Some lessons from the real world
The purpose of this post is to give developing traders a heads-up about the some critical elements of trading profitably, consistently and in a sustainable manner - naturally the discussion of my own learning also helps me too. I am a 'relatively experienced' (8 yrs) and consistently profitable full time index futures trader, now gently adding in some forex set-ups to my existing method.
If you want a prescriptive step by step guide on how to be a successful trader, then this thread will disappoint you. If you want to see some of my "set-ups" and be guided through trades, then you will be disappointed even more. If you want to see some selected highlights about what matters, and what doesn't, based on the practical experiences of one trader, and his observations of several other successful and unsuccessful traders, then perhaps this thread will be of interest to you.
THIS IS A THREAD ABOUT PROCESS, METHOD, LEARNING, AND PITFALLS - IT IS NOT ABOUT A "SYSTEM"
I don't pretend for a minute to speak from some 'enlightened' perspective, nor do I believe my method is perfect or better than anyone else's - but I do trade for a living - it is my job, my livelihood, and I take it very seriously. I am not a trading educator, and never will be - just a humble person who makes a good living from the markets and enjoys his lifestyle in the process.
So these are my realities; it is what works for me - you might do it differently or think about it differently, and that's ok - so let's respect each other's differences. I do not wish to gain a following through this thread, and am not in need of any reassurances about what I am doing, but feel free to ask a question or make a contribution if you feel so inclined. No cliches here; just learning from the real world. The list will probably not be exhaustive so will add more when I have time. If you find something useful here, before this thread eventually dies a slow and painful death, then well and good - if not, then hopefully you will find what you are looking for somewhere else.
Reality #1 - If you want to become a life long, profitable trader, you need to "learn how to learn." (See everything below)
Reality #2 - Consistent, profitable, and sustainable trading is achieved through years of hard work, and is not realised after a few "good months" when the market favours your method of the day. The effort and learning required to becoming a full time trader is akin to the completion of a bachelors or masters degree, or even PHD. If you are not prepared for the implications of this "reality" then for the sake of your bank account, don't try trading - stick to your day job.
Reality #3 - You will NOT realise consitent profitability (month after month, year after year) through purchasing someone else's system, copying someone else's system from this website, attending a seminar, or worse still buying a 'trading robot' on the internet - there are no shortcuts in this business, and if you think otherwise you are deluding yourself! There is nothing wrong with paying for good trading education (hard to find!) but months and years of adaptation will need to follow.
Reality #4 - It is highly unlikely that you will become a consistently profitable trader (for years to come) solely through the use of technical indicators such as moving averages, RSI's, stochastics, etc. No "indicator" available on retail platforms is better than the human brain, and I challenge anyone to prove to me othewise. If you have found yourself system hopping, trying this indicator, that indicator, trying to copy the set-ups in the "trading systems" area of this website but still living in a world of frustration then this "reality" should make sense to you.
Reality #5 - Consistent profitability is nothing more than an outcome from a total trading methodology, and is unlikely to come from the acquistion of a "system" (see realities #1-11)
Reality #6 - If you don't understand the "capability" of your method, there is a good probability that you will loose money. By "capability" I mean how your method will perform under various and differing market conditions, including the mechanics of contract sizing, entries, exits, scaling in/out etc, etc. People who don't understand the true capability of their method, do things like use trailing stops (just in case it's a big one!), or ask questions on this website about things like "what is the best stop loss." People who do understand the capability of their method think, analyse, are flexible, adaptable and constantly testing new rules or theories - this process never ends. They know when they place a trade what the probability of success will be and how much they are putting at risk. They also know with a reasonable degree of probability what their expected rate of monthly returns should be. There are few, if any, "unknowns" when you understand the true capability of your method, and you can trade with confidence and sleep well at night.
Reality #7 - Managing risk is everything, and it is very simple. The first question before placing a trade should be "how much money can I loose if this trade does not succeed?" Almost all struggling traders usually ask the opposite question first.
Reality #8 - The unknown or untested assumptions in your trading method will bite you on the arse one day. Good traders know what the assumptions are in their trading plans, and these known assumptions are either managed as "acceptable risks" by impacting things like contract sizing, or are mitigated to the greatest extent possible by alternate plans. (Untested) assumptions in your trading plan might be things like. "MACD and RSI set at XYZ has made 2,000 pips in the last 3 months on the EUR/USD, and therefore it should continue to do so in the future.." Or "GBP/JPY is volatile and EUR/CHF is not volaitle." Or "My broker will honour a guaranteed stop loss." What are the assumptions in your trading plans, what are the risks attached to those assumptions, and what are you going to do about it? If you don't know the answer to these questions and/or fail to take the neccessary action then there is a reasonable chance that sooner or later you will suffer a big loss.. and be left wondering why.
Reality #9 -The concept of Trading Psychology, as it is most commonly understood, is completely over-rated, and in some cases might actually do more harm than good. "Trading Psychology" sells books, seminars and training courses - to the profit of "experts" who are usually not very good traders themselves - but in reality the psychology of trading should be quite simple. Sadly, it usually exists as the "grand answer to all problems" for people who have failed to understand the basic and practical implications of reality #2 (see above), and/or for people whose capabilities are ill-matched to the realities of the business of trading (though perhaps the latter can be overcome?). If you run a successful business, is that likely to be achieved through buying a course in the internet and hoping someone else has done all the hard work for you, and that it can be copied to achieve almost immediate success - or is a successful, robust and sustainable business achieved through months and years of hard work, staying focussed and disciplined, learning from your mistakes, being realistic and being adaptable? Is there something mysterious and magical about the psychology of this situation, or is it just about understanding reality? If your business is not producing the profit you expect that it should, and you feel emotional strain, anxiety and a lack of confidence in what you are doing, do you try to manage your 'business psychology' symptoms as the principle means to improve the output of your business, or do you try to get down to the root cause(s), and carefully examine the way your business is operating, in a methodical, systematic and detailed manner? Trading is a serious business and should be treated as such.
Reality #10 - If managing risk is "everything," then PATIENCE is "everything, the sequel." I like to think of it as a basic and tangible human discipline - please let's not complicate it and dilute it with the vagaries of "Trading Psychology." Between 17-24 February, on days when the market was open, I sat and watched my charts for 2.5 hours every day, and did nothing - that's around 15 hours of watching charts across 6 days with no trades - because for me, there was nothing there. Today, after waiting for 6 days, I entered a trade based on a set-up that emerged, with a probability of success of greater than 80% and a potential loss of around 0.5% of my capital. This waiting time was longer than usual but I didn't mind, and the result was a modest, pleasing, and slightly better than expected 3% return on capital. The set-up for this trade was, of course, very straightforward, and comparitively stress-free - just see realities #1 to #9. AND exercising patience for a few hours each day lets you feel good about doing other stuff with a clear mind for the rest of the day. If my next trade results in a loss, that's ok. Waiting for 15 hours across 6 days for the right set-up to enter a single (high probability) trade is my version of full time trading, and no doubt there are an infinite number of other 'versions' out there too.
Reality #11 - Most good traders have become so, through learning from their costly mistakes. I definitely fall into this category, as does every other good trader I know. I hope it can be done otherwise, but frankly I don't know.
Reality #12 - It would be nice to have another one, but could only think of 11 just now - and it's time for a coffee.
UPDATE: If you can 'code the above system' I'll happily sell all my assets, you can have half, and let's give the rest to a charitable cause - you can then live of the profits of a 'holy grail' EA, and when my wife finds out I've sold everything I will then be headed for the grave having been proven wrong.
Striking chords and ringing true on so many levels.
Thanks for the outstanding post, Hedginghog. Looking forward to more.
Nice post, particularly #9 #10.
You might be worth keeping an eye on Hedginghog!
Great post hedginghog and all true. May i ask how long you have been consistently profitable ( assuming you are) . If the amount of chart time correlates to success i must be on the way- I usually put in about 8-10 hours a day mainly on the eur/usd trying to really get a feel for how it responds to important areas of S and R and round numbers etc then i spend more time reading and the remaining hours dreaming about the markets. Its seriously hard work and slightly demoralizing to still not be making a consistent profit!
really good post.
and even though i don't think that psychology is overrated i agree with you in the way you put it.
To answer your question, there are about 8 years of learning in my "realities." But I have been profitable for just over 3 years, consistently profitable on a monthly basis for 2 years, and comfortably and consistently profitable for 16 months... not a lifetime by any stretch but long enough.. and before that.. well.. you know how the story goes - just add another 5 years of sometimes good, sometimes bad trading, but overall not getting it right consistently month after month.. and with some absolute shockers along the way. Oh, and playing with 80 years of S&P data - does that equal 80 years of trading experience - I think not, but enough to test a few assumptions I suppose! Cheers
Hedginghog- great to see you are doing so well- gives me hope What i find amazing is that there isn't a definitive guide as to what works in this business. I suppose trying every indicator and combination of indicators is something everyone must go through- part of the learning process. Although i wish i hadn't wasted quite as much time with my naive stochastic system that i started out with, which inccidently would be fine if the market ranged for ever
Its just that it all seems so shrouded in secrecy when there is no need for it be.
I firmly believe that if i have an edge and am consistent i will teach others that knowledge too.Even if all the retail traders in the world were to trade it- which they wouldnt it wont disappear
I currently trade with nothing on my chart except S and R lines and round numbers but i hope i am not on a wild goose chase.
You're right, Hedginghog's post is the business. Right again - there are so many ways to kill a cat and all traders have different styles and they all think theirs is best.
All good except for #9. If anything it is under-appreciated. Which is ironic actually since all your points are directly related to a person's psychology.
Learning from mistakes
difference between reality and fantasy
All Psychology. Anyone new to trading should take psychology very seriously and make it a priority. Other than that it is a very well done list. Good work.
A GOOD post Hedginghog
a question of terminology
Reality #5 - Consistent profitability is nothing more than an outcome from a total trading methodology, and is unlikely to come from the acquistion of a "system" (see realities #1-11)
To add to this, as I think you have covered alot of the other realities quite well, perhaps we could elaborate on what a total trading methodology is.
For most their methodology is very limited. In fact I would go on a limb and say that the vast majority here either dont have, or dont understand what a complete trading method is. What it isnt is
1) Flick through Timeframes of X/Y currency pairs (or indice, futures whatever it maybe)
2) spot pin bar
3) place order on pin (either market or break whatever looks good)
4) watch the trade
5) watch the trade (its going agaist me, nails getting shorter)
6) phew its going in my direction again
7) ok its good, switch to a lower timeframe to see what is happening now
8) Oh no massive BEOB on 1 minute timeframe exit, exit exit.
Ok thats a bit over the top but I know many here do it, I did when I was starting. The pain of loosing was really ordinary and it still is, to a degree. However so many still trade this way, day in day out because they have not taken the time to make a plan, A business model of sorts.
It is easier than it sounds provided you have taken the time to learn from your experiences.
Your plan should cover a checklist for an up and coming trade. The checklist that you have compiled should aim to capture trades that have the highest PROBABLE outcome in your favour. That is, if a certain number of checklist values fail in the analysis of the situation then the likelihood of the trade being profitable in the short and long term is less than acceptable.
Hedginghog touch on pretty much this principle with the discipline to wait out a week of trading. Over the course of the week there may have been a few opportunities that could have been traded but for whatever reason none qualified.
So the basis of a plan should include (feel free to add more)
Entry Criteria- For each model this may differ however there should be a setup for what qualifies as a great entry. The checklist should be a comfortable length. To short of a list would allow a greater number of lower quality trades, to long a list would severly limit the trades taken.
Risk- Risk in my view should be limited to 2%. 2% is a healthy average that allows growth while maintaining a fair level for drawdown.
Exit Criteria- This can be broken into 2 groups.
Stop Loss Criteria and Profit taking Criteria
SL Criteria may be just 1 or 2 items of a combination of items. For example you would have your initial SL, that is the SL at the start of the trade that carries your acceptable risk, A trailing SL that as the market begins to move in your favour reduces your overall risk and or a moving average that over a long term acts as a point of exit.
Profit taking criteria may mirror much the same as the above. For example you may have a set Profit target relative to a portion of the position at a point that allows for risk reduction or positive growth. You may have multiple points where position size is reduced and or a long term moving average.
Profit taking is quite possibly one of the least understood skills in trading for amatuer traders. It could be that while positive point gains look impressive the actual return (on account of capital size) is not enough to register 'the endorphine release valve'. So what usual ends up happening (because there is no plan in place) is that people are looking for the biggest gain while risking the positive growth of a trade in order to fill that mechanism. NOTE: Threads that claim phenomenal growth but lack longevity.
and my final contribution would be account diversity- or managing accounts that have grown past a planned point. For some they will remove the excess and place it into another investment stream, others will leave it somewhere else but having a plan for excess cash, instead of it just sitting there can allow for further growth through either low risk or high risk mediums.
Thanks Hedginghog for an excellent post and one that moves straight into my "Axioms of a Trader" file
After putting in the required 10,000 or so hours that is IMO needed to master the art of "Consistent, profitable, and sustainable trading", for me, the most import lesson to master is the art of PATIENCE ......
As I've reached # 12, its time for a nice glass of Rioja....
I suppose when we talk about a TRADING METHOD we are talking about an end to end business process that might start with something like a 'problem statement' or question such as "can I become a life-long profitable trader and if so how?" and that hopefully ends up with consistent, positive return and ongoing improvement at the other end of the process. (yep, with all the hard work in between!) I risk getting a little too theoretical here, because I like to see successful trading as a highly practical and tangible activity (ie not the stuff of "fairy-land" that many educators try to draw the novice into to serve their own objectives), but I do think that one of the most important aspects of the 'total trading methdology' is that it's development pathway is not set in stone, but develops and emerges based on the real life learning of the individual trader, though it may often include some common attributes briefly outlined in my original post.
It is not surprising (to me at least) therefore, that the actual mechanics of what I trade and how I trade are vastly different to what I was doing when I thought I was a 'good trader' not long after starting out 8 years ago - and I also maintain an open mind as to the possibility that I could be trading "different stuff" in another 8 years, if indeed I really am being flexible, adaptable, and continuing the learning process - though of course that would have to be for a very good reason.
Trading robots = $$$ for brokers
Reflection of the day:
Q: Why do brokers love seeing their clients use trading robots?
A: Because they (brokers) can take their clients money faster that way.
If I am right about even 50% of the ramble in my original post, then almost all retail trading robots will eventually fail - perhaps after a couple of months of very "marketable" results, at best.
I have just glanced over a thread by one of the most prolific contributors to these forums, and by all accounts he/she must be a very good programmer indeed - something to be respected, no doubt. I will not reference the thread by direct link through fear of insulting these well-intentioned efforts. However, a further glance into the history of their contributions fails to reveal one single trading robot that appears to have actually made any money, consistently... ever. And it appears that there may be literally hundreds of such attempts to programme these apparently "good systems" by our incredibly well respected programmer.
In a similar thread, another enthusiastic and prolific programmer cites how he uses no less than 30 different robots to trade at any one time - if he/she is still(?) trading profitably in 12 months time with their 30+ robots then they would be quite a remarkable trader - but this is what I call the "SPRAY AND PRAY" trading method ("damn it, if I try everything possible, at least something has to work!"), and not surprisingly the question of sustainability is easily raised in this scenario..
So what is going on here?
I was recently talking to a few very good traders who I have the pleasure of comparing notes with from time to time, which among other things involved a laugh or two about trading robots. But something interesting was discussed that did not properly register with me until now. All but one of them had attempted at one point or another to fully automate their most profitable trading set-ups (including 2 guys who had paid for such a service), but the automation had failed to produce profitable results in every instance even though the traders themselves continued to use these set-ups very profitably in a manual environment....
My 'theory' (only) on this situation lies in an extension of reality #4. Shall we call it work-in-progress possible reality #4.1!!
Good methodologies can rarely be programmed correctly
Enough for today.. Happy trading.
The right target and the wrong target
Reflection of the day:
"If I can just make 10 pips each day, and with the value of compounding account growth, I'll be rolling in cash in no time..."
Could this be the most common (and damaging) statement that defines the initial approach of many would-be traders?
After 18 months of grinding away, one of my old trading acquaintances eventually gave up on this full time trading venture and went back to a 'real job.' My theory on why he failed (and dumped somewhere in the order of 100k in an 18 month period) is that his 10 pips per day ambition was unwaivering - almost an obssession - and it blinded this very intelligent, otherwise analytical thinker to the extent that he was destined to fail, for as long as this "10 pips a day" statement continued to dominate his trading approach.
Not surprisingly the behaviour observed associated with this approach was endless system hopping, trying this indicator, that indicator - rejoicing from the roof-tops when he had found the indicators and set-up that gave him his "10 pips a day" in backtesting mode for the last 3 months - but then falling into a crushed heap when this "system" magically stopped working as soon as he went live.. and so the story went until he finally gave up - a lot of cash down, but thankfully with family and major assets still intact.
So what is the better alternative (in my opinion, from my experiences). Well, in short, see reality #6. I think if my friend had took more time to understand "system/method capability" he would have stood a much better chance of not failing, because he would have realised what his trading method was capable of delivering, and set his target accordingly.
I use a target - for me, it's currently 8% return on capital per month, within an expected 5-15% range (no target daily, or weekly because this would be arbitrary for my method, where I can wait for days for the right set-up) which I tend to exceed more months than not - and it is based on my ongoing findings from the implementation of reality #6, not from something that sounds right, or feels right - it is very tangible, and comes from very practical activity.
When I talk about "understanding the capability of your system" there are 2 areas of most importance, for me:
1) The capability of your physical set-ups: What the performance should be of your physical entries, exits, contract sizing, risk management etc, under varying market conditions. I know, for example, that in January, my method will tend to deliver more conservative results (in fact maybe I should take January off next year?), but in June through to August, and in December I expect much better than average results - because of seasonal factors - of course working within the tested assumption that "history tends to repeat itself." It is also true that determining the capability of your physical set-ups is constantly developing, and ideally, never ends. "Continuous improvement" is the simple way to put it. Thinking, analysing, testing (more forward testing - less backtesting), questioning, and being hard on yourself - and bloody hard work in general. This is an entire topic unto itself and I can't cover it all here.
2) The capability of YOU. There is a strong dependency between 1&2 (one might benefit from the development of the other and so on) so it is probably not correct of me to separate them at all, but I will for theoretical purposes only. From previous posts, you will see that I am not fan of "trading pyschology" (mainly because of the way it is expoused by the hungry educators, who would be better to spend more time talking about a practical method rather then mystical pyschology) but nevertheless this is about understanding your own profile as a trader. I absolutely HATE exposure to risk in my trading, and will do everything possible to minimise it. I simply cannot accept an account drawdown of more than 3% (I budget for 0.5-1% per trade, but have an additional tolerance built in for the unexpected - what have I assumed that might not be the case today?). In a practical sense, over the years this has meant slicing away a number of otherwise profitable set-ups in my trading plan, because I refuse to carry a set-up that might loose for 2 consecutive months even though it is profitable over the total year...that's just me! No doubt you are different. But most importantly I know what the capability of these set-ups is, and as a result can make an informed decision about whether or not I will trade it.. This is quite different to the "I want 10 pips per day" approach.
And so back to my old trading acqaintance. He was a good example to show that there is nothing wrong with swallowing your pride and determing that trading is not for you, and moving onto something else - before it is too late. It think takes a lot of guts to make this decision - and it is also true that some years ago, I came close to making this decision myself. My old trading acquaintance realised his family and his home was more important than his pride, and is to be commended for the decision he made. Perhaps it also tells us, depsite what the hungry educators might tell you, that trading is not for everyone after all - but I'll leave that for another post.
In the mean time - instead of setting an arbitrary target that is likely to damage your trading methodology, think about what reality#6 might mean to you.
Superb thread. Great Views.
Just my 2 cents but I think beign under capitalised is the biggest reason new traders fail. They open a new account with $100 and when something goes right and they make a 2% gain they don't take it because it only equates to a measley $2.
If on the other hand they made 2% on a $10k account then they would be more inclined to take some money when they are ahead.
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