Shortcuts to becoming a profitable trader

I could never get on a desk at Goldman but I would say that I think they would only take on a trader with the correct psychology.

Using your car driving example - Many people learn how to drive in practical lessons but when it comes to a driving test, they go to shit. Now that is the psychological impact of not having the experience and confidence yet.

Same with trading - You can give someone a working system with entries and exits, but if they lack the experience and confidence then they will screw it up, either through modifying the system to what they believe is better, too large or too small positions, or trying to find a new system when they suffer a few losing trades in a row.

That is the massive advantage of learning through an institution because if you deviate from the system then you are forced back on track. Retail traders do not have the experienced mentor over their shoulder telling them to chill out.

It takes massive faith in a system to stick with it when you get 5+ losing trades in a row. I'd go as far as to say this is the single reason why retail traders will struggle, because they don't have enough faith in a system to stick with it through hard times. No system will work through all market types and I feel that highlighting this is a massive point that many people can miss. For example - grids work amazing in volatile, range markets but get smashed when things trend. Breakouts do really well at the start of a trending market, then lose money hand over fist in a range.

The title of this thread was tongue in cheek, and I would hope that people would have realised this. I'm not going to say that there are shortcuts to trading success, but I have no doubt that I can help people avoid some pitfalls along the way.

I've noticed that the majority of comments here have been from people who imply that they have already got it figured out. Regardless of how true this might be - I'd like to see comments from people who are having problems and see if we can find a potential solution.

do your research and be careful in your every move, I think that i the shortcut, but still it won't guarantee success everytime.

I am one of those trader who is still finding my way in this trading game. I got into the game in 2008. Blew up 2 of my accounts.
Stop trading since then. Just got back in this year.

Started with thinking that I got it down after lots of studies & focussing on the basics. Overconfidence man. But then, the attachment you have with your money. The negatives eats me up each time I open a trade. Funny thing is that most of the trades that ended up as losers are actually a profitable trade.

The fatigues, the nerves. The trading plan that is always all over the place. The systems, the time frames, the lots sizes, the trigger happy of my fingers.
There was a week where in terms of pips gained I was up by 100+ pips... But my net capital for the week shrunk.

It got to the point of me questioning the very essence of my ability. Started to doubt about my self. Questioning my intelligence. Being very disappointed.

Well, now. Started toning down my thoughts. Always being realistic. Each time I want to take a position I always ask how much will I lose. Instead of how much I will gain. Cut my attachment with trading money. Limiting my exposure to the markets. Being very selective. Let the trade plan plays out instead of me tweaking it out of erratic impulses / nerves. My trades have started being more & more consistent. But still a long way to go (recouping what I've lost )

I think you need a strategy that guides you on how to act depending on what the market condition is. A sort of battle plan. The discipline to stick with your plan. & also money management. I am not sure if I am on the right track yet but psychology & discipline really does play & important role for me.

If you deviate from the system, then you get fired....too bad coz your trading career will be over anyway

Hey Cluing, thanks for the honest comment.

I've got a ton of paperwork I need to get out the door today so I'll write a propper reply with some thoughts this evening.

I'll tie this in with my next topic which will be trade size and money management.

Regards,

LT

Good stuff! I understand this is not really a "shortcut" post but more of a experienced trader guiding the new traders to walk a straighter road.

Thanks!

Okay Cluing,

Being trigger happy is natural. No one wants to miss out on trades that will add to their p&l. It is best that you take a step back, and focus on your process without your psychology messing you up. Go back to demo. Don't worry about missing out on real profits in the mean time. The market has been here for longer than any of us, and will be here after we are gone. Don't worry about it for now - best to preserve your cash to trade when you have got this.

One thing that makes trading hard for smart people is that smart people naturally think "that might not work for me, I'll find my own way." Now in the long run, once you can be consistent, this will really help - but when you are starting out, you'll just be tempted to jump from system to system before you get a good idea of how to trade a particular method. So you need to find something you can stick with to get consistent.

Firstly, what are your available times for trading? If you work a day job then I would not try to trade anything lower than a daily chart. I honestly believe that it is easier to trade a lower timeframe and focus on just one market or currency pair - but if you do not have time in the day to trade London hours, or at least early NY hours then stick to the dailies.

(Demo account for now)

2nd step - pick a system. Ideally one that fits you. If you get on well with support and resistance, find a break out system. If you like moving averages, then find an MA cross system. I can't say which is best but there are tons of systems out there which work, given correct money management. Just pick one - money management is going to be strictly controlled for now.

Your system needs to have a risk/reward in your favour that you can manage position sizes around. For the purpose of getting your mechanics sorted, start off with risking 1% per trade (In reality, risking the same amount per trade is not optimal but we'll cover more on that later). Aim for 2% or more on your winners.

Take 20 trades, see them through - and your goal is not to make money, but to see if you can follow one method without making mistakes.

Once you've got your mechanics right, it's simply a case of finding a method that works for you.

In demo your psychology wont matter, but getting your trading execution down should be the first step.

Remember it's not about profit here - it's just about getting the process right.

Let me know how it goes

Hi TraderLT,

Great thread & good read, really helpfull!
I guess I'm like Cluing, been there done that & sometimes still!
Appreciate what you're doing!

Tnx

Position Size and Money Management

I've been wanting to post about money management for a while - because I believe that this is the second most important aspect of getting your trading right.

(1. Psychology 2. Money management 3. Trading system)

You can illustrate the importance of position sizing just through games of a random outcome. It's hard to illustrate this through written text but I'll try.

If you roll two 6 sided dice to simulate the outcome of a trade. Start with a notional balance of $10,000 - you can chose to risk as much or as little as you like on each trade. R = the amount risked on each 'trade'

Outcomes
2-7 = loss of 1xR
8 - Win 1xR
9 - Win 2xR
10 - Win 3xR
11 - Win 4xR
12 - Win 5xR

So this represents a trading system that has a less than 50% chance of a winner, but has a 1/12 chance of a 5xR winner.

If you play for a few sets of 20-30 'trades' you can see that the system doesn't change but the result vary massively. This is what happens in reality with trading. The largest influence over the account balance over the 20-30 trades is your position size. Now statistically, this system would be very profitable in real trading. To develop a system with that type of performance is not impossible.

However, if you are risking 10% of the account balance on each trade and you get 10 losers in a row you will be out of funds. Although very unlikely, this is a very real possibility. Even if you were risking 2% per trade, the chances of a 20-30% drawdown are very real and possible.

Do you think you could stick with a new trading system that gave you a 30% drawdown at your first practice? I doubt it. You'd think 'this doesn't work' and move on.

If you risked 0.2% of your account balance per trade, and had 15 losers in a row, you'd only be down 3%. Would that cause your fear emotions to kick in and get you out? Probably not. On the other side, if this system only takes 3 trades a week, then it'll take you about a year to make 20%. For most retail traders with account balances of $10k or less - you think it's worth all the learning, practice, failure and constant monitoring of the system for a pathetic $2,000. You could make much more money with a part time job with a lot less risk and add some value to society.

It's a very careful balance between finding the level of position size that will keep you in the game. You don't want to panic in times of drawdown, but equally you do not want to get bored. Think carefully about what level works for you.

Personally I have position sizes of between 0.5% - 1% risk of account balance in my longer term positions then 1-3% in my short term positions.
I can take more risk on my shorter term positions firstly because I know they have a higher probability of a profitable outcome and secondly because I am actively watching the markets and can act quickly should I need to.

I will write more on this topic later. I've got stuff to do now but just wanted to quickly add -

For anyone working on becoming consistent (the step before profitable) - Sticking with the same level of risk for a mechanical system (eg. 1% per trade) is good practice. This will protect you from blowing up an account, and will make gains given a half decent system.

For more experienced traders who can work with a system without making errors - the same level of risk per trade is not optimal. There are going to be times when the market gives you clues that your trade has a higher probability of winning than normal.

If you are a trend follower - remember early this year in JPY pairs? It was so easy. During those types of markets you can comfortably up your risk and take advantage. If you think of the market like playing poker - You need your risk to be low enough to keep you in the game through lots of bad draws, but when you get those pocket kings or aces - You need to go big, because these chances don't come every day.

It makes no sense to risk the same on a trade with a 40% chance and the next trade with a 60% chance - but for the purpose of learning and becoming consistent, it's about staying in the game, not making big returns. Don't worry - the money will come in time.