser, but that as a fleeting winner.  This gambling mentality is not the best approach to long term success. 

However, this experience of chasing methods has exposed me to many trading systems and methodologies.  And this has helped me to learn what works for me and what doesn't, as well as gaining more knowledge about trading.  On a good note, it has considerably reduced my "upgrade-itis" desires to look for that brand new and shiny trading system.  Every time I look into something "new", it's like I've been there, done that.  I've become somewhat jaded of systems, which is good.

I've always known that the "holy grail" system of trading doesn't exist.  But after overturning so many rocks, I finally believe that it doesn't exist in the form we all seek.  There's a big difference between knowing and believing.

So the ability to pace yourself, so that you don't lose all your money or your psychological capital before finding your style, is critical to success.  However, how quickly you find "your system" that fits "your style" and personality can involve some luck.

Managing and exiting a trade is arguably more important than entry setups
Most new (and experienced) traders find it much more exciting to hear about a great system / model / indicator / methodology / holy grail that gets you long at the lows and short at the highs.  So how exciting is it to learn about where to put your stop losses, or how to scale out?  When you're starting off, you don't really think of how much you can lose, only how much you can win.  And scaling out?  Doesn't that mean you don't make as much money when you are right? 

Well, FuturesTrader71 promotes a coin toss SIM exercise where you enter long or short trade based on a coin toss, and then manage your trade according to predefined stop loss and profit scale outs.  He makes the point that the focus on entry setups are overrated.

As you adjust the stop and profit targets over various iterations of your experiment, you will become enlightened to the powers of what trade management can do to your bottom line results vs. an all-in all-out type management, even if the entries are based on a random coin toss. 

If you're not yet a consistently profitable trader, don't be surprised if you find that the coin toss experiment generates better results vs. your current trading.  Sad but true (don't as me how I learned, haha). 

You'll also see that trade management of your stops and profit targets are just as important (or more so) vs. your entry signals.

Risk management is key
For the beginning trader, discussing risk management is a BUZZ KILL.  The last thing you want to do when you're starting to trade is to limit your risk, because that will get in the way your huge profits!  But as time goes on, we all learn that this is mindset is the wrong approach for long term success.

If you don't have an edge, like gambling at a casino, they the best strategy is to bet all you have for just one play.  Then quit, because the more you play, the odds will eventually work against you.

But if you have a trading strategy with an edge, risk smaller per trade so that you can stick around around for the long haul.  Because even high probability strategies can have several losses in a row.  Therefore, if your per trade risk as % of portfolio is too high, you could eventually suffer a business ending drawdown, even with a solid high accuracy trading system.

The next post in this series is:  LESSONS LEARNED (Part 2 of 3): THE LEARNING PROCESS