The six stages to achieving trading success:
The first three stages tend to be obstacles, while the second three involve the process of learning to trade.
By reading each stage carefully, even multiple times, and taking a 1/2 hour out of your day to relax in your favorite place and consider that day's stage, you will move yourself much closer to your goal of being a successful trader.
Day One: Ownership
The first, ownership, which we will cover in today's lesson, is the biggest roadblock, and the reason why most individuals fail to become successful traders. Ownership encompasses your belief that you own everything from the idea to become a trader, to the method you will use, to the time you trade, to the platform you use, down to the chair you sit in and the mouse you hold. You are not only attached to these components, you own them, and value them as such. Because of this it will be difficult, and in many cases nearly impossible for you to change any of them based on someone else's suggestion. This can be particularly so if the person making those suggestions is different than the type of person you would normally seek counsel from. The problems created by ownership, also known as "attachment" are ego related, and commonplace in individuals who trade only their own money. Some of the best examples of this I have seen were experienced traders coming off the trading floor who would not take the counsel of younger traders offering advice about trading on the screen. It is not easy for people to heed the advice of someone younger who they perceive to be not as knowledgeable or experienced as themselves, particularly when the advice is free. Our ego makes decisions for us regarding other people based on everything from age, to different politics, to whether someone shaves regularly, without a second thought. The idea of taking advice from someone different than us, let alone of being in a position of owing them a debt of gratitude, runs deeper than we know.
Traders who have been trained professionally to manage firm or customer money generally don't have ownership issues. They own none of the before mentioned components, and always know that if they are not successful they will be fired. It is obviously much easier to be trained, have a funded account provided for you, and to be given your marching orders by professionals, than to do it on your own. There are no egos on a professional trading desk on the first day of a new month. Most professionals are comfortable in the knowledge they owe their paycheck to those who came before them.
What is the cure for "ownership" for people just learning to trade? Realize that it is ok to be thankful to others for their help, and there is nothing wrong with owing someone a debt of gratitude. Most of us find the idea of owing someone, particularly for something that led to us putting money in our pocket, burdensome; that type of thinking is a serious handicap. Not listening to someone who can contribute something you need and avoiding being indebted to them for helping you because of your pride is destructive behavior that contributes to failure. For many of us just about every decision we make, or have made, is done with our emotional or physical well-being in mind; which is human nature. It goes against the grain, to ask for help, and then express nothing but honest gratitude in exchange; particularly when that helps comes from a source we could not have predicted. An open mind will eventually overcome the attachment of perceived ownership and opinion.
Day Two: Planning
Today's lesson covers the 2nd phase to achieving trading success: planning. Nothing that has stood the test of time in this world was built without a plan. It is essential in your journey to become a master trader that you have a plan. You will definitely need a trading plan, which will tell you what and when to trade, and how to manage your trades. But before you get to writing out your trading plan, you need to make the most important decision you will make, which is to identify what methodology you will use. The methodology will define how you trade; whether you are to be a trend trader, or a mean reversion trader -- counter-trend trader. Which time frame you trade also needs to be determined depending on variables from if you have a job other than trading, to your attention span, to how much sleep you need. Most of us learning to trade gravitate to counter-trend trading because it dovetails with our perception of value. Counter-trend trading in simplest terms means buying price dips and selling rallies, which supports our existing believe to buy when something is cheap and sell when it's expensive. It can be said that the vast majority of us have mean reversion mentalities; meaning we have a rough idea of the worth of something so it does not make sense when price goes too far beyond that value in either direction. This mindset supports a method that takes advantage of sideways markets. Given price goes sideways the majority of time most traders initially opt for a counter-trending method. The potential drawback to a mean reversion method is over the long-term, markets are anything but mean reverting. Historic charts of stock indices and currencies show long drawn out price trends that often last for many years. We have to take a closer look to make out the sideways price action when markets pause or eventually do reverse. While markets do spend up to 75% of time moving sideways, the directional price movement the other 25% can be extensive. For example a market can jump quickly during the first hour of the Asian session, then move sideways for 12 hours, before jumping quickly again on the opening of U.S. session, before resuming a sideways pattern for the rest of the day. A strategy to try to take advantage of the impulsive or trending price action won't work in the slower moving sideways price action. The opposite of counter-trending is impulsive or trending price action. A trend trading method is designed to get in a trade aligned with the longer-term trend, or price pattern and stay in it, allowing the market to do the work for you. It also has the advantage a lowering your transaction costs because you trade less. In stocks, futures and Forex you pay a transaction charge every time you trade, therefore the trader looking to take smaller bites by trading more frequently such as a counter-trend trader, will have a higher cost of doing business than a trader whose goal is to stay in a trade for a more extended period of time. One of the reasons trend trading is not as popular with beginners is our own mindsets are often out of sync with extended periods of growth or shrinkage. Without experience it's hard for the average individual to see continued value in something that has increased sharply in price over the previous season. Likewise when we see a market that was in demand the previous year and trading at $100, and is now trading at $75, it's not our natural inclination to bet it will continue lower to $60.
All these considerations take planning, and testing, and adjusting over time and through different economic seasons. And then there is fundamental news, such as scheduled economic releases and breaking developments concerning everything from natural events to social occurrences to national and global economic events. How do you plan for these? For example take scheduled economic releases such as employment data or Federal Reserve decisions; do you exit trades ahead of these potential price determinants, and await their release before going back into the market? These contingencies must be planned out ahead of time. And while it is your goal to craft a trading plan that defines how you chose a market to trade, and what trade set-ups and signals you're looking for, you also need a plan to determine how you identify the different trends at play in the markets and how you measure current direction. You need to know when direction has changed as this will determine the timing of your operations. And then there are market correlations and the interference - divergence and convergence - they create to consider. Whether they are considerations for you or not has to be determined ahead of time. It's starting to sound more like work isn't it?
I'm very familiar with the work aspect of learning to trade and the thoroughness needed in your planning. In the past when I've set out to compile plans to help myself and my clients improve their trading they ended up literally becoming books. You will find in learning to trade there will be necessary detours along the way you will need to follow in order to stay on the right path in your journey. Don't worry about this, you are exactly where you are supposed to be. In the end your trading plan will be boiled down to one simple page which will be the tip of a much larger plan known as your trading education and experience. And it does stand to reason that the traders with the most education and experience are the ones whose capital is preserved and multiplied.
Our next lesson will cover "working", where we will see that our current perceptions about hard work and reward may be holding us back as traders.
Day Three: Working
In stage two, planning, we covered the importance of selecting a trading methodology which will be the most important choice you make as a self-taught trader. Step 3 is an extension of the planning stage, when you sit down and spell out your trading plan based on your methodology. Generally speaking the less moving parts to a method the better. Less is definitely more in this business. A friend used to work in the system development areas for one of the biggest broker dealers in the business and the rule of thumb was if a system designer could not explain and demonstrate his method/system in five minutes they wanted nothing to do with it. One of my earlier trading mentors, Bill Williams insisted that in order to trade for him, or use his method, you needed to be able to analyze a market in about 10 seconds. A cluttered chart is the product of a cluttered mind. Hard work should not go into creating the methodology - most methodologies have already been created, or are a slight variation of an existing method. Understand that there is very little new under the sun, and most successful methods give the same signals at the same time. The difference is traders being on their post and executing their trading plan properly. The actual work should go into spelling out your trading plan, and then back-testing it, and then making sure you spend as much time as you can on the screen in live markets. The trading plan should be no more than one page long and define how you determine the market to trade -- overview --what you look for to tell you a trade is forthcoming -- trade set-up -- what needs to occur to enter a trade -- signal or trigger -- and how you manage the trade -- your risk & exit strategy.
Work ethic is important, but patience is more so. Just because you are sitting in your office with live markets in front of you does not mean you must trade. This is where your planning comes into play. No trigger, no trade. Most self-taught traders get into trouble because of their previous experiences and existing perception that they can out-work their competition. Trading is as simple as waiting for the market to give you a trigger - an occurrence which you have no control over -- then clicking your computers mouse, and sitting tight until the market does what it's going to do - again a process you have absolutely no control over - and then clicking the mouse again. You either made money, or lost money. Then the process of waiting starts over again. There is no real work involved other than maintaining a positive attitude and focus. Most people who have enjoyed self-made successes have a hard time accepting that they have no control over the process and instead of rolling up their sleeves and taking action need to actually surrender to what the market tells them to do. Someone who may have built a successful business, or risen up the ranks of a competitive, successful company may find it difficult that success is now based on sitting and waiting. If you are a trend trader and find yourself in a counter-trending environment, or vice versa, you better know it and keep your sails trimmed. Success as a trader depends on being in the right place at the right time, and that's where the work ethic comes in: being on your post, and not procrastinating when everything is aligned and the trade trigger is given.
Day Four: Analyst
When I ask a client whether they see themselves first as a trader, or an analyst, the response is predictable. Most men say "trader" while most woman say "analyst". The correct answer is analyst first, trader second. Women tend to understand the need for planning before taking action while men tend toward action…or as my father often said: "boys will be boys". And herein lay one of the difficulties in learning what should be a straightforward process: analyzing a market first, before taking a trade signal. It is a rare person who can both craft a viable plan, and then execute it. This is why in most firms there are executive teams who plan for growth, and a marketing department which is responsible for detailing that plan, and an advertising and sales team assigned to execute that plan -- not to mention a compliance department to keep an eye on everybody. A plan without execution, or vice versa, is no good without a lot of luck; and professionals do not rely on luck. It needs to be the same in your trading. The plan is your market analysis and trade selection - your methodology -- and the execution is your trade entry and management. A self-taught trader needs to handle both of these diverse tasks simultaneously - and don't forget about the compliance aspect, i.e. trade and risk management!
Like most of us learning to trade, I had to learn the hard way that we need a solid methodology and a trading plan before we can take action. I also quickly learned that I am risk adverse. I do not like risk, and like losing even less. While I generally prefer acting to planning in most other aspects of life, I favor planning over acting in trading. Because I know this I make sure I am well prepared before taking action - pulling the trigger on a trade. Many of my clients are more action orientated when it comes to pulling the trigger on a trade. I'm a good match for them because they know I'm always working on improving trade selection to cut down on risk. They realize that between my planning and their acting together we make a stronger team than if they were on their own. If I have a client like me, who is somewhat risk adverse, and steeped in planning, we wouldn't make as good of a team because we would not complement each other. We can help such a client out by providing a sound methodology, and showing him how to measure pattern and direction, but what he really needs is the confidence, i.e.: lack of fear, to pull the trigger. The only way to do that is to observe our demonstrations and then replicate that in a demo account. Easier said than done, given peoples penchant for ownership - see Stage 1. Planners, those who are inclined more toward analysis than trading, unfortunately are also more prone toward ownership.
The best market analysis is generally provided by a trading method that is straightforward and simple. Regardless of the level of simplicity it must be effective, and the way to measure its effectiveness is to demo trade it in live markets through the different economic environments the global economy puts us through.
You will need a method that provides objective output based on market generated information only, i.e.: price. It needs to be empirical. You need to build your method on market generated information only, i.e.: the opening, high, low, and closing price of the bars, or candlesticks on a chart, because those 4 inputs encapsulate how a market priced in all natural, financial, and societal occurrences or developments to that point in time. The chart, and not your opinion, or a pundit or market strategist's opinion is going to give you the best measurement of the current fundamental environment. And most important the method providing your analysis must differentiate between a balanced market - counter-trending market-and an unbalanced market - trending market. You need to know when to trade direction and when to trade both long and short. You may not know it yet but most of us are handicapped when it comes to seeing both sides of a market. The individual who is comfortable going long in the Asian session and short in the U.S. session is rare. Once an individual decides which side to trade from - long or short - it is not easy to get them to shift gears and trade in the opposite direction. This is because our mindset is out of touch with how markets move. For example the market's nature is chaotic and tends toward disequilibrium. When you throw up their hands and say, "This market is CRAZY!" when a market does the opposite of what you thought is should, you are right, though the correct term is "manic".
While we as individuals experience our ups and downs it is unlikely we could ever coordinate our moods with that of the market's gyrations. However if we understand that the underlying structure of the marketplace is chaotic, and that we've been raised to behave in a steady, reliable manner, it becomes apparent why market movement seems to confound newcomers. Our mindset and the markets underlying structure are definitely at odds. You are very likely going to need a method of analysis that is NOT aligned with how you think! Once you start to grasp this conflict between how you were raised to think and behave, and how price action behaves, you start to see why trading psychology is such an important subject, despite what you thought about it before you read today's lesson. By following a viable method, that is taking every signal it generates in up, down and sideways markets you are going to be asking yourself to do the opposite of what you think, which is a tall order. It is extremely important that you decide now that it is not you making the decision to buy or sell but the method you use. You are not there to figure out which way a manic market is going to move next. Professional traders are not in the business of forecasting.
Though you may not like it at first, you're an analyst, a tool, whose job is to do what the market and the method tell you to do. And that is when trading can become an art form.
Day Five: Artist
Artist rhythms with chartist, whose canvas is the computer screen. You need to be very careful about what overlays, i.e.: trendlines, retracements, pivots, and indicators you place on your chart. A confusing chart reflects a confused mind. It is difficult for even the most gifted mind to keep track of more than 4 or 5 simultaneous occurrences. Most people quickly lose track around three. It is very important that you know exactly what each overlay and indicator is, and exactly how to use them, or they are going to confuse you, and your account balance is going to go down. It's easy to think that a trading plan is a linear list like checking everything off before one starts an old fashioned airplane. And is to a degree, yet once the plane is in the air and being buffeted by divergent forces everything is occurring simultaneously and there is no time to take your hand off the stick and leisurely run down a check list. It's the same thing in trading, only it's your money at risk, not your life. A clean, orderly chart where you understand everything at a glance is the rule for professionals. I label the different patterns in the market with text, and color code all my overlays so they are the same every time. I also never change the market or the time framers on my screens. My eye is trained to go to the same place for the same information in the same market every time. Also never rely on your memory when you can set an alert, or at least make a physical note. In the time you can answer a ringing phone and have a short conversation you can miss a trade signal.
When you are in your trading studio you should never let yourself get distracted for longer than a glance. And just as you need to protect yourself from physical interruptions you need to learn to control your mind from fostering mental interruptions and distractions. If you know that you need the market to create a specific occurrence at a specific time before you can act, why would you waste thoughts on trying to anticipate when this might happen or what might happen afterwards? You need to quiet your mind as you observe the market's behavior as it moves from set-up to signal and back again. The more relaxed and at peace you are the more receptive you will be to what the market is telling you, and believe me the only way you will succeed as a trader is to have a method that insures you listen to what the market is doing and not what you think it is going to do!
Market analysis takes on an art form when you are so familiar with the mechanics of your method, and so experienced at observing markets move through time that you start to anticipate the next market move, and you are correct more times than not. This is called your trader's intuition. But before you can expect your intuition to contribute you have to know that the first input to your analysis is market generated data, i.e.: price action. A market's opening price, high price, low price, and closing price offer a myriad of information for us to draw on. In fact every indicator and overlay on the chart below are derived from only those 4 inputs -- the opening, high, low, and closing price of the candles.
Price pattern and direction on all time frames are determined from just these 4 inputs. Therefore the impetus to place a trade must first come from the chart, and not from your intuition or opinion. We teach, "No trigger, no trade". This is very similar to how an artist takes an image or event and uses the emotion generated to create a drawing or painting. Yes the artist contributes by physically making the object, but before that, an outside visual or other stimulant must generate the emotion(s) that inspire the artist to create the work. In fact most artists will tell you that they cannot take much credit for a project because they don't fully understand the process themselves.
Paul McCartney summed it up best when asked how, at such a young age, he and the other Beatles were able to write such insightful songs that are as apropos now as ever. Sir Paul offered that he can take no credit for those lyrics, and understands that the best stuff that comes off the tip of his pen is definitely guided by a higher power. Even more to the point is #1 New York Times best-selling author Dr. Wayne Dyer's quote in Change Your Thoughts Change Your Life: "As I sit and write these words… I know that I don't own what mysteriously appears on the paper. I've surrendered. I know that God writes all the books, composes all the music, and erects all the buildings".
It is that deep understanding and humility that those artists show to their craft which should inspire us as traders. While we can give ourselves a pat on the back for being on our post when a set-up and signal occur, it is the market that does the real work. We just need to make sure we follow our method - surrender to the market -- and have the patience to let the market do the work.
Imagine how easy your job as an analyst/trader becomes when you fully realize it's not you making the trading decisions, but instead it's the market! At the end of a good day, or week, or month don't let your ego get away with taking the credit; remember to thank the market.
Remember that despite the fame and wealth that the ex-Beatle Paul McCartney as accumulated he knew not to question what came off the end of his pen, and he knew it was a much greater force than him. Now it's up to you to realize the same holds true for you. If you follow the signals the market gives you can achieve success, but if you listen to your own thoughts first, you will continue to get what you've always gotten. Bottom line: let the markets pattern and direction lead you first, before you allow your own experience to contribute.
Day Six: Trader
Once you understand that discretionary trading is an art, and you've completed a trading plan based on sound analysis, and then demo or micro traded that plan profitably through six months of live trading, with the full understanding that it is always price action which supplies a trade signal and not you, you are a trader. Most individuals don't make it this far for two reasons. They are not accustomed to following orders, i.e.: following the trading plan they have chosen. And they cannot make the mental adjustment to risking their money knowing that the outcome is uncertain on every trade. The way a professional handles both of these hurtles is very simple: qualify the method you've chosen by trading it in a demo or micro account in blocks of ten trades. Understand ahead of time that a trade only counts when you have followed your trading plan to the letter. After entering and managing 10 trades in a row you can review the plan to see if any adjustments are necessary. Then complete 10 more trades, pause and evaluate, then 10 more trades etc. You may find for example that trading between the close of the U.S. session thru the opening of the Asian session produces false signals. While this is not the forum to teach specific trading tactics there are a couple of observations we can make to help you to be able to quickly tell if a trading method is viable for not. Number one it needs to function in both trending and counter-trending environments. A method that works in one and not the other will likely never produce the consistency you need to risk your hard earned money in today's financial and commodity markets. Number two it must address trading multiple contracts, and money management. To operate in all market environments traders need the ability to take a profit on a portion of their position should market movement - volatility - contract, and let the balance run should price movement expand. The only way to execute this simple tactic which allows you to simultaneously protect a profit while allowing a profit to run is to trade multiple contracts.
You also need to have a simple strategy for limiting your loss on every trade before you enter the trade, i.e.: entering a stop loss order. Once you know and accept your potential loss by placing the stop order, you are able to focus on the success of the trade, which allows you to achieve what 90% of traders consistently fail to do, which is "let a profit run". You are not going to achieve large winners consistently without planning for them ahead of time. In order to believe your trading plan will be successful you have to mentally accept and then embrace the risk of loss ahead of time.
Individuals who have achieved the trader status also think differently than 90% of the population, and it shows in their speech. You rarely hear a trader referring to "my method" because she knows the dangers of "ownership". The method you use is simply "the method". You also won't hear a professional trader express their opinion often, because traders know the danger of having an opinion to start, let alone expressing one. "Lose your opinion, not your money" is gospel on trading floors around the world. For professional traders discipline and patience go without saying. They know that "the wish must never father the thought". They also know "to keep it simple" because, in the words of Benoit Mandelbrot, the father of fractal geometry: "great theories are often humbled by mere facts". The professional trader's plan of action from her philosophy to her method, to the trigger, to the management of the trade fits on one piece of paper, and once established, rarely, if ever changes. And foremost the trader understands that it is not money they strive for, but peace of mind
Jay Norris is the author of The Secret toTrading Forex, Futures, & ETFs: Risk Tolerance Threshold Theory. To see Jay highlight trade set-ups and signals in live markets every Monday & Thursday go to Live Market Analysis
Trading involves Risk of Loss and is not suitable for all investors.