Saturday, May 2, 2015

Things I Wish I Believed When I Started Trading

Although I've been involved with trading (i.e. survived) on and off for over 20 years, it has been 4 years since I've started actively trading again.  I'd be the first to admit -- although there are good moments, life of trading isn't always easy, especially when you're first starting.

For whatever reasons, I wanted to write some "things" I wish I believed when I first started trading.  Every time I see a new trader trader start to learn how to trade, I wonder if they really know what they're up against.  What most people don't tell you is that trading can be very difficult, especially mentally.

Don't get me wrong -- I love to read about peoples dreams and expectations, because it helps to remind me why I first decided to trade.  You MUST have those dreams, and they MUST burn a fire of passion deep within, or else it'll be too easy for for you to quit when the inevitable dark times come.  If you've been through the trading school of hard knocks, you know trading can get really brutal.

When I first started trading, I wish someone told had told me what to expect, and perhaps my journey would have been a little smoother, or totally different.  

Well, I take that back.  

Honestly, I probably wouldn't have listened or taken this type of message to heart.

Many of the "things" I list below are well known and no secret.  I would have said, "This doesn't apply to me."

We all need to learn the path ourselves, similar to how we need to discover what method and style of trading works best for us.

We're all different, so this list may not even apply to you.  But this is what I've experienced, and have also observed from many other traders on their (often failed) journey.  As they say, hindsight is 20/20.

You need to be a bit of a psychopath to do well as a trader
First of all, having certain psychopathic tendencies isn't necessarily a negative thing.  But on the other hand, if you are to become wildly successful from trading, you are not a normal person.  

The learning curve to trade successfully is brutal and takes a lot of time and energy.  Sure, when you're on a winning streak and on top of the world, trading seems so easy.  Get too confident, and the market will certainly punish you financially and mentally.

But to be able to keep pushing forward, when the chips are down, and you can't seem to do anything right when you book a loss after loss after loss.  It requires extraordinary effort, like psychopathic tendencies, to continue moving forward.

You can read an interesting article on psychopaths HERE.

Once you learn the basics, successful trading is mostly about behavioral modification / trading psychology
How many people do you know who have tried to diet or exercise or lose weight or quit smoking, or whatever, but couldn't succeed?  

Of those who are successful, how long have they been able to change their behavior?

Google up "Success rate for [smoking/losing weight/etc.]"  Is it coincidence that the % that fail are similar to those who fail as traders?

Chances are, you know many people who have tried to change their behavior, like a diet, achieve some level of success, then revert back to their old ways.

But I'm sure we all have seen success stories, long term success in some cases,  people who truly changed their ways.  

What were the successful people able to do?  They were able to modify their behaviors and habits.  It's very similar with trading, since natural human emotions are wired counter to successful trading habits.

Learn from other fields of study that require behavior modification or how to change your habits in order to succeed.

So in hindsight, what should I have done?

Learn as many trading setups and test them out, preferably live to work off the emotional charge of trading, but trade very small size.  Find ones that produce an edge for YOU over at least 50-100 trades, or more.

Pick your top 3 performing setups (or just ONE, per Trader-X below) and commit to them.  Get married to them, for better or for worse.  Continue trading super conservative risk management (RISK SMALL, risk well under 1/2-1/4% of your total account) and track how well you do with a more focused setups.

In the meantime, focus your energy on the behavioral and psychological side of trading, to see if you can simply remain consistent with your plan and execute properly.  If successful over time, this will build up consistency and confidence.

So, how do you work on your brain and make it stronger?

Self-hypnosis, NLP, meditation, mental exercises, sessions with a trading psychology coach, biofeedback, etc.  Like trading setups, there is no right or wrong way to work on this, only what works best for you.

Ultimately, finding what works best to strengthen and maintain your mental game will determine whether you succeed or fail as a trader.  It's not the setup or the strategy.  It's all in your mind.

If you're an adrenaline junkie looking for excitement, don't trade.  Find something else for excitement and keep trading "boring"
For a rush and excitement, perform in a musical band, compete in something whether it's chess or triathlon or to get on a game show like Jeopardy or a cooking show, go rock climbing, give public presentations, etc.  

Find a passion that will give you goals and excitement outside of trading.  But seeking excitement from trading will only make you lose money.  Because that's gambling.  And over time, you will certainly lose money if you gamble.

If your main goal is "I want to spend more time with family", don't daytrade.  Maybe consider swing trading. Or better yet, don't trade at all.
Active daytrading is more of a young person's endeavor.  When I was fresh out of college, I spent a considerable time learning to trade and I would easily spend 14-18 hours a day.  

There was no impact to family, since I was single.  I could blow up trading accounts, and oh well, no worries, since I have my whole life ahead of me.  

However, this not something as advisable if you have a family and are just learning to trade.  And are you over 30? [my hand is raised]  Then the odds are even more against you.

See an interesting article on about why there aren't many top traders over 30 years of age HERE.

Venture into the field of trading because you love it, not necessarily because you want to have more time for other things.  Learning how to trade successfully is all all encompassing and will take over your life. 

And if you treat trading as a hobby, then sure, that's fine, but it will likely be an expensive hobby.

Focus on mastering one setup
I should have listened to Trader-X, one of the original old school bloggers.  Read the articles HERE and HERE about "Chasing Success."  Read the comments, there's a lot of gold in there.

In the old school sushi restaurants in Japan, an aspiring sushi chef will spend years working in a restaurant and mastering various tasks, like simply making steamed rice for 2 years, before even being able prepare the fish.  

Seems a bit excessive, doesn't it?  But what a way to build discipline.  So what did I do?  

I went into stocks, then forex, then futures, then options, then stocks again, then options, then back to...

And within each of those asset classes, I tried discretionary trading, charts patterns, volume profile, Fibonacci levels, mechanical systems, quantitative/statistical outcomes, special situations, etc.  

A jack of all trades.

I have a personality that loves to research and to constantly learn.  So it's hard for me to just focus on one setup and only execute that for an extended period of time.  

Because it can be so...boring.  To just sit around waiting for one setup seems like such a drag, you know?  It's like a...job


When I've felt and treated like trading was a job -- you know, somewhat of a drag, somewhat boring (which trading can be much of the time), like something you didn't necessarily want to do (sitting around endlessly looking at a computer screen), but you know you have to do it and do it well -- those have been the times when I've executed my trades the best. 

Assuming you've successfully worked in the corporate world, don't immediately try and replace your salary
Before the latest return to trading several years ago, I was fortunate to be in the tech/financial space where 6 figure annual salaries are not a big deal.

So when I returned to short term trading, I wanted to replace that salary (AND MORE!) without really spending the time to develop a sound process and strategy that was in sync with my personality.

Why would I want to limit my losses to $20 and possibly gain only $80 on a great trade?  That's peanuts!  Wuss!  C'mon, I don't play the $5 tables in the casinos, so why should I do the same in the stock market?  Now add a few zeros to that and then we're talking!

Bad mistake.  Ego was talking.

Get a solid strategy and process in place first.  RISK SMALL (less than 1/2-1/4% of your portfolio per trade).  Achieve consistency.  Work on getting through any emotional and mental issues trading live.  Then scale up, slowly.  Otherwise, you are likely just gambling.   Which means you'll lose.

Trading small -- easier said than done.  

Most people will initially have the discipline of risking small, but will eventually get tired of the grind.  When the realization that someone working at McDonald's is making more than you, going for the big win out of boredom and/or frustration of a bruised ego is easy to do.

Sure, you might get lucky betting and winning big, but eventually, if you don't follow a sound strategy and process with an edge, it's only time before you lose it all.  I've seen it happen to many people.  On twitter, keep track of those traders who go quiet and/or permanently disappear.

For the first year or two (or more), it shouldn't be about the money, but about finding the strategy that works best for you, and creating a process that you can repeat over and over.  Make it through that learning experience with minimal tuition (i.e. losses).

If you're coming into trading from a successful career making respectable $'s, it will be especially hard to bet only peanuts while you learn.  Whether you admit it or not, you have a big ego, although you might call it confidence.

The temptation to size up will be big.  And you'll be lucky at times, or for weeks or months, but if you don't practice prudent risk management, the market will take it all back.  It's only a matter of time.

Learn to walk before you run.  Don't think about the money, just whether you executed your plan properly.  And RISK SMALL, especially while you're learning.

Trading is all about money, but successful trading has nothing to do with money
Yes, the basis of trading revolves around money.  So it becomes easy to focus on profits and losses for every trade.  

But this is one of the best ways to get sidetracked and to go down that dangerous road of emotional trading.  Focusing on money (especially if you're losing) can quickly lead to FOMO (fear of missing out) trades, along with impulse and revenge trades.  Once you're in that frame of mind, it's pretty much game over, and there's a high probability you will kiss your $'s goodbye.

Those who are successful traders will usually have a different perspective of trading -- the outcome of any single trade doesn't really matter, as long as the proper execution and position sizing has taken place.  

In addition, the routines of the processes/routines necessary to be properly prepared for the next trading day are repeated consistently over and over and over.  In many ways, it's just one big constant grind to be a consistently successful trader.

It's a lot of work, which has nothing to do with money.  So you better love everything about trading, especially all hours of research and homework you'll need to do when the markets are closed.  Otherwise, find something else that captures your passion.

If you're starting with a small account expecting to make a decent living, then yes, you're gambling
Study trading long enough, and you'll hear endless stories and mantras about "Don't risk more than 1% (or 2% or whatever) of your portfolio per trade.  Risking small works for people with a big account in order to make a reasonable living.

It's one thing to have a $1 million dollar account to try and achieve a 10% return in order to make $100k a year

But it's another to start with $5,000 and think you can make $100,000/year, consistently, especially if you've only been trading for less than a few years.

And let's say you are one of the few that does it.  Still, you can not quickly build an account without either risking a big % of your account on a several "high conviction" trades, and/or have a unusually lucky series of consecutive wins.  

For those of us who start with a small account and build their account to a sizable amount, there was significant LUCK involved.  Making big $'s from a small account -- it can happen, I've seen it happen, and I truly hope it happens to you!  I've seen people win the MegaMillion lottery, too.

But it's not a good idea to base your business plan and trading career on luck. If you do start with a small account, consider it additional tuition expenses, not your ticket to the big time.  Because you will likely blow it up either via losses or commission/fees.

And in the meantime, work hard and hustle to save up enough to open a respectable sized trading account.  Then you can risk a minimal % of your account so that you can statistically reduce your risk of ruin, but still generate reasonable account growth.

After you have a lot of successful experience, then maybe you can decide if you want to trade like George Soros, where you put all your eggs (and more) in one trade based on your level of conviction.  

But for the rest of us, that method is not a good idea.  

Expect AT LEAST 3 to 5 years to become consistently profitable, assuming you don't quit or blow up first
Huh, WTF?  That's a really long time, c'mon, that's BS, man.

What about "Joe Super Star Twitter Trader" who started making $10k/week after 6 months?  Or all those other people banking big bucks and killin' it week after week within a year after taking a trading class?!?

Sure, it's absolutely true that you will start killin' it in under a year -- very possible, but very rare.  Most of the time, it's just a lot of it is BS from people trying to sell you something. 

If you've been around long enough, you'll understand the saying "Trading is the hardest way to make an easy living."

For every Lebron James that skips college and immediately becomes a elite superstar in the NBA, there are millions of others that don't make it.  And even though he's at the top, Lebron continues to work harder in than nearly everyone else.

Same with trading.  If you happen to be "the one" that makes it big, I'd seriously be the first one to cheer you on and congratulate you.  I love to see people succeed.  

I'm not trying to be a buzz kill, but there's a 90+% probability you won't succeed and be around in 3-5 years, that's just the cold hard facts about trading.  It's a tough grind for the majority, you have to be a little crazy to stick around.

Want to increase the chances to beat the odds?  

When you first start trading live, keep losses really really really small for a long long time. 

This will be very hard to maintain when you go on a losing streak and feel that you need to chase your losses.  Or when you think you need to cover certain financial expenses every day/month (like your daily fees or housing rent/mortgage).  That's when the downward spiral often begins.

So be prepared to give your blood, sweat, and tears, and but plan to GIVE IT YOUR BEST for at least A FEW YEARS.  It's a marathon, not sprint, so pace yourself!  

Find accountability partner(s)
When you're in a slump, trading can take you into some very dark corners of your mind, places where you may never have experienced.

Gurus are easy to find, but finding someone who will both be totally honest with you, have your best interests at heart, and have the TIME to spend with you, especially during the really tough times, are very difficult to find.  

But having such a partnership could make the difference between making it as a trader, or not.

When things just aren't going well, most of us become quiet.  We don't journal anymore.  We don't blog anymore.  We don't socialize anymore.  We clam up.

This is exactly the time when we really need to have a voice of reason, to make sure we stick with our process.  That we continue to grind away, journal and continue to study and review our trades.

We all need someone who can provide the intervention necessary to hold us accountable and remain true to ourselves.  Someone who will help keep us from being our own worst enemy.

Do you best to find a solid accountability partner.

Mental Game > Risk Management > Exits > Entries
When I first started trading (and even now at times), I was obsessed with finding the Holy Grail of trading, which meant finding a new way to enter trades.

So this is how I thought as a beginner:

Entries > Exits > Risk Management > Mental Game

But what I failed to realize was how important exits are (just as much as entries).  And how about position sizing and risk management?  Most don't realize the huge impact of position sizing to your longer term success.  

Assume you have the same exact system trading in 2 different accounts.  But you use a different position sizing method for each of the portfolios.  Let's say on one system, you risk 1% of the account.  And on the other, you risk 3%.

You will see a HUGE difference in performance between the 2 account simply based on the position sizing.

Ultimately, your mental game is critical to making sure you're able to take your trading plan, and execute properly.  That's the area most traders focus very little on.

I believe successfully working with your emotions is the holy grail of trading.

So whereas beginners and losing traders focus primarily on entries, successful traders will focus much more on improving their risk management and psychology of trading.  

Do what the successful traders do.  Focus on your mental game.

Develop other sources of income
Investigate any long time successful trader -- nearly all have other sources of income. Whether it's from a trading chatroom, real estate, business, corporate job, etc.  

This very helpful to reduce the amount of pressure you have to make enough from trading in order to pay your bills.  In general, income from trading can be a very cyclical, where you never know if you're going to have a good week/month/year, or not.

But with additional sources of income, you don't need to worry whether you'll have a good or a poor month from trading.  And don't forget the pressure from whether or not you'll have food on the table and a roof over your head.  

You'll be able to focus on trading from the perspective of having the valid setups.  And if they don't show up, fine, you'll have other non-trading areas to focus on and to help generate constant income, and thus reduce your overall stress.

As a result, this makes you a better trader.

The Grind NEVER Ends
I thought that once I figured out THE method with an edge, life will be easy, the money will flow endlessly, the sun will always be shining, the birds always singing...


Life happens.  As soon as you think you finally have it figured out, the market will let you know otherwise (i.e. will punish you mentally and financially).

Just when you think everything is going well, there will always be something happening that will ying and yang with our emotions and mental well being, thus messing with your ability to execute and to trade consistently.

Your holy grail/bread and butter/go-to strategy will one day, gulp, stop working.  Or your internet or PC will glitch on you right as the market is starting to go against you. 

That's why I've found that the amount of success is often equivalent to the amount of work you put into grinding away -- doing your journaling, doing your homework, doing your practice, doing new research for new strategies, and so on, especially when the market is closed.

This could amount to many hours a day, beyond just executing your plan during regular market hours.

But wait, this isn't what I signed up for, is it?  Didn't I want a life sitting on the beach, only working a few hours a day?

Sure, this could be achieved, but most of those people (assuming they're not BSing), have spent thousand upon thousands of hours grinding away, until eventually getting to that point where they're at peace with how they trade.

And even then, they're so used to the grind, that it becomes "normal" and they become lost in their routine.

If you truly love trading, the passion will keep you going, regardless of the good times or bad, till death do you part.

HEALTH is most important
When Paul Tudor Jones (legendary hedge fund manager featured in the first Market Wizards book) was in a slump, he signed up with Tony Robbins (for $1 million a year) to be his business coach.  

And Tony's first advice to Paul was to become his best, he had to get into his best physical shape.  See the article HERE.

Unless you're physically fit, your mind will not be operating at its peak, and all of the above won't matter.  And remember, you can't do much trading buried 6 feet under.

* * * * *

If you've read this far, thanks for reading.  As if you didn't notice already, the keys to consistent trading success is having a STRONG MENTAL GAME, along with RISKING SMALL / conservative risk management.

And surprise -- these are the topics least interesting by most developing traders.  Coincidence?

Best of luck on your journey!


Unknown said...

Mate thank you for the write up and opinion piece here. I think you have covered a lot of the tribulations of a novice trader.
Any suggestions on some good mentors to follow?


CapitalStars07 said...

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Unknown said...

Really Great post!! This post really helps the newbies traders to learn very important things they should know about trading.

Well according to me, to be a successful trader, one needs to understand the importance of and adhere to a set of trading rules. Each rule is important, but when they work together the effects are strong. Currency trading with these rules can greatly increase the odds of succeeding in the market.

Treat trading like a business
Always use a trading plan
Avoid overtrading
Don't get unnerved by losses
Try to capture the large market moves
Always keeps learning and become a student of the markets
Protect Your Trading Capital
Always be alert to opportunities of making some money with less risky strategies as well
Treat trading as a business and keep a positive attitude
Never blame the market for your reverses
Understand that there is no holy grail in the market
Use Technology to Your Advantage
Develop a Trading Methodology Based on Facts
Risk Only What You Can Afford to Lose
Keep Trading in Perspective

Understanding the importance of these trading rules, and how they work together, can help traders establish a viable trading business.

Trading is hard work, and traders who have the discipline and patience to follow these rules can increase their chances of success in a very competitive arena.

Jhon Marshal said...

This is one of the most incredible blogs Ive read in a very long time. The amount of information in here is stunning, like you practically wrote the book on the subject. Your blog is great for anyone who wants to understand this subject more. Great stuff; please keep it up!
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Unknown said...

Very nice post in market there are so many fundamental and technical factor that affect your profit and loss but it is important to maintain the proper strategy and mindset that during investment or trade. if some one making investment by his individual risk appetite as well as with support and resistance level that would be better.Equity tips

Al said...

Hey Gove Under,

How are you?

Happy Holidays ! ! !

I have been trading for about two years and a user of Tradervue.

Tradervue recommended you for someone who could help me sort through the Tradervue data and metrics so as to understand how to modify and improve my trading.

I have more broader questions to ask if with in your services.

Let me know.


Al said...

Forgive the typo, Grove Under !

Grove Under said...

Hi Al,

Great to hear you've been using Tradervue for so long, it's an awesome tool!

Feel free to email me. I'm on and my username is: underthegrove

Happy Holidays!


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