I clearly recall how I felt when I first started working in the dealing room. The learning curve was crazy steep! I felt soooooo intimidated. There literally were thousands of permutations of everything to consider when making trading decisions.
These could range from different types of trading strategies, entry and exit techniques, types of correlation, significance of pivot points, event risk, strike risk, spike risks and so on and so on. I literally can go on and on about all the variables out there and how they are all intertwined into this massive spaghetti bowl called the financial markets…
The point is, that if you get bogged down by every single thing that is out there to do, or that could possibly kill you, you will literally end up doing nothing! You have to start somewhere and build on that momentum.
There is a famous quote which by now is so plagiarised that I honestly don’t know how to give credit to for it.
“Every expert was once a beginner”Unknown
Translated to trading it reads “Every Professional Trader was once a novice trader starting out just like you are staring now”.
So how do you get over your trading inertia?
By following the guidelines below it should cut the noise to some extent and allow you to hone into your most ideal target zone in which you would be operating most optimally. Understand of course that people are different and that what works for one does not by implication automatically work for another.
So if you hear someone professing to be a guru on the latest most greatest trading strategy, don’t be discouraged nor intimidated. If that strategy does not fit into the below frame of reference, then it has no relevance on your trading.
This is an important point to grasp. You need only to become an expert in a few core strategies to give yourself a major advantage and shot of being a successful trader. If you chop and change the whole time you will never truly get into your own rhythm.
What Type of Trader Are You?
To explain this concept, let’s look at comparing a few types of cars. There are a whole range of cars out there. All serve the general same purpose but inherently all serve a different target market.
- Sports cars will get you to your destination fast, but is rather useless to use when going on vacation as there are hardly room for one’s ego in a car like that, let alone luggage or family/friends.
- Minivans are dead ugly, but amazing when you have kids. Each one of the kids can sit on their own seat, far enough from their siblings which makes for a nice, quiet and peaceful drive. It has a ton of luggage space but finding parking can often be a headache.
- Small compact cars are great for when you are young, with little to no surplus cash, really needing fuel efficiency, as every cent saved on gas can go towards beer…
Yet, in the end, the basic function of all the above is to move people from point A to point B. So don’t confuse FUNCTION with any form of SUPERIORITY of one over the other.
Trading has existed for centuries, so why would you want to recreate the wheel when all you need to do is just choose the “car” that fits your own requirements in getting you from point A to point B? Who cares if someone else drives a different car, if its FUNCTION does not work for your own unique and individual requirements, then why consider it as part of your decision-making process?
So, in a nutshell, your trading style will likely change as you grow, but that’s not of concern to me now. The reason why I am here is to get you moving from point A to point B in the simplest way possible which is the easiest to understand, has the lowest time impact and lowest level of complexity.
Trading Style Checklist
So, let me help you choose your ideal “car” by guiding your decision-making process through exploring each of the below:
- First and foremost, figure out what trading style suits your own personality.
- Realistically determine how much time you wish to dedicate to trading (on a daily basis).
- Understand why you want to trade
- Define your market, and then your time horizon (which will be in line with points 1 and 2)
- Create a trading plan
- Study and master all components of your trading plan
- Implement and stick to your plan for a while
- Don’t forget to enjoy the ride!
1.YOUR TRADING PERSONALITY
In my lifetime trading I have literally seen all sorts of people. Most talk a big game but when it comes down to it run for cover with every opportunity they get. Their risk management techniques are as shocking as they stock selection theory. Every week they are “back testing” the latest and greatest new trading theory they came up with and for the most part are “killing it” in the markets.
Humprey Neill, the father of contrarian analysis had a famous saying
“Don’t confuse brains with a bull market”Humprey Neill
For me, the single thread that cuts right through everything I will ever tell you is that you need to find what works FOR YOU!!
In the end, unless you are money manager or a prop trader at an insto, you will always only be accountable to yourself. Your greatest competition will be yourself. The market does not care what you do, what positions you have on. In the end, You can either be your own worst enemy or your own greatest ally.
For this reason, trading needs to match your personality style. Allow yourself the time to develop your style. How does one do that though? Well the only real way is to actually start trading.
The trick to this would be to start in a way that goes the least against your natural grain. In other words, by keeping the position size small enough that you are emotionally neutral to a win or a lose (well a little partial to a win is always a good thing)… SO, having said that, I cannot overemphasize the importance of managing your limited trading capital which becomes key while in your discovery phase.
We can however move from a safe point of departure. For the bulk of the population, it’s safe to assume that, if given a choice, most people would prefer not to take a trade in which they know for a fact that they will lose. That is a given, however, the funny thing about humans are that “expecting to lose” becomes far less daunting if this loss can be predefined, and is coupled to a potential benefit for taking this perceived risk.
This is a crucial piece to understand in assisting you in getting over your initial inertia.
So in summary, its 100% ok if you don’t know the answer to your ideal trading personality as yet. My advice to you though would be that until you do, focus on keeping things simple. Don’t over complicate your trading by using overly complex indicators which have a ton of rules that changes with every change in another random variable.
Choose only a few indicators and become a master in those. Trust me there are plenty. In fact the basic stuff I will use during the “trade to a million” process will all have very minimal rules, very easy to understand, identify and execute,.. you’ll see exactly when we get to that point.
2.TIME AVAILABLE TO DEDICATE TO THE MARKETS
The next step would be to realistically determine how much time you wish to dedicate to trading every day.
This is a CRUCIAL piece of information that goes into the trading puzzle as this alone can singlehandedly result in certain strategies to be included or excluded from your trading plan all together.
Broadly defined you need to decide the following:
Do you trade for a living or do you live to trade?
The choice ultimately depends on your own personal setup at the point when you start trading. Note that I am purposefully excluding the “Professional Traders” from the below classification as my reasoning is that you will get all your training via the institution you work for, and really don’t need my help.
So the below is typically what one would consider “retail traders” will be classified as. You should measure your own available time allowance against the following and define yourself broadly as per the categories below:
- Day Trader – typically requires one to sit in front of the screens every single day, for a good few hours. This is your job, you don’t have anything else that pays the bills.
- Wealthy Trader – you already have enough capital built up to live off the income you make from trading and can afford to spend as much (or as little) time as you desire dedicated to doing research, looking for trade setups and general “watching the screens”.
- Part Time Trader (albeit a temporary plan on your way to trading for a living) – Trading part time generally implies you have other commitments you need to attend to like a formal job, or studying, or playing a professional sport, have a family or small kids, in general anything other than the markets that takes up a lot of your time.
There is a lot of allure to day trading, but very few people truly have the stomach to ride out this style of trading. It’s a completely different thing making a profit on a good trade when it happens, than to have the constant reminder that you ABSOLUTELY HAVE TO MAKE A PROFIT else there will be no dinner tonight, or the lights may be turned off, or you cant afford the instalment on the Ferrari next month. This by far is also the riskiest side of the retail market as everyone think they can hack it only to find out that they have reached the end of their money sooner than expected.
My personal opinion is that day trading is something that one morphs into. You don’t start out as a day trader. You only get there once your training wheels are off and you have migrated from Part Time to Wealthy.
Novice Day traders reminds me of the saying, “What’s the quickest way to trade yourself to a Million Dollars…. Start with Two Million…..”
Your time dedication to the markets dictates which type of trading styles you can experiment with. It’s is either a driving force or a pushing force. If you have all the time in the world, (and capital) then you can afford to watch the markets the whole day and trade very short time spans.
In fact, its almost a given that you will. Your time watching the markets shall require your system to regularly kick out trading signals. If you want to see a trader scratching his own eyeballs out from the inside, then have a day trader follow traditional trend trading techniques over a long-term time horizon… if they can’t scalp the market they will rather eat a cactus.
On the other hand, if you have a job not related to trading, then the last thing you can afford is to have your trading signals and decision based on a 2-minute chart pattern. You will never have the time to react to these short time spans if you are at work (or alternatively one would have to assume you will never end up doing any work as you’ll be constantly on the internet checking and managing your portfolio)
3.UNDERSTAND WHY YOU WANT TO TRADE
By now you will understand the significance and importance of “why you trade”.
The “WHY” has a material impact on all your decisions ranging literally from the most basic info like the type of computer, the amount of screens and the speed of the internet access you require, to more complex issues such as your stop loss levels, which in turn has an impact on your deal size and frequency (as well as instrument distribution).
My advice to you is that slow is better. I know that is the WORST message you can give a new trader. In general, trader personalities, especially when starting out are “go big or go home” type. I know, I’ve been there. No one can become the master of the universe by taking it slow..right?!
The honest truth is that had my dad given me this advice I probably would not have followed it either! But hey, I made a promise that I will keep telling you guys the stuff exactly as it is, no frills.
Trading at a fast pace without understanding what you do and why you are successful (or not) is a major risk to your future existence as a trader. One need to be able to differentiate whether your results are attributed to randomness or your trading system/style.
In fact, if this book is still available by the time you read this I would want for you to read “Fooled by Randomness” by Nicholas Talebb. It will show you the devastating havoc that randomness can cause and will hopefully give credence to my philosophy of trading for the long term.
You will recall that one of my core fundamental guidelines to you was that your trading should match your personality. So just trust me on this.
4.DEFINE YOUR MARKETS
There are a ton of different markets out there to trade, each with numerous different instruments and securities. More importantly is the fact that some markets react completely different to others, and even the way one would quote them are different.
When starting out the worst thing to do is to go on a shot-gun approach where you literally try and shoot every moving target out there.
Instead I would offer this simple advice. Rather than following a whole bunch of markets, instead find a trading strategy, and then look for signals of that particular trading strategy within a given set of markets or instruments. As an example, you can trade an “inside day” strategy and every night scan for these across say 10 currency pairs. If it does not exist there that night, then pass…. Don’t go wondering off into unknown markets looking for this setup.
The reason why is that following a given set number of markets will result in you becoming in tune with those markets. I experienced this first hand. When newcomers joined our trading desk I would often ask them for their views and trading ideas on a range of currency pairs. I would then sit in amusement listening to all their text book answers. (by the way, for the most part, we used the text books as door stops in the dealing rooms).
I would then redirect them and ask them for the next two weeks to only follow 4 currencies at max. This small focus, narrowing down the universe of possibilities made a HUGE difference. Suddenly their trading ideas and opinions on the market were supported by fundamental facts, or technical observations to a much deeper depth than when they tried to have an answer on everything. By boiling a cup of water, instead of the ocean, they were able to dramatically improve their in-tune-ness with the market they were focussing on.
5.CREATE YOUR TRADING PLAN
Once you’ve decided how much time you can dedicate to trading, and once you have defined your markets you wish to focus on, the next step is to explore trading strategies that fits in with this plan.
What you’ll find is that certain trading signals/strategies favour certain market conditions and or trading styles. A lot depends on the time one intends to be in a trade, how entry and exit levels are chosen, and to some extent, the frequency with which one intends to trade.
Quite often traders will tend to blend many of these into a single trading style, using one set to determine entry levels, and then perhaps switch to another set to manage the trade and determine exit positions.
For the most part and very, very broadly defined the below are the most common different trading styles and categories in which the various trading signals fits into (loosely arranged from most active to generally least active):
- Day or Intraday Trading
- Technical Trading
- Swing Trading
- Trend Trading
- Fundamental (Macro / Value Trader)
The aim would be that once you have defined which category of trader you are (or aim to be), you will then identify all the relevant trading patterns and indicators that are typically applicable or commonly used with that particular style.
6.BECOME AND EXPERT IN THE COMPONENTS OF YOUR TRADING PLAN
Your trading plan’s evolution up to now will be a culmination of all the various factors highlighted above. The remaining responsibility on you is to master all the various strategies you intend on using. My advice here remains to limit these to only a few entry and exit techniques.
Gain your familiarity with this while fiercely protecting your trading capital.
When all is said and done, I will show you my “Secret Sauce”, and how I use derivative structuring to enhance this process even further!!!
7.IMPLEMENT AND STICK TO YOU PLAN
Strategy can only be measured and altered after you’ve allowed it a reasonable time to play itself out. The worst thing you can do is to chop and change your trading style.
Find a trading strategy or indicator that works for you, that has some sort of historical relevance (in other words, have been time tested and works), and just stick to it for a while.
Consistency will eventually determine your success. If you can’t stick to your plan you will never truly be able to isolate areas of concern. In other words, you need to be able to establish whether your trading strategy failed or did you fail the strategy?… this can only be measured over time.
8.ENJOY THE RIDE
Lastly, always remember that you’re here, on this trading journey, because you want to be, in fact you chose to be. Why do something that makes you unhappy or unfulfilled. Enjoy Life