When I first started full-time trading, I was always looking to find/figure out a system with best win-rate and highest return possible. As years passed by, I came to terms with other tenets of trading that ‘actually’ makes the difference in shifting from unprofitable to a consistently profitable trader. This post is about those tenets and it might sound trivial to seasoned traders but it is always good to revisit basics every now and then. We tend to ignore the basics as we move on (this applies to all kinds of profession/business).
1. Trade Plan – In order to be successful, we must have a detailed trading plan that we trust, respect, and most importantly — follow (easier said than done, right?). We wouldn’t decide to build our next home from scratch without blueprints/floor plans, why would we step into trading without a plan?
Firstly, we need a written plan that goes over rules. I repeat – ‘written plan‘ covering every scenario of our trading profession. These are when we will, and when we will not trade. I am not just talking about technical analysis, I am also talking about “I will not trade when I am not 100% focused and in the zone”. “I will not trade when am traveling or my dog is sick” The trading plan also needs to describe, in detail, our trading methodology. Describe our setups. What actions do we take when we get stopped out? What actions do we take when a trade is going against us?
Secondly, we must be ready to execute our trade when our setup shows up and meets all of our rules. If we hesitate as the market unfolds, we can/will lose money.
Hope we all have written rules and read over them every day to make it second-nature. After few months, we should be able to say if we have a setup or not in 20 seconds (looking at any chart).
2. Focus – Trading profession must be respected. We must be focused. Disciplined. No two ways about it. We can’t have constant interruptions and distractions around our workplace if we expect to become a good trader. Many traders say it is like war, we are literally doing battle for life or death in the trading world. This is the only profession I know of, wherein we put a part of our net-worth on line every single day. How can we expect to win if our phone is constantly ringing, or if our kids are playing in our office, our dogs barking, or if we are replying to emails/forum posts? I don’t think those things would go over well in a real battlefield. The amount of respect and diligence we give to a profession is directly proportional to the level of success in it (Work is Worship)
Our trading environment needs to be calm, private, and comfortable. Turning our cell phone off (or atleast put on silent), closing email inboxes, and explain to the family that we cannot be interrupted. Make ourselves comfortable, relax. Buy a nice office chair and comfortable table. We need to be “in the zone”.
Many of us enjoy the ability to work from home, but it must be treated with respect. If we can have a few uninterrupted hours/make great trades and earn a living, then have the rest of evening to devote to the family (am not sure what to say to folks who trade equities and commodities in a single day – work/life balance is the biggest factor in determining happiness in any profession)
3. Education – It is interesting how many traders believe they can make 50 lacs/year after one year of looking at charts and reading books. Why would one think that trading requires less education than a lawyer or a doctor? These professionals spend years, learning their trade. A successful trader should expect to spend years as well.
Education is not free. Most successful traders blow out their account at least once or twice before they went on to make money. It might help to think of this as tuition, instead of as losing money. Education is expensive in other ways as well, not just financially but also mentally, emotionally, and time consuming (a typical professional degree takes 4 years). We have to devote ourselves to it in the same way a professional athlete would do before running a marathon. They don’t just wake up one morning and grab something at a restaurant to eat before they run the marathon. No – they train for months to condition their bodies, have strict diets, follow rigorous training day-in/day-out.
We need to condition ourselves for trading, and to do that we have to educate ourselves. Books, videos, classes, the Internet, and probably most important – ‘firsthand experience’ which takes us to the next point.
4. Experience – Education is important, but experience is key. Why do employers prefer candidates with not only college degrees but also on the job experience? Simple – experience is the most powerful way to learn/hone our skills. Putting what we’ve learned into practice is not easy. The experience of actually trading, not just reading about it, is what will really motivate us to learn and be successful.
We can read about support and resistance, or read about taking the emotion out of trading. But until we experience a trade that stops on some value because of support/resistance, and furthermore, it stops us out of a trade that we were confident would be a winner, then we really can’t fully understand the importance of what we read about (support/resistance and emotions). Best analogy I can think of – reading 100’s of books about swimming and dreaming to be a great swimmer. Unless we jump into the pool, real swimming can never be learned.
With experience comes wisdom, and wisdom is required to properly assess our trading. I think most successful traders had that “ah-ha!” moment when they realized that they were the problem (ie: look ourselves in the mirror, the problem is that we are not following our own rules). We cannot have that epiphany if we lack the experience and wisdom to be a proper judge, even of ourselves. Very important point to remember.
Everyone will recommend that new traders do ‘demo-trading’ until they are profitable. But they also realize that 1) they didn’t follow this rule themselves, and 2) even if they had, they would not have learned the same lessons until they traded and lost ‘real’ money. Demo trading is great (am not striking that down), but it is more like being on the outside looking in. It is not until we’ve placed real trades and lost enough money to be “painful” that we will start to change our ways, our rules, ourselves. That is because we are gaining experience by learning from the past.
5. Tools of the trade – The proper tools are essential for making money in any profession. Tools can range from our computer, our software, our internet connection and backup facilities. We need to probe our tools for weaknesses and if it is displaying a major flaw, correct it. For instance, don’t trade if the Internet connection is unreliable. We need to correct that. Don’t trade if our computer is too slow and our charts freeze during heavy market volume. Don’t trade if the broker terminal freezes during busy market hours (seems to be a popular topic among traders nowadays)
Indicators are also tools and many traders have way, way too many indicators on their charts. Some traders have none, trading strictly based on price action. If our chart has too many indicators, we will get conflicting signals. I suggest starting with a clean chart, and then adding only the absolute essential tools/indicators(if one trades based on indicators) to it. Too many of them can lead to ‘paralysis of analysis’.
Also want to emphasize the importance of picking the right broker (w.r.t cost) and data feed, not to mention charting and execution platform. Official data feeds are not expensive nowadays and am sure we would not let our head go into a MRI machine if we know the lab is using unauthorized MRI machine to image our skull. All these things matter in the long run!!
To end this post, take what I have said to heart. Trading is not for everyone – so if we are having trouble accommodating the above-mentioned information, then we might want to consider another profession. It would almost certainly be a lot easier on ourselves, our family, and our bank account. However, for those of us who push onward and conquer our demons, the benefits of being a successful trader are endless. It is, after all, the near-perfect job – in my opinion.
Force ourselves to realize there is no Holy Grail. The way to make money in trading is not by having the perfect indicator or automated strategy or the perfect Amibroker AFL. No, no, no – the way to make money in trading lies within our ability to understand ourselves and become an expert in the market we are trading. There are no short cuts.
Happy trading !!