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What follows are some of these observations and conclusions that we have used in our own trading over the years to help develop improved behaviour and keep us on the right path, you can use them as a guide to determine the probability of being a successful trader and where you would need to make adjustments to insure an easier learning curb.
Observation one
The greatest number of losing traders is found in the short-term and intra-day time horizons. This has less to do with the time frame and more to do with the fact that many of these traders lack proper preparation and a well thought-out trading plan that only comes with experience.
By trading in the time frame most unforgiving of even minute error and also most vulnerable to “temporary manipulation” and general costs of trading, losses due to lack of knowledge and lack of preparedness can be exponential.
Winning traders most often start out their trading careers in the mid-term to long-term time frames and gain the adequate experience over time before considering whether or not entering the short-term and intra-day arena is something that is viable or even of interest to them. Most traders find themselves gravitating to the shorter time frames, but for the wrong reasons, lack of capital and lack of patience.
Conclusion
From a statistical point of view trading and gaining experience in the mid-term and long-term time frames offers greater probability of success for the novice trader. There is a great deal of reason for this but for the most part it has to do with ones mental stance and ones ability to shift perception of what the market is doing and been able to take action on that understanding.
It is just far more complex and difficult to do this in the short-term and intra-day time horizons. The mid-term and long-term time frames offer a far more forgiving environment to learn the dynamics of successful trading.
Observation two
Losing traders often use complex systems or methodologies that they do not understand or rely entirely on outside recommendations from gurus or black box systems as well as tips and sometimes they even have no systematic well thought out trading plan at all.
Winning traders often use very simple techniques, invariably they use either a highly modified version of an existing strategy or else they have designed and developed their own. They also are disciplined and consistent in the implementation of their preferred approach.
Conclusion
This seems to fit in with the mistaken belief that "complex" is synonymous with "better". This is not necessarily the case. Logically one could argue that simplistic market approaches tend to be more practical and less prone to false interpretation. In truth, even the terms "simple" or "complex" have no real relevance.
All that really matters is what makes money and what doesn't. From this observation, we might also conclude that maintaining a real stake in the trading process via your own trading ideas and analyses through study is very important to being successful as a trader, instead of simply relying on the methods of outside sources that you do not understand.
This may also explain why a trader who possesses no other qualities other than patience and persistence often outperforms those with advanced education or superior intellect.
Always remember, “Making money is more important than been right or bright”
Observation three
Losing traders often depend heavily on systems and methods from outside sources because they do not take the time to understand first before making use of them.
They do not take the time to study the mathematical construction of such tools nor do they consider variable usage other than the most popular interpretations and more importantly, they do not take the time to test a trading method first to gain understanding of it’s characteristics in the market. This builds and develops confidence in the trading methods ability to profit in the market before applying it to real capital.
This results in the inevitable lack of conviction in any market approach. This type of trader will always have a week stance in the market second-guessing every decision made rendering an otherwise sound approach or trading recommendation useless.
Winning traders often take advantage of the use of computers because of their speed in analysing large amounts of data and many markets and even the use of systems and indicators or recommendations from outside sources but first they test and understand these systems completely.
However, they also tend to be accomplished chartists who are quite happy to sit down with a paper chart, a pencil, protractor and calculator.
Very often you will find that they have taken the time to learn the actual mathematical construction of averages and oscillators and have completely evaluated the trading systems they use and can construct them manually if need be. They have taken the time to understand the mechanics of the markets and the tools they use, right down to the last nut and bolt before applying any method to real capital.
It is inevitable that this type of trader will have the adequate conviction and trust in his approach and trading methods to insure consistency and discipline in it’s implementation to real capital.
Conclusion
Trading is not and should not be seen as a complicated task but nothing comes easy. If you want to be successful at anything, you need to have a strong understanding of the tools involved. Using a hammer to drive a bolt into a threaded hole might work, but it isn't pretty or practical.
“Always keep a detailed trade-log / journal and study it every week”
Observation four
Losing traders spend a great deal of time trying to forecast where the market will be tomorrow, next week or month and then hang onto that view long after the market is doing something new.
This is not rational if one hopes to make money in the market. Subconsciously they are essentially saying it is more important to be right than it is to make money. Sooner or later the market will prove them “very wrong indeed” for subconsciously believing this.
Winning traders spend most of their time thinking about how traders will react to what the market is doing now, and they plan their strategies and systems accordingly. They are able to make very fast paradigm shifts in their view of the market.
Conclusion
Price forecasting is important and it has its place. There are also very accurate forecasting techniques that can produce very profitable trades but often these techniques are based on highly sophisticated mathematics or require a great deal of subjective interpretation by the trader, therefore it can take years of study and practice to perfect.
The success of a trade is much more likely to occur if a trader can understand what type of crowd reaction (fear or greed) a particular market event or move will invoke and then construct their strategies and systems to seize advantage of these events.
Being able to respond to irrational buying or selling by market participants with a rational and well thought out trading plan will always increase your probability of success. It can also be concluded that being a successful trader is easier than being a successful analyst since analysts must in effect forecast ultimate outcome and project ultimate price movement.
If you were to ask a successful trader where he thought a particular market was going to be tomorrow, the most likely response would be a shrug of the shoulders and a simple comment that he would follow the market wherever it wanted to go. By the time you have reached the end of this coaching program, what may seem like a rather silly response may be reconsidered as a very prophetic view of the market.
“Never think in terms of boundaries that limit what the market can do because simply the market can do absolutely anything”
Observation five
Losing traders focus on winning trades and high percentages of winners. Winning traders focus on controlling risk, money management, solid returns, hit rate and good risk to reward ratios that produce an acceptable Positive Expectancy.
Conclusion
This observation implies that it is much more important to focus on overall risk versus overall profit, rather than merely "wins" versus "losses". The successful trader focuses on possible money gained versus possible money lost or what is know as a positive expectancy, he cares little about the mental highs and lows associated with being "right" or "wrong" where as losing traders seem to always have there ego’s on the line and this keeps them thinking irrationally.
Some of the best traders we know are right only 40% of the time yet still make enormous profits through proper risk controls and money management. Often these very successful traders never risk more than 3% on any single trade, still other even less.
A good friend of mine always says “If a trader is profitable 99% of the time but risks his wallet on every trade sooner or latter he will lose everything”. This is obviously true and therefore risk controls and money management plays an enormous roll in the success of a trading methodology.
“Always think of risk, reward and points in terms of percentage never money”
Observation six
Losing traders often fail to acknowledge and control their emotional processes during trading. Doubt fear and greed through lack of preparedness control their decisions and sooner or later they always find themselves in a spiral of panic losing all rational thinking.
Winning traders acknowledge and control their emotions, examining the market based on their complete trading methodology, which they have taken the time to “know”, leaving no assessment of the market to an emotional impulse, particularly if the state of the market has not changed or the trade is still within it’s original trading plan.
Conclusion
If a trader enters or exits a trade based purely on emotion having no real trading plan, then his market approach is neither practical nor rational. Even trading through reliable outside recommendations or from black box systems that the trader has not tested to gain understanding of their characteristics, again his market approach is neither practical nor rational.
For this trader there is no conviction in anything he is doing leaving the door open for doubt, fear and greed to stamp its ugly mark. Strangely, much damage can also be done if the trader totally ignores his emotions. In extreme cases this can cause physical illness due to psychological stress.
In addition, valuable subconscious trading skills that the trader may possess but has no conscious awareness of may be lost. It is best to acknowledge each emotion as it is experienced and to view the market at these points based on your trading plan to see if the original reasons you took the trade are still present.
“Always be disciplined and consistent, plan your trades and trade your plan”
Observation seven
Losing traders care a great deal about being right. They love the adrenaline rushes and emotional highs that trading can produce. They become obsessed and must be in touch with the markets almost twenty-four hours a day. Winning traders recognise the emotions but do not let it become a governing factor in the trading process. They may go days without looking at the markets. To them, trading is a business.
They don't care about being right or wrong for that matter. They focus on what makes money and what doesn't. They enjoy the intellectual challenge of finding the best odds in the markets. If those odds aren't present they simply do not trade.
Conclusion
It is important to stay in synch with the markets, but it is also important to have a life outside of trading. It is a rare individual who can do anything to excess without suffering some form of psychological or physical breakdown.
Successful traders keep active enough in the markets to stay sharp but also they realise that it is a business not an addiction. Any other way to view the market seems impractical, inefficient and counter productive as it can stir up all kinds of harmful emotions.
The fact is that a disciplined trader who can consistently and systematically implement a rational and clearly defined complete trading methodology and at the same time apply strict rules governing the principles of risk control and money management within that complete method with the same consistency will achieve long term profitable results.
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