Trading… A Different way of thinking…
This is a long article but I am convinced if you give it the time of day you may take something from it that will help you in your quest to success.
Psychology...Now theres a word that I didn’t take seriously when I first heard it… I thought to myself I am successful at what ever I try to do, this must be a warning to the masses, a warning to your everyday Joe, but not me I am smarter than that…
Well needless to say I got a quick reality check… I entered trades which were perfect and got stopped out for no reason other than that’s just what the markets do… I then tried to re-enter and win back my money again I got stopped out… Wow my system must be wrong right?
Wrong!!! It is just the markets, they don’t behave for us, we don’t have a crystal ball, we simply have an idea, an edge and we play the probabilities.
I didn’t understand this, so I started my quest to finding the perfect system… That elusive 100% system which never fails… a few started really well and I thought I was there, I had cracked it… then you guest it a few losing trades later and I was back on that journey to find the perfect system. A few more attempts at this and finally the penny dropped… Maybe it’s not the system… Maybe it’s me… mmm am I giving myself enough time to let a system work? Could it be that every single system in the world will lose at some point? Do I make it worse by chopping and changing systems? How about the revenge trading… Does that add to my problems? Surely it can’t be me……
Recognize that story… I would think that 7 out of 10 people reading this will and if they don’t then if they don’t take note will experience this…
See the point I am trying to make is that the markets don’t do what we say and to think that we can control them is simply ridiculous. This is a point that we must understand as traders. We must understand that we simply have an edge in the form of a system and like a casino we will have losing hands but as long as we have Money Management and enough discipline to stay in the game then in the long run we will prosper.
It is ok to say “yes I understand” but understanding isn’t enough, you really have to own this… Only you do will you have the opportunity to live all of your dreams…
So how do you do this…?
I have a few steps which have helped me and am sure will help you too…
1: Back test your system and forward test your system…
There are many reasons for this but all of those reasons culminate in one massive psychological breakthrough which is Confidence. You see once you test your system you will learn a lot of things about your system which will help peruse your dream.
You will learn that you do lose, and sometimes even have a losing streak. You will also learn that at the end of the testing period you still came out in profit. Imagine that you had a losing streak yet you still managed to win.
You will also have something to measure your performance with, you will have statistics telling you what your average winning streak should be, what your average losing streak should be, how many pips you should be making on average. If you deviate from this then you know you have to sit down and re-assess things… understand exactly why your live performance differs from testing one.
2: Keep Trading Records
Now this sounds simple… but how many of you will actually do it… how many will note down all of the losers? My guess is not many, but the ones who do will accelerate their learning exponentially.
By keeping trading records you are able to go back to both losing and winning days and see what you did and what you felt on those days. You can then learn from the losing days, you can understand if it was negative emotions which caused you to close early, maybe you are a technical trader and you didn’t see an important longer tern level, or maybe you missed your entry but because you saw the momentum in the market you wanted a piece of it and ended up jumping in right at the top and getting stopped out.
On the winning trades you can equally learn from… you can see that when you followed your trading plan to a tee you were successful, you can see that by leaving the missed entry and waiting for another signal you saved yourself from getting burnt.
The fact is that we can’t see into the future but it is helpful to look into our own past and see what it was that we felt, experienced and did on the days that we were successful and the days that we were not so successful. We can then learn from this.
3: Have a Trading Plan and Stick to it (Discipline)
This is something that is thrown around quite loosely in the market but I doubt many follow one exactly… I am willing to bet that there are a lot of traders out there who have a Trading Plan but few follow it.
The fact is you will do this when you are not trading… you will devise a plan and it will all seem great. Then as soon as you sit down to your computer you forget you ever made one because the excitement is now kicking in… The markets are moving and you start to see opportunities… Your trading plan says wait for a confirmed signal but you think well if I wait any longer then I’m gonna miss this move and you enter… 10 minutes later you get stopped out. Wow my trading plan would have saved me against that…
Or you enter a trade according to your rules but the markets have suddenly gone stale and the movement is no more… mmm you have 4 pips profit, you take it off the table as you are scared of losing your profits… an 1 hour later the market shoots off in your initial direction and your initial signal was right… If only you had stayed in…
You see many will argue that sometimes you need to get in early to catch the bulk of the move, or sometimes you should exit early cos you could of ended up losing….
The key there is the word “sometimes”, I agree sometimes you would be right but by doing this and not following your plan you are giving back your edge. You are simply gambling… you may as well toss a coin.
Having a trading plan also helps you overcome the emotions of trading and gives you discipline… you see if you know exactly what to do in the event of X or Y and you have documented this in a plan at a time when you weren’t mesmerised by the markets and you were thinking logically… then suddenly the voice of reason can enter your trading. Suddenly it isn’t your decision when to enter or when to exit… You don’t have a say… Your trading plan is your boss and you simply execute a trade as your boss tells you… nothing more nothing less.
4: Money Management
This sounds so simple yet very few including myself take any notice of this in the beginning. I’ll give you an example…
When I first came to trading I heard about the Non-Farm Payrolls and I thought what a great opportunity to make some money… Spend one Friday a month in front of the computer for half an hour and make nearly enough money to completely pay your bills and live until the next Non-Farm… It couldn’t be easier…
So I got some money together… it wasn’t everything I owned, it wasn’t even a trading fund it was simply me saying my broker needs at least 50 times my pip value to allow me to place a trade on the Non Farms so that is exactly how much I will put on… No thinking about what if I make a wrong decision and lose it all…
Anyway Non-Farm came and sure enough I got whipsawed out of the market and lost everything I had in my account. Now it is worth knowing that this wasn’t all the money I had but just all the money I had put in to my trading account to trade Non Farm…
But… This still really hurt… The psychological impact it had to see my account go from £5000 to £100 in the space of a few minutes really got to me. I was distraught… Not only was I proved wrong by the market but I also lost everything that was in my trading account… I didn’t trade again live for a few months.
Now let’s look at the result of what it could have been with proper money management. Regardless of how much of a sure thing it was I shouldn’t have risked more than 3% (even this is a lot to some). If I lost 3% of £5000 that would be £150 leaving me with £4850. Now granted I wasn’t going to be a millionaire over night but I definitely would have kept on trading the very next day… I wouldn’t have had the psychological barrier to overcome.
At the end of the day Trading is not a get rich quick scheme… It is an area which potentially can make you very rich but it will take dedication, time and perseverance. 95% of traders fail… a line everyone hears all the time, but I am willing to bet that a large proportion of them simply didn’t have enough money to stay in the game long enough to learn how to be consistently profitable.
That is the reason the Money Management is so important. Survival….
I hope you can see that there are many different factors which contribute to a trader’s success and the system it self is just a very small part of it.
I hope this helps some people out there particularly those who are in search of the holy grail!!!
This is a long article but I am convinced if you give it the time of day you may take something from it that will help you in your quest to success.
Psychology...Now theres a word that I didn’t take seriously when I first heard it… I thought to myself I am successful at what ever I try to do, this must be a warning to the masses, a warning to your everyday Joe, but not me I am smarter than that…
Well needless to say I got a quick reality check… I entered trades which were perfect and got stopped out for no reason other than that’s just what the markets do… I then tried to re-enter and win back my money again I got stopped out… Wow my system must be wrong right?
Wrong!!! It is just the markets, they don’t behave for us, we don’t have a crystal ball, we simply have an idea, an edge and we play the probabilities.
I didn’t understand this, so I started my quest to finding the perfect system… That elusive 100% system which never fails… a few started really well and I thought I was there, I had cracked it… then you guest it a few losing trades later and I was back on that journey to find the perfect system. A few more attempts at this and finally the penny dropped… Maybe it’s not the system… Maybe it’s me… mmm am I giving myself enough time to let a system work? Could it be that every single system in the world will lose at some point? Do I make it worse by chopping and changing systems? How about the revenge trading… Does that add to my problems? Surely it can’t be me……
Recognize that story… I would think that 7 out of 10 people reading this will and if they don’t then if they don’t take note will experience this…
See the point I am trying to make is that the markets don’t do what we say and to think that we can control them is simply ridiculous. This is a point that we must understand as traders. We must understand that we simply have an edge in the form of a system and like a casino we will have losing hands but as long as we have Money Management and enough discipline to stay in the game then in the long run we will prosper.
It is ok to say “yes I understand” but understanding isn’t enough, you really have to own this… Only you do will you have the opportunity to live all of your dreams…
So how do you do this…?
I have a few steps which have helped me and am sure will help you too…
1: Back test your system and forward test your system…
There are many reasons for this but all of those reasons culminate in one massive psychological breakthrough which is Confidence. You see once you test your system you will learn a lot of things about your system which will help peruse your dream.
You will learn that you do lose, and sometimes even have a losing streak. You will also learn that at the end of the testing period you still came out in profit. Imagine that you had a losing streak yet you still managed to win.
You will also have something to measure your performance with, you will have statistics telling you what your average winning streak should be, what your average losing streak should be, how many pips you should be making on average. If you deviate from this then you know you have to sit down and re-assess things… understand exactly why your live performance differs from testing one.
2: Keep Trading Records
Now this sounds simple… but how many of you will actually do it… how many will note down all of the losers? My guess is not many, but the ones who do will accelerate their learning exponentially.
By keeping trading records you are able to go back to both losing and winning days and see what you did and what you felt on those days. You can then learn from the losing days, you can understand if it was negative emotions which caused you to close early, maybe you are a technical trader and you didn’t see an important longer tern level, or maybe you missed your entry but because you saw the momentum in the market you wanted a piece of it and ended up jumping in right at the top and getting stopped out.
On the winning trades you can equally learn from… you can see that when you followed your trading plan to a tee you were successful, you can see that by leaving the missed entry and waiting for another signal you saved yourself from getting burnt.
The fact is that we can’t see into the future but it is helpful to look into our own past and see what it was that we felt, experienced and did on the days that we were successful and the days that we were not so successful. We can then learn from this.
3: Have a Trading Plan and Stick to it (Discipline)
This is something that is thrown around quite loosely in the market but I doubt many follow one exactly… I am willing to bet that there are a lot of traders out there who have a Trading Plan but few follow it.
The fact is you will do this when you are not trading… you will devise a plan and it will all seem great. Then as soon as you sit down to your computer you forget you ever made one because the excitement is now kicking in… The markets are moving and you start to see opportunities… Your trading plan says wait for a confirmed signal but you think well if I wait any longer then I’m gonna miss this move and you enter… 10 minutes later you get stopped out. Wow my trading plan would have saved me against that…
Or you enter a trade according to your rules but the markets have suddenly gone stale and the movement is no more… mmm you have 4 pips profit, you take it off the table as you are scared of losing your profits… an 1 hour later the market shoots off in your initial direction and your initial signal was right… If only you had stayed in…
You see many will argue that sometimes you need to get in early to catch the bulk of the move, or sometimes you should exit early cos you could of ended up losing….
The key there is the word “sometimes”, I agree sometimes you would be right but by doing this and not following your plan you are giving back your edge. You are simply gambling… you may as well toss a coin.
Having a trading plan also helps you overcome the emotions of trading and gives you discipline… you see if you know exactly what to do in the event of X or Y and you have documented this in a plan at a time when you weren’t mesmerised by the markets and you were thinking logically… then suddenly the voice of reason can enter your trading. Suddenly it isn’t your decision when to enter or when to exit… You don’t have a say… Your trading plan is your boss and you simply execute a trade as your boss tells you… nothing more nothing less.
4: Money Management
This sounds so simple yet very few including myself take any notice of this in the beginning. I’ll give you an example…
When I first came to trading I heard about the Non-Farm Payrolls and I thought what a great opportunity to make some money… Spend one Friday a month in front of the computer for half an hour and make nearly enough money to completely pay your bills and live until the next Non-Farm… It couldn’t be easier…
So I got some money together… it wasn’t everything I owned, it wasn’t even a trading fund it was simply me saying my broker needs at least 50 times my pip value to allow me to place a trade on the Non Farms so that is exactly how much I will put on… No thinking about what if I make a wrong decision and lose it all…
Anyway Non-Farm came and sure enough I got whipsawed out of the market and lost everything I had in my account. Now it is worth knowing that this wasn’t all the money I had but just all the money I had put in to my trading account to trade Non Farm…
But… This still really hurt… The psychological impact it had to see my account go from £5000 to £100 in the space of a few minutes really got to me. I was distraught… Not only was I proved wrong by the market but I also lost everything that was in my trading account… I didn’t trade again live for a few months.
Now let’s look at the result of what it could have been with proper money management. Regardless of how much of a sure thing it was I shouldn’t have risked more than 3% (even this is a lot to some). If I lost 3% of £5000 that would be £150 leaving me with £4850. Now granted I wasn’t going to be a millionaire over night but I definitely would have kept on trading the very next day… I wouldn’t have had the psychological barrier to overcome.
At the end of the day Trading is not a get rich quick scheme… It is an area which potentially can make you very rich but it will take dedication, time and perseverance. 95% of traders fail… a line everyone hears all the time, but I am willing to bet that a large proportion of them simply didn’t have enough money to stay in the game long enough to learn how to be consistently profitable.
That is the reason the Money Management is so important. Survival….
I hope you can see that there are many different factors which contribute to a trader’s success and the system it self is just a very small part of it.
I hope this helps some people out there particularly those who are in search of the holy grail!!!
you might want to reference the source
