This weekend I decluttered my house — and I wrote about how it reminded me of my early days trading. One of the things I unearthed during that massive decluttering mission — was my very first chart book. In it were about 50 or so charts of some of my very first trades.
Talk about a time capsule. These charts were taken from a 3 year losing streak that had me throwing computer keyboards, cussing out my monitor and backtesting useless trading strategies all night long.
Let me just say this — I was a really REALLY bad trader! Here’s just a few of the things I did wrong.
- I traded tips from the news
- I traded tips from other traders
- I traded tips from message boards
- I bought tops
- I sold bottoms
- I traded emotionally
- I traded without a plan
- I traded other people’s plans
- I bought wacky trading systems from anyone who was selling them
- I switched methods every other day
And nothing worked. Well, nearly nothing. Somewhere (I forget where) I read about the power of reviewing your own trades. So I printed up my last 50 trades and studied them day in and day out — for months.
I can honestly say it’s been the number one thing that helped me become a better trader.
Getting in too early? It shows up on the charts. Chasing crazy price action? It shows up on the charts. Closing out winning trades after really SMALL profits only to see price gap up hugely within a few days? It shows up on the charts. Holding your losers way way WAY too long?
It shows up on the charts!
Since that exercise, and after spending time on a ton of trading forums listening to the questions newbie traders ask (What’s the best indicator to use?, Who’s the best broker?, Etc.) — I began to ask myself:
If this was my first day/month/year of trading, what do I wish someone would tell me?
Which is a great idea for a post.
So here goes:
1. Trading is really not THAT complicated.
Don’t believe me? Here’s a chart…
Let’s say we enter on the circled day. How do we know if our trade is working out?
Price moves in our favor. Like this:
Awesome. Nice trade — and a check mark in the winner column.
Here’s another trade…
So how do we know if this trade isn’t working out?
Easy again — price moves against us.
What do we do if price moves in our favor? We keep our trade open. What do we do if price moves against us? We close our trade out. And that’s it.
So why do we make trading so complicated? I’m not really sure. Thinking back to my early days trading, I made it complicated because it SEEMED complicated.
There’s 24 hr market news on CNBC and FOX Business, experts yammering away all the time about their stock picks, important economic data that’s supposed to move the markets, and God knows what else — and on top of that there are THOUSANDS of books, videos and websites all on the topic of trading.
And then, beyond all of THAT nonsense, we have our own expectations to deal with. What we THINK trading should be like. How much we THINK we SHOULD be able to make.
So yeah — you can complicate the heck out of trading or you can keep it simple and know that the market can only move 3 ways: up, down, sideways.
2. You Can’t Predict the Future
For the longest time I thought that successful trading had everything to do with predicting the future. As if that could ever happen! Thank God I read this book by Michael Covel — and took its lesson to heart. I mean, seriously, I remember running into a co-worker’s office one day and yelling:
“Another one of my breakouts failed! How can I tell if a breakout is going to fail beforehand?”
Do you see the absurdity in that statement? If I knew in advance which breakouts were going to fail — I would be a gazillionaire in a matter of days. Instead of trying to predict the future, now I take trade setups that I know have a pretty good chance of success, and then I manage myself! If it doesn’t work, I close. If it does work, I leave it open. And I try and keep myself out of the way.
3. Turn Off The News — Like, Right Now!
I would tune in religiously — every morning — to CNBC. Before the market even opened I would listen to the “pros”, I would trade their tips, and I would lose. Is the market looking good today or bad today? Which stocks should I be trading? What’s the future look like?
Surely these guys knew what they’re talking about, right? After all, they WERE on freaking CNBC. Wrong. My trading improved immeasurably when I stopped watching CNBC and I started paying attention to my own trades.
Yammer, yammer, yammer. Blagh blagh blagh…
4. If it Works for You, it Works!
A strange thing happens on trading forums — strategy battles! Someone shares a method that works for them, and then someone else battles them over it — puking up 100 reasons why it could never, ever, EVER work. Then the two trading gladiators go at it for about 20 posts. What a waste of time and energy. If a trading method works for you then it works. Period.
A friend of mine on a popular forum put it this way:
If I go up to you and tell you that I love steak and that I think steak is the best food on the planet — would you tell me I’m wrong, that CHICKEN is the best meal?
Laughable, right? But that’s what traders do on trading forums every single day. So a better title for this tip might be — If it Works for You, it Works (And Stay Away From Trading Forums!).
Prepare to die — because my method’s better!
5. You Don’t Always Have to be Trading
The big boys — the managers and the funds — have to be invested all the time. We are not the big boys. We are the little guys. The retail traders. And we can get out of the market at a moment’s notice.
Is the market crashing? Get out. Not sure of your method? Get out. On a losing streak? Get out. Exhausted? Get out. Unlike our day jobs — we don’t have to be chained to the desk all the time. Take advantage of that and take breaks when you need to.
For some, I know, trading becomes more about the excitement and having a position in play. That is not what trading is about. It’s not a game. It’s a business. And you should treat it that way.
Need a break from trading? Go surfing!
6. Pay Attention to the General Trend of the Market
Stocks move in concert with the general trend of the market at a rate of 4 to 1. So pay attention to it! If the market is rocketing upward — you should be trading long. If it’s crashing hard — you want to be in cash — or short.
Keep the odds on your side.
No longs here, please!
7. You Don’t Have to be Right All the Time To Make Money
In fact, you are never going to be right all the time. That’s how the market works. In fact, you are probably going to be wrong just as many times as you are right. The key is to keep your losses small, and let your winners get huge. That’s how you make money.
Imagine the following 10 trades.
Yes, that is a method that has 80% losing trades — but is net positive +127%. That’s because it’s the size of your winners and the size of your losers that’s important. Add this information to the percentage of winners over losers and you have some very important information about your trading method.
8. Keep a Trading Journal
If you turn off the news, and you stay out of the trading forums — what should you focus on? 2 things — the market — and your own trades.
Keep a running journal of all of your trades. The reason why you took them and all of the stats. Entry date, exit date, gains, losses, etc. This way you can create a set of valuable statistics that will let you know everything you need to know about your current method and if it’s working or not.
9. Find a Method that Works and Stick to It!
Nicolas Darvas had his boxes. William O’Neil had his cups with handles. Timothy Sykes short sells penny stocks. I have breakouts, continuations and new highs. That’s because it’s important to master a strategy — to know more about it than anyone else — and to use that knowledge to make money.
Breakout, Continuation, New Highs!
10. Give Yourself Time to Learn!
Trading might be simple — but that doesn’t mean it’s easy. It’s hard because successful trading flies directly in the face of human nature. And if you’ve ever tried to do anything that runs contrary to human nature — you know how impossible that can be.
So give yourself time. Time to learn the market. Time to learn how to manage money. Time to learn yourself. Time to learn how you feel about having money at risk. Time to learn how you feel about losses.
11. (Bonus Tip) The Sequence of Returns are RANDOM!
I have to thank trading psychology GENIUS Mark Douglas and his book Trading in the Zone for this tip.
What it means, essentially, is that the distribution of returns from your method do not arrive in a predictible fashion and even if you have had 13 losers in a row — you have to take the next trade. Even if you have had 50 winners in a row it doesn’t guarantee that your next trade will be a winner.
For me — this knowledge was a breath of fresh air. It let me know that I can’t predict the future and that I don’t even have to stress about it. It told me that my results are a compilation of my returns OVER TIME. Each trade or entry was an event that was almost meaningless in the bigger picture.
Strange that newbie traders (like I used to be) place so much importance on the next trade or the next stock pick.
Trading is the most challenging and frustrating and rewarding thing I have ever done and I love it. It took me a LONG time to learn the ropes and I’m still learning. But without a doubt, these are the top 10 things I wish someone would have told me about trading at the beginning of my journey.