Trading Lesson: 8 Steps To Be a Successful Trader
09/01/2017 2:51 am EST
Is your trading career doomed from the start or can you really do it? You can! But only if you’re willing to take these eight steps towards your trading success, writes Dave Landry. Look for weekly trader education commentary every Friday on MoneyShow.com.
1. Don’t be doomed from the start
Honestly ask yourself: Are there any blatantly obvious or tangible hindrances that would doom you from the start? I’m not a big sports fan, but I do know that a 50-something-year-old fat guy like me has no chance of becoming a professional athlete. Likewise, in spite of what the marketers say, you’re not going to be able to parlay a small account into millions. Yes, it can happen on occasion, but occasionally people win the lottery too. If it were that easy, why don’t they just do that themselves? And then rinse and repeat? These “one-hit-wonders” are doing you a huge disservice by suggesting these extraordinary results are repeatable. True, you can’t take that away from them, but what good is their one-time lucky streak to you?
Does your spouse or significant other support your endeavor? And, if not, can you reach a point where you can present a well-thought plan that includes a solid methodology and risk control plan so that they will?
Could you paper trade it long enough to prove your case? Would you then be willing to allow some serious introspection from that person? I have a client who does very well but then makes a lot of mistakes, and knows that he is making them. I asked him, would you be willing to involve your wife in the process so she could see what you’re doing? His reply was, “Oh no, that would end the marriage!” There was a study done (Odean and Barber) about what happened when husbands involved their wives in their husband’s trading decisions. Guess what? Their trading got better. On the flip side, not so much. When the wives got their husbands involved, their trading actually got worse. My take on this is that ego trumps emotions when it comes to trading mistakes.
I don’t know all of what's going on in your world, so the burden is on you to ask any remaining tough questions. Is there anything else that has nothing to do with the markets that could potentially derail you going in? For instance, if you’re dealing with a major crisis in your personal life then now’s probably not a good time to start trading. Educate yourself as a distraction but do not put actual dollars on the line. If there's a hole in your life, trading will not fill it.
2. Study and study and study your methodology
It might seem that I pick on the reversion to the mean (RTM) players, but that’s not my intention. It’s not my way or the highway. It’s just that I can save you a lot of grief here. The siren call of this type of trading has ruined many (and yes, I have a T-shirt too!). It truly is a “that'll work until it don’t” approach. In a recent chart show, I mentioned that one of the well-known advocates of RTM now appears to be a trend follower. I was asked if I was referring to the options trader of YouTube infamy who went from a small account to managing hundreds of millions. No, it’s not but it did get me curious. Just for fun, I did a “where are they now” Google search and it appears that person is in a bit of sheep dip for hiding $100 million in losses. So, here we have yet another exhibit A. I would never be schadenfreude, especially in this business when you get humbled often. The point is that if you don’t know that bad things can happen, then you’re going to be really surprised when they do.
Be your own devil’s advocate. Spend as much time looking for the what could go wrong with your system as you look for what could go right. Once you identify the bad, then honestly ask yourself if you could deal with it? I’ve been presented with systems that have 50% (or more!) drawdowns. Could you really lose half of your money and keep plodding away at it?
Once you do think that you have something plausible, then make sure that it fits your psyche. With my stuff, you’re going to have to be patient. Big trends don’t come along every day. You chip away at it until you catch the mother-of-all trends. In the meantime, you’re going to be wrong a lot. Occasionally, you will print money. Obviously, that’s a good problem to have. The point is that it’s one thing to know your methodology and another to embrace it, from both the good and bad.
3. Prove that you can do it by doing it
You’re probably sick of me and others spouting the cliche: “plan your trade and trade your plan” but are you doing just that? Probably not. A recurring theme in this column is for me to show the exact plan that I laid out and they take the trade even though it doesn’t trigger and then ask me what to do with the loss. If they do follow the initial plan, they quickly abandon it when they hit the first signs of adversity thereby avoiding a soon-to-be big winner. On the trades that stop out at a small loss, they hold and hope. Yes, it's cliche and much easier said than done but that’s the thing to do.
So how do you do that? Just do it. At least, just do it once. I'm not a tough love kind of guy, but if I got hit by a beer truck tomorrow, I would be doing you a disservice by not letting you know that if you can't follow the plan for just one trade then maybe you shouldn’t be trading. You can do it though. Just do it once. And, if you do follow the plan for just one trade-regardless of the outcome-then congratulations! You did it! Now, rinse and repeat for the next 1,000 trades. My work is done.
4. Embrace and accept the unknown
In one of my Random Thoughts ramblings, I talked about the fact that “a wise trader knows what he knows and knows what he doesn’t.” Provided that you really have picked the best and left the rest, then you let the chips fall where they may. Proper money and position management will keep you in or take you out. Never forget that follow is the key word in trend following. We don't know, but we can follow.
5. View losers as one step closer to winners
One of my favorite trading analogies is by the late and great Mark Douglas. He tells the story of two salesmen: A bad salesman gets rejected a few times and then drinks his lunch. A good salesman gets rejected a few times, grabs a cup of coffee and goes back to work, knowing that he's getting closer and closer to a sale. Trading is no different. Provided that you have a solid methodology in place and are picking the best and leaving the rest (see #2 above), then a string of winners will follow a string of losers.
6. Do nothing when there is nothing to do—keep yourself occupied elsewhere
As I often preach, busy traders make good traders-at least with my hybrid approach. They trade only when opportunities present themselves and then let trades unfold as they should. In the meantime, they save lives, build buildings, and do other great things. I know myself. I always have to be doing something. It's borderline a sickness with me. Even when I’m doing nothing, I’m doing something. For instance, if I’m watching TV with my wife Marcy I grab my laptop, or at the least, I’m shaking a foot or fidgeting a bit. I know that if I just stare at a screen, I’m going to feed that slot machine. Instead, I keep myself ridiculously busy. I write (literally, right now it’s keeping me from micromanaging myself out of a position), create courses, do webinars, and travel the world speaking the good gospel of trend following.
7. Find excitement elsewhere
Wait, didn't you just say that? Well, not exactly. Don't look to the markets for entertainment. You'll find that trading, done properly, can often be quite boring. You spend a lot of time waiting for positions and once you're in them, you'll spend a lot of time waiting for them to work. As I often joke, if you're looking for excitement, have an affair. That way, you only lose half of your money. Seriously, trading is not for entertainment purposes. Go to Vegas instead. It's cheaper and at least a pretty girl will bring you a drink while you lose money.
One of my “keep-myself-busy-projects-so-I-don't-fire-off-unnecessary-trades” is to clean up (and occasionally re-purpose) articles. In the process of cleaning up this one, I realized that I left out possibly the most important step to trading success.
8. Practice deliberate practice
Deliberate practice means that you are working diligently to get better and better at what you do. It is not just going through the motions. Did you really “pick the best and leave the rest?” Did you really work hard to become better at following your plan? Did you do an honest post-mortem after every trade? Could you have done better before/during/after?
The journey to become a trader is far from easy, but often not difficult as many try to make it. Take the eight steps to success and you’ll be well on your way!