Shortcuts to becoming a profitable trader

Hello FF readers,

This thread is going to contain a selection of concepts which can help any aspiring trader to increase their chances of becoming profitable in this industry.

It's going to be a long read, so I'll publish it in chunks. I'll take questions along the way and answer as best I can.

- Firstly, I'll start out with a few reasons as to why this thread will add some value to your life.

If you are reading this, then you are either an aspiring trader looking for more information to help bridge the learning gap - or you are a profitable trader who is curious/sceptical about the bold thread title. I'm guessing that 99% of the readers will be in the first category so I will be writing this to benefit those who are thinking about starting trading or attempting to become a profitable trader.

- I have no product, service or system to sell. I don't believe in one specific trading method more than another. I've got no agenda or axe to grind about anyone else. This is all completely independent.

- About me

I am a private client investment manager. I advise on investments for high net worth individuals. Typically we hold positions for a minimum of 6/8 weeks, so I understand that this is much longer than most of the traders on FF - so most of the methods I use to build investment portfolios will be of no use here. This thread may touch upon specific trading systems but there will be no system or 'rules' found here. I will focus on concepts I have learnt from my years in the industry, working initially in sales - then moving on to investment management. I have the privilege of working with some outstanding traders and some of the best fund managers in the industry. I also trade my own account, and have done for five years now (I've been profitable for 3 of them...) I'm fully qualified through the Chartered Institute of Securities and Investment - I may discuss specific trades but none of these are advice or a recommendation. Everything here is just for your reading enjoyment.

My own personal trading is 90% from the daily chart using a systematic approach. I did post in another thread that I started last year where I covered all my trades in real time. I was profitable for a couple of months, showing the good and bad of my trading. It became too much effort to keep uploading videos and reporting on my trading so I let that one go quiet. I'm not going to have this thread like a trading diary - just cover some concepts. My method is still quite similar to how I was trading in my previous thread, a few money management changes and a slight tweak to entries in an attempt to remove discretion. Once again - I don't feel that I am a guru or trading expert. I have a lot to learn. But I am at a point where I can consistently profit by around 30% p/a with drawdowns very tightly controlled (<10%). Some months I will come up breakeven or at a minor loss - generally in lower volatility. High volatility I'll bring in 6-10% in a month. For a proprietary trader, this is fairly low. For someone who is building a system which requires no more than an hour of attention per day - I feel this is acceptable.

I've attached a trade explorer to my profile which is from my demo account. Everything using a 0.20 lot size is with my current systematic approach.

Down to business

Okay so over the next few days, I'm going to publish posts on the following topics

1 - Proprietary vs. Systematic: The two main styles of profitable trading for the retail hopeful.

2 - Managing your expectations: What do you want to achieve from trading and how to build a method around your goal

3 - Trading Systems: Out of the box, or build your own. Pros and cons.

4 - Technical Analysis: It works.

5 - Psychology: Sometimes dogs bite children, and sometimes you will lose money.


What do I get out of this? Firstly, it allows me to reflect on my trading and keep me on track. Also, I'd like to get some feedback from some other traders out there on what works for you and how I could see improvements. Specifically if anyone has programming ability - I'd love to hear from you on how you apply that to trading.

I hope you find this useful - and I'll publish my first topic soon.

Regards,

LT

this could be interesting. keep on going.

I will also be watching with interest.
If you find time, I would welcome a discussion of timeframes.
Reading your intro leads me to think you would baulk at trading off the M1 chart.
Bets of luck
Fred

Thanks for the reply Fred, and yes you are right - Personally I can't trade off an M1 chart.

I will cover this in a bit more detail in my next post, but my experience on M1 is as follows:

1. Transaction costs will kill you. I'm from the UK, so unless you work on an institutional trading floor, your best option for trading is Spread Betting. This means that your typical spread will be between 1-3 points. Let's say that it is 1 point - and your typical target for a trade is to take 10 points of profit. This means that 10% of your trading profits are going to pay your broker - and your trading method has to compensate for this by being 10% better than applying the same method to a higher timeframe where your probability of a winning trade is similar.

2. Any time I have been trading on a very low timeframe - it always seems like the moment I take my eyes off the screen for some reason, that is when something significant happens and I miss an entry I've been waiting for/position gets smashed.

3. Your risk of slippage is huge - especially when trading FX. If anything happens when you've got a position on - regardless of your stop, price could gap and really smash your account.

I'm not saying it can't be done - I know a few traders who work off tick charts and price ladders only (Prop traders on fixed income eg. Bund) and these guys make money. The thought of watching price ladders all day makes me feel sick, but they clearly love it.

I'm not one to say - 'this cannot be done' or 'this way is better' because I really believe that it's all about finding the approach to trading that works best for you. I know that sounds like a big excuse but all the evidence I see points to that conclusion. Personally, I find M1 very difficult - and when I was attempting to build a method on M1, it seemed like there was so many unpredictable variables, I couldn't get any idea of weather my profitable trades were a result of a good trade with a defined entry or if it was just blind luck!

Just been for a run.... it's weirdly hot in the UK today. Everyone has their BBQ out. I'm going to do the same with the family this evening so I'll write my post, finish some paperwork for tomorrow then enjoy the rest of my Sunday.

Right I'm going to crack on with my first topic which is:

Proprietary vs. Systematic: The two main styles of profitable trading for the retail hopeful

I believe that your best chance as a retail trader to make money is to follow one of the above two approaches to trading.

A proprietary approach is using technical analysis to identify price patterns which indicate a higher %age chance of a movement long or short. This is typically on lower timeframes (anything lower than the daily chart right down to tick charts and tape reading just the price). The majority of traders I know use a proprietary method. Actually, thinking about it, every professional employed trader I know in the industry uses this approach. Trading entries are typically taught by a prop trading firm - these methods usually use price action and a couple of indicators in a combination researched by the firm. An example would be using floor pivots (which in my opinion, are fairly reliable)



A systematic approach is basically a set of rules that will enter trades based on price/indicator combinations - exits are always pre determined and not up to the trader at all. The systematic approach should have zero discretion, meaning that the system tells you when to trade, not your own personal decision making. Typically this type of approach is applied to a daily timeframe, with new market orders set at the close of each trading day.
I know several institutional funds, retail investment trusts and hedge funds that use methods like this. The system criteria are usually developed by programmers and quants - effective systems are closely guarded by the professionals. An example for a retail trader would be to use a combination of moving averages to determine when to buy/sell. For example, buy when the quick MA crosses above the slow. Sell when the quick MA crosses below the slow.




Now there are other methods of trading such as a Quant high frequency trade, Statistical arbitrage, order flow ect. To be honest, I don't fully understand any of those methods. I could explain them on a basic level but it's not worth it because if you have the information and ability to apply those trading methods then you wouldn't be reading this.


Which approach is better?

Well, that depends on your circumstances.

Personally I use a systematic trend following approach because my day typically involves lots of meetings with clients and institutions where I can't be in front of my trading platform. It's worth noting that unless you have the freedom to be trading without distraction for a full trading session i.e. London open to close, then I wouldn't recommend trying to trade any lower timeframe than the daily.

This whole attitude of "I will just make my 20 points and be done for the day" just does not work. What if your first two trades of the day are losers? Then you are chasing. Are you going to call it a day and miss out on potentially profitable trades in the afternoon?

It's really nice to believe this type of approach works - because most people looking for a new income source are attracted to the lifestyle more than the money. I can promise you this - trading will not bring you a carefree life of taking money out of the market for an hour in the morning then relaxing at the bar for the rest of the day. The best (and richest) traders I have met - work 12 hours a day. This says a lot. Once again, I'm sure there are exceptions - but as a newbie, you will have to put the work in. Maybe you are God's gift to trading, and you can make all your money in an hour from the London open - but I'm going to assume that you are just a regular trader hopeful. Don't limit yourself by saying 'I'm only going to trade for an hour'. That's like opening a store on Oxford street in London and saying you are only going to sell stuff from 9am to 10am. You will find that you will have most days that are flat - some you will be down - some you will make huge gains. On those days, you want to take the market for everything you can get - because you can bet your ass it will try to take it all back tomorrow.

The smart person would say - my system will trade all day for me. Or I will employ a trader who does want to do it all day!

The advantages of trading a proprietary method

You can make a lot of money in a relatively short period of time. Simple as that.

When I was offered a job at a prop trading firm straight out of university - the deal was you would be given £15,000 of firm capital to trade with - any profit you take, 30% goes to the firm.

So you need to make 10% on your starting account balance to even make £1,000 per month! Oh and this was in London and £1,000 will barely cover your apartment rent.

I didn't have the balls to take this job. But I can tell you this - although most people did fail, several people went on from that standing start to becoming very wealthy.

In reality, the traders that survived were making money elsewhere while they were learning the business. Working two jobs - Making money on the side - then building up their firm account to allow for good and bad months.

I guess the point I'm trying to make here is that if you are going to trade a discretionary short timeframe approach - you will have a much harder time becoming a consistently profitable trader unless you have the ability to be in front of the market all day. I would strongly suggest working on a systematic approach if you work a 9-5.

Good thread, subscribe.

Okay next post

Managing Expectations

This one may be met with some criticism because I'm not going to type what people will want to hear.

It is nice to think that with enough effort and determination - you can be good at anything. Personally I don't believe this. An example would be for myself, I could never be a programmer. I have so much respect for what these guys can do - and I've tried to learn, but for me, it will just never work. I don't have the attention to detail, or the focus to be able to troubleshoot thousands of lines of code. I just cant do it, and unless I had a gun to my head, I don't think I ever could.

I've heard trading being compared to running a marathon. Unless they have a serious physical condition, anyone in this world can train and eventually run a marathon. It wont be quick, but it's possible. Yet only 0.01% of the people in the world will be able to run a sub 3 hours. In trading - pretty much anyone can learn to trade, and to make money but only a few will be incredibly profitable.

In my experience, I have seen many people try and fail. People who I thought would be very good, did not ever become profitable. I think it takes a great deal of discipline as well as many other skills.

Trading is 'simple' but not easy. The time you spend learning this skill - you could have spent learning another trade which will have as much earning potential as being a trader. So the point is - You have to want to be a trader. Not just want to make money. Or want to be free of a job.

Being a trader can have free time, and lots of cash - But also you can go through times of no financial reward or loss. Also when trading intraday - you may as well be trading from prison as you will be tied to the trading screen.

I've seen so many graduates come out of uni with the attitude of 'Right, I'm going to the city to become a big swinging dick and dominate the markets' - Then I've sat in on an interview and they don't know where the FTSE closed last night. They don't have an opinion on where Gold is going. They don't know who Ben Bernanke is.

Actually, I'm going to find you a video which says it all -



I know that if you feel a bit let down by this view then you'll ignore it and think "What the hell does this keyboard hero know?" - But you can remember this when your eyes are burning from the screens, you feel sick at the thought that you might blow your capital at any moment, and you bounce from system to system, searching for the answers.

Some of my earliest memories are of my Polish grandfather teaching me card games. I ran a gambling club in my middle school where I provided the 'house' for kids to play blackjack. I started trying to develop a stock market automated trading system when I was 15. For me - this has been a natural path, and regardless of how much I hate it sometimes, I know this is what I am meant to do.

The point is - trading is hard. Sometimes it is a soul destroying nightmare of a business. So unless you really have an interest in financial markets, enjoy puzzles and care about economics - Just find something that you have a natural passion for. You will have a much happier life and probably make more money. Seriously.


I'll split this topic over two parts because it's a big post.


I'm anxious to crack on with the 'good stuff' which is around trading method development and how to practically go about improving trading. This stuff is all important so you'd do well to pay attention, but I know people aren't here for a lesson on how to live their life.


Regards,


LT

Great thread, LT. One comment I would like to make based on my personal experience with traders. I work in the industry and have met more than my fair share of professional traders. A significant number of the successful ones had no clue what trading was all about when they started. Typically they got into the business because they had friends/family who brought them in.

That's a good thing because training a fresh mind is much much easier than fixing a broken one. These guys look at it as a job and nothing more. And that's why they're so successful and disciplined. They don't let the losses/wins get to their heads. Most of the times when I ask them for an opinion on where the market is going, they claim to have no clue. The way they look at it is, "What's the upside and what's the downside". If the expected return is positive, they take the trade. Their minds just work that way. They don't have to tell themselves to think about expected returns.

Happen to share the same sentiment. This is a job just like others and as long as you do not let trades to get into your head, then you are good to go.
Surprisingly many of these guys already know what works for them and never look at forums or even daily market commentary. Keeping it real and really simple.

Danny

I do agree - Great point Card and Danny.

I think that one of the reasons I didn't take a position as a prop trader when I was fresh out of University was that I was a current struggling self taught trader. So much trash gets stuck in your brain - as well as limiting beliefs about trading. Coming from a fresh mindset and jumping straight in (with guidance) is key. I had the attitude of "Well, maybe this will help but I'll probably need about 6 months to get really good and I can't afford to fund myself for that time".


That is why I think the average person would have a huge advantage to start trading prop under professional guidance without any prior knowledge or beliefs impacting on their thoughts. That is probably the best way to do it - If you have the financial means to go without an income for 6 months - Go trade prop and be taught properly. Don't pick up self taught bad habbits.


For most people who would be on this forum, Prop trading may not be an option - So in my next posts we'll go through some key points to iron out those 'retail' habbits that stand in the way of profitability.


Cheers all,

Subscribed

John from Durban

Great stuff. Subscribed and looking forward to reading the rest!

There is noshortcut to successin forex market. Only those are good trader who invest their valuable time in this market . They become experienced to face market. they can confidently do trading , Their analysis and predictions come true. If we find any short way to reach success it is just for time being not long lasting.

Subscribed as well. Love your stories

The learning curve can be shortened if you don't waste your time learning strategies that don't work. After two years a novice trader in the city is usually much better than a self trained trader, because at the pit, all you learn is the important stuff unlike retail traders who may spend up to one year without a solid system.

My two cents to this interesting debate, and I'll be short. From what I've learned, and I've been a full time trader for four years, is that trading successfully is about finding or developing a system that brings profits, that's all, not win to loss ratio, as that can be in your favour and you can still lose money, but consistent profits, and you either do this on a demo account, or on a micro account. There is absolutely no short cut to this process, it takes time, and you will not meet many traders who do not speak in terms of years, not months, for this. The short cut can come with the psychology, because if you accept the risk in trading from early on, that is, if you can fully accept that incurring losses are part and parcel of this business, and are not afraid of those losses, then it is possible to shorten the learning curve. But it is vital to understand the charts you are trading first, because if you don't, you will simply lose money well before psychology becomes a factor.

Spend serious time learning how to trade, then go for it, know exactly why you are taking a trade and where you intend to leave it. The losses will be there, always, but so will the wins. Keep your trading tight, only go for the best set-ups, and never worry about any individual trade. It's the 20, the 50, or the 100 trades that make a difference.

There are no shortcuts, you have to bang in at least 10,000 hours before you are considered proficient in any skill.

Trading is all about processes, get the process correct and stick to it and its only a matter of time....break your processes and you will be all over the place.

Today I'll be at my desk all day - So I'm going to watch for a trade on EURUSD. Personally I like to use Floor Pivots when trading Euro. I've got a short bias - so if I'm taking a short trade, I'd expect probability to be higher and I'll risk more.

These are my two preferred trades of the day on the Euro. A break of a pivot point, followed by a retest - then enter.



Target 2:1 risk. 1% of balance for a long, 2% for a short.

My personal opinion is that risking the same arbitrary amount per trade is lacking because some trades will have higher probability than others - and these are where you want to load up. Let's see how it plays out.

TraderLT

do you have a short bias because of 5 and 8 MA on the daily ?

Interesting discussion.

The biggest issue most newbie traders ignore is the psychology part of trading. I firmly believe trading is 70% pyschology, 20% risk management, and 10% trading strategy. The risk and trading strategy can be taught. The psychology side is only realized through experience. It is the fundamental reason why many fail at trader. Most start out learning the markets and start developing an system that fits them. I really believe Psychology of trading should be the first topic that traders need to master before anything else. I wish I could have realized this when I started out, would have saved me years of time... But it is really the media that puts out all this garbage that misguides the lost souls.