Get Beyond the Hard Part
Accept that the Market is Random
Only Takes One Trader
Review Your Equity Curve
The Endless Cycle
How I March Right Back
No More Tips
Too Much Noise
Truly Accept the Risk
Knowing When to Take Profits
Recognizing when you are wrong
Take Every Setup that fits your System
Just Take the Trade
Recognize that the market is limitless
Trading Psychology and Self-Reflection
Develop a Winning Attitude
In Summary
Avoid Analysis Paralysis
Most traders start out soaking up information. This information will come in the form of stock picks, books, seminars, trading coaches, gurus, you name it. Your personal beliefs, background and personality traits will then take that information and digest it into what I call your foundation for trading.
Next, you will take this newly found information into the world of the market. This can be exciting and scary at the same time. If you are lucky you will put on a few trades and things will go smoothly. Your account will grow. If you are unlucky (uneducated, actually) , you will quickly realize why 90%+ of traders fail within the first few years.
No matter how you start out you inevitably will have a loss that will discourage you. This loss, depending on your mindset and size of your trading account, may scare you.
You will feel a sense of helplessness as your trading account shrivels much quicker than the time it took to build it up.
Get Beyond the Hard Part
This is the phase where most traders will spend their entire careers. In any business analysis of the company’s performance to drive further growth is paramount. Trading is no different. The only problem is you have to decipher when it’s time to tweak your model versus when results are just noise from the market.
Think about it, if you have just spent hours, weeks or months researching a system. This system on all fronts looks like it will give you an edge over the market 60% of the time. In addition to this edge, it also provides you 2-to-1 in terms of the size of winners and losers. By all accounts, this would be considered a system worth testing in the real world.
Of course, since the market is random, let’s say out of your first 6 trades only 1 works. The seasoned trader will know that it’s a matter of placing a large enough sample set of trades for things to net out. The junior trader or the trader stuck in the analysis paralysis phase will without a doubt, change this system before it has time to bloom.
As I’m writing this, it sounds so obvious that you have to allow time and opportunity to work in your favor. But when it’s your money on the line your first reaction is to analyze and correct. It’s such a normal human reaction to protect oneself. Yet this type of behavior is what traps us as traders and never allows us to reach our full potential.
On a personal note, this type of system will fail and you will run out of money (the term the industry uses is “blowing up your account”). The reason is that, in a system of coin toss where the odds of betting “heads” are 2:1, (50%), it is a proven fact that in 20 or so tosses, a “tails” can come up 20 times in a row. Yes, eventually the number of heads and tails will even out, say, in a million tosses, but in the real world, you will run out of money in this 50% system.
Bottom line: if there’s a trading system that works consistently, it hasn’t been invented yet. This leaves you with the fact that…….
Accept that the Market is Random
Understanding that the market is random is probably the key tenet of becoming profitable. I am convinced that predicting the next action of the market (remember Johnny Carson’s “Karnak The Magnificent”?) can’t be done with any degree of certainty. Elliott Wave, harmonic trading, point and figure, classic breakout estimates, etc. etc. At times the market would adhere to my analysis, which would make me feel a sense of control. However, there were times when the market would pass through my key level as if it didn’t exist. Now that I’ve been doing this for over 10 years, I can say with certainty that any rational analysis does not exist – if you’re looking for a “system”. The only reason the market would respond to my analysis is based on whether or not the other active traders who can influence the move of my stock are on the same page as I. Hence, the basis of “reading” candlesticks.
Only Takes One Trader
It only takes one trader with enough capital to completely invalidate your analysis. It doesn’t take a herd of people yelling and screaming on the floor or placing thousands of trades over the internet. Remember, it only takes one person somewhere (with a lot of money) to decide that the stock should go higher or lower.
So, where does this leave you? I will never tell you to not perform some level of analysis because I believe in technical analysis. What I am saying is you must remove any emotional attachment for what the market can or will do next. You have to believe that the market will and can do anything. Until you come to this realization you will always cut profits short or get stopped out short of the breakout move, because your analysis has told you that if x happens then y is right around the corner.
Review Your Equity Curve
People spend a lot of time analyzing their individual winners and losing trades looking for some sort of insight that will help them crack the code. Maybe if I choose a different moving average or if I cut my losses earlier. These all are helpful things when looking at one or two trades, but how would this impact your bottom line?
Have you honestly maintained the same system long enough to even analyze how minor tweaks could help?
For me reviewing individual trades is critical, but even more important is the review of your equity curve. This allows you to take a bird’s eye view of your trading performance. If you plot your equity curve you will see some of the same patterns that you see in price charts.
The Endless Cycle
I shoot for having winners 70% of the time. Or rather, I shoot for no more than 30% of my trades being losers. And of those 30%, the losses must be small. Over the last 3 months every time I hit 70% I would have a nonsense trade that backs me off my high and then I quickly march right back up there again only to be denied. What hit me just his past week is that every time I approach the high, my appetite for risk diminishes.
How I March Right Back
I worry that if I lose my principal I’ll lose my motivation for trading. I know that if I lose my appetite for risk I won’t have the mindset to be a trader. Remember, a trader MUST accept the inevitable risk. The key is to recognize the risk but know myself and maintain a confident attitude, knowing that I can’t lose much on any trade. In other words, I won’t let a trade get away from me. That’s what I teach in my day trading course, Trading Mastery For Financial Freedom. This is because I wait for a setup where I have an “expectation” and pull the trigger, and with confidence. If the trade goes as I expect, I stay in it. If it doesn’t, I don’t wait to be proven right. The market does what it does, and it is always right. In this case, I’m wrong and I get out right away.
So, my point in telling you this story is that when you review your equity curve you can see clear as day psychologically how you are processing the information presented to you by the market. It is better if you start your review of your account first by looking at the equity curve before you go into each individual trade. This will let you know if it’s really your system or if it’s you sabotaging yourself. My advice is to paper trade until you can trade with confidence, but with an element of respect that the market is always right, and I’m not.
No More Tips
The one thing the internet provides as a ton of market analysis and opinions. There are literally hundreds of sites that will tell you what the market is going to do next. Watching the pre-market news and pundits, I keep the info more as entertainment in nature rather than giving me an indication of market movement. And remember, we never know what the market is going to do next.
Then there’s the talking heads, the gurus on morning TV. One says the market “may” go up, another says the opposite. It makes me laugh to think that anyone can take their drivel for market information. Entertaining, yes.
Too Much Noise
Just to make sure I didn’t lose you there I just want to say that all the market noise, er, news, from all sorts of people should be limited. I try not to let myself be swayed to giving me an idea of what the market is going to do, because I know it’s just noise. So, regarding the noise and it’s likelihood to sway my trading decisions, I generally simply regard it as entertainment and don’t let it confuse me or impact my decisions.
Once I shut out all of the “noise” my equity curve never looked back. The reason being is because I could interpret the market for myself and no longer relied on other people to make my mind up. That is the same reason you can become successful as a day trader.
Truly Accept the Risk
Some of you reading this will say that you always place your stop and are willing to lose the money. While you may say this, you really don’t want to lose the money. You’ll place your stop out there, which could be pretty far off from your entry price. Over the next couple of hours or days depending on your timeframe, you will slowly move the stop up because the stock is not “acting” properly. Sure enough, at some point, your new stop order is triggered right before the market takes off. If this has happened to you, it is one of the most frustrating events that can occur in the market. Your analysis was right, the market, in the end, gave you what you expected; however, you were not willing to accept the randomness of the market and the fact you could lose money.
Until you accept the risk, you will interpret the noise of the market as a potential threat and will find some way of rationalizing to yourself that you must exit the trade now.
Frankly, I’d rather get out and accept a small profit. Remember, you never lose by taking a profit. And as for the lost opportunity, there’s always another bus (my students have heard this in my day trading course).
Knowing When to Take Profits
What is your trigger for exiting a trade as a winner? Please don’t give me some nonsense about this or that key level. Unless you are intuitively trading for profits, which are probably less than 1% of the trading population, how exactly do you book profits?
Again this concept sounds simple enough, but when you factor in that most traders have an expectation of what the market will do next it makes this almost an impossible task.
Do you find yourself holding on for what your analysis says the market should do next? You must figure out when it’s time to walk away with the cash to move on to your next conquest.
Recognizing when you are wrong
Recognizing when you are wrong does not mean the stock deviated from how your analysis stated things should go. Remember, the market is completely random. Understanding when you are wrong is something you need to define. For me, it’s how much a position goes against me before I see a profit. Once this happens things will go one of two ways for me. First, the market will give me the mercy exit opportunity and will close the position with a minor loss or slight gain. Secondly, the market will continue in the opposite direction and I will simply close the trade. Please do not get caught up in my specific rules; more focus on the fact that you need to know when you are wrong. Accepting that you will not always get it right will save you all sorts of time and money.
More importantly, you will begin to think of the market in terms of averages. You will have x percentage of winners and x percentage of losers. There is no escaping this fact. Show me a trader that always needs to be right and I will show you a negative equity curve.
Take Every Setup that fits your System
I use to create alerts for setups that I would review at night. Then once the alert was triggered I would sit there and analyze the structure of the setup to make sure it still fit my system. I would then tell myself that the stock wasn’t that good and if an alert was triggered for this other stock I would jump all over the trade. Sure enough, the alert would trigger for the other stock and I would enter the position. Since I am my harshest critic I would then follow the stock that I decided to pass on to see how it would perform. Funny enough 50% of the time the stock that I thought was no good would outperform the stock I thought was a sure winner.
Just Take the Trade
What this says is if your system presents you with opportunities that fit your trading parameters, just take the trade. Avoid paralysis by analysis, and you’ll be a better trader.
Taking every opportunity as they are presented allows you to trade in harmony with the market and not overthink the trade before under consideration. This means trading in the moment and not trying to outsmart or predict what the market will do next.
Recognize that the market is Limitless
If you haven’t read the market wizards books, please do; especially the first one, it’s a classic. As you read these stories of successful traders, you will notice that they have enormous gains. I’m talking taking a few thousand dollars to hundreds of millions of dollars. In addition to the size of their gains, the consistency of their wins almost seems too good to be true. The reason their gains have no limits is that these top traders do not think in terms of yearly targets.
They have their system and they take whatever the market presents to them. If this means a windfall profit, they do not look to rationalize the markets movements or exit the trade prematurely. They simply follow their rules and let the market goes wherever it must.
Let’s say you came up with the bright idea to make a 100% in the market. At some point you are at 50%. The difference now is that you no longer have any expectations you won’t have a profit, and you won’t have to worry about such things. If you set a target you will either fall slightly below it or above it. By placing this confine on your trading you will inevitably hit the target.
Trading Psychology and Self-Reflection
Never be too proud that you are unwilling to recognize your flaws. In this article, you’ve see a number of examples where I have called out flaws in my trading. This is both therapeutic and also forces me to realize that my issues have little to do with my system and more around how I mentally approach the market.
If you approach the market from a negative perspective, you will lose money. Negative does not mean you expect to lose, but you may have a lot of fear in your trading or have not fully accepted the risk. Reviewing your equity curve and keeping a trading journal will help you navigate times when you fall off the rails.
Develop a Winning Attitude
I have had streaks of 14 or more winning trades in a row. When you are in the zone it is the best feeling in the world. It’s like you and the market are 100% connected and the money falls into your account.
You can only get to this mental place if you approach the market with a can-do attitude. This does not mean you approach the market with an “I am right” attitude, but you fully accept that you will get whatever the market is willing to provide.
In Summary
Winning at trading has little to do with your system, trading equipment or internet speed. It comes down to can you accept full responsibility for your trading results. Do you accept the fact that the market gives you what you are willing to receive? Do you believe in the concept of probabilities and that you do not have to be right on every trade? The quest for finding the trading zone and staying in it never ends. So, remember to have fun along the way. And remember what was said in answer to the question: “how do you get to Carnegie Hall?”. The answer: “PRACTICE, PRACTICE, PRACTICE”.
