Hi every body,
I know there are threads here which give similar advice but i think the first few paragraphs highlight the basics but with a different analogy. Hope it helps.
Please forgive me i am not trying to contradict the more experienced and veteran traders here, who may have better advice than given in this article.
This is no different from any other trade. Would you expect to
become a brain surgeon after attending a week-end seminar and reading
a few books? Yet, why do so many people expect to become a Market
Wizard within such a short period of time?
At some point, if they last long enough, all traders discover that successful trading is not the ivevitable result of a good trading strategy or a system. If all we needed was a good system or indicator we would all be successful traders. Yet we are not, far from it, there are very few traders making their living consistently.
If Stephen hendry, the snooker champion, borrowed me his cue, would i be able to play like him? I doubt it very much, on the other hand if we could borrow Tiger wood's golf clubs, would we be able to play as good as him?
If you ever have the privilege to ask questions to a successful
trader you'll realize just how much effort, time, determination and
lost money it took until they arrived at where they are. Being a
consistent stock market winner is no different from being a top lawyer,
Doctor or businessman.
First you must decide that you really do want to trade. Ask your-self
is trading the stock market something I am genuinely interested in or
are you lured by the potential money it has to offer you? I always
remember reading a book called " Grow Rich With Peace of Mind"
Napolean Hill. Whilst interviewing the top people in a number of
professions he came to the conclusion that these people loved their
chosen fields. They would have done it for no money.
Trading is the
same. If your number one goal in trading the markets is simply to make
as much money as possible then I doubt you'll make it into the super
trader status. If you are simply chasing the money it can be a
motivation as long as you are motivated to learn and work at what
really works in the market and NOT keep chasing the latest hot new
trading idea that exploits peoples love of money to make them act.
I am amazed at the number of traders who have not even read a
number of very basic stock market books. It seems it is too much
effort for them to read a book and learn some basic principles.
Yet, these people will blow a £10,000 account in less than 6
months chasing the pipe dream.
Get real! Successful trading requires
not only a lot of ground work but on-going effort in order to keep
at the very top of your game.
In market wizards' I and II you will find that ,all but one trader,
went through years of trial and error, not to mention huge amounts
of effort until they became consistent, successful traders. Why
should it be any different for us? Are we saying we are better than
they are? Make no mistake, just like it takes many years of intense
studying to become a top lawyer, to become a top trader is no different.
If you are new then don't expect to strike out and make 80%+ returns
from the day you start.
Consider the first three years of your trading as going to University. The stock market is the
teacher and your initial account are your fees ( so keep it small)
So, what does it mean to work hard at your trading? I have broken
it down into two sections:
Firstly you will have to spend much time on analyzing your-self,your personality, find a trading style you are most comfortable
with, learn how to trade properly, read, study, ask questions.
Basically, you are going to have to start from scratch and build
a system that fits you. It will take a couple of years at a minimum.
If this sounds like too much effort GOOD. You have just saved
your-self a lot of lost money. Forget trading and move on to
something which genuinely interests you.
If doing the above ground works sounds good, and you can't wait
to get started then may-be there is hope.
Once you have developed a trading system that fits you and you
have the iron clad discipline to follow your plan then it is a
constant battle to stay on top of your trading. As a trader you will
never get there, you are always getting there. You must strive to keep
improving. Never be satisfied with your trading system. Whilst I
don't say "keep looking for fault," I do say every system and trader can
be improved. The markets change their character over time, so keep
working on what impacts new developments have on them. Strive to
become even more disciplined and keep working on your mistakes.
Yes, even veteran traders still make silly mistakes.
Look at Jesse Livermore ( and I suggest you not only read this book, but
study and fear the way this guy operated). Livermore was a stock and
commodity trader way back in the early 1900's. He ran a small shoestring
account into several millions but kept losing it. On the one
hand he was one of the greatest traders to have ever lived, yet on
the hand he was dangerous in that he could not control his emotions.
Having run an account up to millions and then losing it, one would
think this experience was painful enough so as not to be repeated?
Yet when he painfully started from scratch, built his account into
several million again, only to lose it in one bad trade, then the
alarm bells should have been ringing. Any-one can make a mistake
but to not learn from it is fatal. Sadly, after repeating this event
one more time he could not face the thought of making a come-back
again and took his own life.So whilst Livermore was a top, top trader he never worked enough
on his own psychology. Had he worked on a sound money management
plan and strictly followed a plan for every trade he would not have
created this situation.
The lesson? Even when you have made it to become a successful trader
that one fatal mistake is lurking in the dark waiting to hit you.
Only by keeping on top of your emotions and working on your trading will
you avoid running into a catastrophe.
How long does it take to become a competent trader? There is no set
time but i would say as a general rule here are some guide-lines:
(0-1 yrs)
* Work on finding out whether you are willing to put the time
and effort into finding a system that not only works but fits your
personality.
* Read some basic books on the stock market. Don't just read them
and think "hmm that’s interesting, nest one.." Really try to get
inside the traders mind. Get a feel for how much time and effort
was put in before they became successful, how many times did they
go down closed avenues? What characteristic made them such a good trader?
* Attend a couple of seminars. But not -ones where the "Secrets of
the Stock Market are Revealed" The secret is there are no secrets.
Give them a wide berth. Go to seminars about basic chart reading skills,
psychology of trading, money management, etc.. and if the lecturer knows
his stuff then get his contact information and keep asking as much
information as possible.
* Using a very simple charting package, start looking at some bar charts
of shares and the markets. Do nothing but observe
* Buy a self help book. Could be a motivational book or similar work
and work through it. My trading and life has become so much better since
I started working on my-self. It will definitely help in finding a system
that fits you.
you should know whether trading is for you. And a
certain kind of trading technique should appeal to you more than others.
Go with this natural feel, it is the one that fits you personality.
If you find trading is not for you? Great! You have saved a lot of
time and money. Move on. It's not for every-one. I personally know of
some traders who will have to go back to the start if they wish to
succeed. In the meantime they keep handing money to the market.
It's sad because they've been trading for years. When will the penny
drop?
YEAR 2:* Open an account with a small amount of cash. This is your learning
fees. Expect to lose it all as part of your fees.
* Keep reading, studying, attending seminars and asking successful
traders.
* Develop a style of trading you are comfortable with. Back test it
by hand and get a feel for the size, regularity and number of trades
your system gives out. Try to determine how many streaks it comes out
worth. ie did it have 5 successive losing trades? Did it have 7
successive winning trades? That way in the heat of battle and your system
has just given you 5 successive losers you know there is nothing wrong.
Get a feel for how it reacts in certain market cycles. Every system acts
better in certain market conditions than in others.
* Develop a plan. (re-read section 2) Try to accommodate for every
possibility.
* Keep observing the charts. I am not a great believer in paper trading
in order to find how much progress you have made in trading. Simply
because you have no emotions whilst playing games and it is controlling
emotions that separates the winners from the losers.
But what I am a great believer in is playing simulation games so as
to get a feel for how money management plays such an important role and
for you to get a feel for how any game of chance can and will have streaks.
This is what i do from time to time.
Get a hat or jar and place 100 marbles inside. I paint the winners blue
and the losers red. I paint a HR (home run >10 * Risk gain) on just four of
those marbles and I paint a BL ( big loss >4 * risk) on four of them. All
the rest are either 4 * Risk gains or 1 * risk losses. Here's the
interesting part. Start risking different dollar amounts on each trade
and see the difference in your results after 100 trades. This should
really hammer home the importance of money management.
Firstly, say you start with a £10,000 account risk just 2,5% on each
trade. Therefore, risk per one trade is £250 or R = £250. If you draw a
losing marble your account is debited £250. If you draw a winning marble
your account is credited by 4 * £250 = £1,000. If you hit a "Home Run"
then your account is credited by 10 * R = £2,500. On the other hand if
you hit a "big loss" trade then you are debited by £1,000.
Put the effort in and give this a try. You'll be amazed at the difference
position sizing can have on your account after 100 trades. You'll see even
in a 50/50 you run into streaks of winners and losers. Having 5 successive
winners and losers is quite common. Not only that try to imagine your-self
trading this system. How are you going to be feeling after taking 5
successive losses? Will you be feeling something is wrong. What happens if you
risk £500 per trade and you start off with a "big loser"? That's a £2,000
loss. Can you come back from this? Be pro-active and play around with the
figures it's a great simulation.
* If you feel comfortable trading make a trade.
The whole point of trading is to follow your rules. Making or losing
money is not the important point. Trade with such a small amount it
hardly seems worthwhile. What you want to know here is:
How do I react when my money is down?
Can I follow my rules?
Is my system working in the long run?
Year 3
You should have your own system that fits you and starting to take
small gains out of the market. If you still find your-self lacking the
discipline to follow the signals ask why? Keep playing the simulation
game as though it was your system and see why taking four or five
successive losing trades is acceptable as long as you can manage the risk.
Year 4
By now, if you are still trading, you should be pulling consistent profits
from the market and know your-self well enough to continue learning.
Consider learning to trade like taking a degree in the stock market.
Are you willing to sacrifice 4 years in order to learn the trade? If not, then
walk away now. If you are then get to it.
If you want to be a top trader there's a lot of work involved.
Don't be fooled by all the trade magazines saying you can pull 100%
out of the markets year in and year out with no effort. It isn't going
to happen. But if you really do keep working at it the rewards can be
amazing.
5. Positive Self- Belief:
" All truly wise thoughts have been thought already thousands of times;
but ro truly make them ours we must think them over again honestly,
till they take root in our personal experience."
- Goethe
Iron clad belief not only in the system you are trading but also in
your discipline to execute both entry and exits flawlessly are essential
to your success in trading.
The top traders know it is the discipline displayed in following their
rules that is the important thing in trading and the money rewards are
secondary. For if you can not execute your signals, on both entry and exit,
without question it takes just one mistake to give all those hard earned
profits back to the market.
Positive self-belief is built from repetition after repetition of
following your rules. Extensive back-testing of your system and
constant self analysis.
You'll never be able to follow a system if you have a doubt in your
mind. That's why so many people who buy other peoples systems fail.
When that system goes through a losing period the person who purchased it
will throw it away and search for the next system. Yet the trader who
has rock solid belief will be aware that the system does display periods of
losses. He's seen it all before and sits it out waiting for the conditions
to become more favourable. When they do he gets back in and makes a ton
more cash. The person who purchased the system in the meanwhile is now
losing more money with the new system because that too has just come into
a losing streak.
Only by doing the groundwork in section four will a trader have confidence
in a system. You must strive to work through as much market data as is
possible with any system so as to know what is normal and what isn't.
This is why even the top famous traders have losing streaks and they never
batter an eyelid. Every-one seems to be aware that George soros is the
greatest trader alive. The guy made billions in the 1980's and 1990's,
yet he as also had some amazing losing periods. His fund has also lost
billions and posted big negative returns. Did it bother him? He knew
that his style of trading will go through losing periods. Just as dawn
follows dusk, a losing period is usually followed by a winning period
and vise -versa. Yet too many traders throw in the towel after taking a
couple of successive losers. They are never around when the system kicks
into a big winning period.
What you believe is what you get. If you look at your problem areas you'll
find they are rooted in faulty and limited beliefs. So if you are having
problems with your trading results examine your beliefs about trading. If
deep down you have negative feelings about trading, or making money or you
lack complete confidence in either the system you are following or your-self
then you have to stop trading and go back and find out why.
A person who is a compulsive gambler will never make it trading the markets.
I'm sure when they lose a substantial amount of their capital then every-one
else will be to blame, but deep down if they analyzed their beliefs about trading
they would probably admit they see it as a big casino. If your beliefs about
making money are negative then how can you expect to make money in stocks?
I have heard of traders running accounts up to a ceiling figure, say $1 million
and then losing it all. They have repeated this several times before seeking help.
Usually, it is found that some deep seated, negative belief about making a lot
of money has caused them to push the self-destruct button. As Ed Seykota ( very
successful professional trader) says, every-one gets what they want from life.
You'll find in trading you'll get what you want.
You have to ask your-self what are your beliefs about trading? Are you told
continuously that trading is a no win game? It's a gamble? You can't win?
Trend following doesn't work? etc... Do you believe any of it? Write down
what you believe about trading. What kind of returns do you think are possible?
How much time and effort do you believe you must put into a day's work to obtain
a day's pay? When I first started trading I felt I needed to work hour after hour
every day. I checked on the quotes continuously, phoned my broker, read reports,
listened to the news, etc.. Why? Because I believed I had to put in hard work to
receive pay. It took a long time to shake that belief out.
If you believe it's relatively simple to make 50% p.a from the stock market
year in and year out, with very low risk and with just ten minutes work per
day then good, because it's possible. Then this is what you'll work towards
( I know many people will disagree but first ask whether these people are in
a position to pass comment).
On the other hand, if you believe just working ten minutes per day for a wage
is a lazy way to success and you feel uncomfortable with this then you will
have to resolve this conflict before you can obtain these results.
Choose your beliefs wisely. In all problems with your trading you are both
the problem and solution. The top traders know this. If they go through an
extensive period of losers they'll start analyzing their beliefs. Looking
inside and not out-side for the answers.
How do you develop poitive self-belief?
Foremos,t it has o be said it takes a lot of work (refer to the previous chapter.)
You will have to start with accepting total responsibility for your trading ,be
willing to put a lot of work into finding and testing a trading system.
The rest is built from experience. It takes years of experience for you to
develop the belief. A bit of a catch 22 but how do you gain experience in
trading? By staying in the game. Trade with such a small risk in the early
years that it hardly seems worth your while. View trading as a 20 year venture
and not a "get rich quick scheme."
It is only when you have total confidence will you be able to view your trading in
terms of points rather than money. Once you are on this level the rewards can be
staggering. Which brings me on to the next chapter.
6) View Trading as a Score in Points and Not In Money:
Really what I am saying is "follow your time tested rules which you
have complete belief in and forget about everything else"
How can you do that when it's money we are trading with? Use some
imagination. Pretend it's not money but simply a game your playing
and your account represents points scored. Stop counting dollars every
time the market moves and start concentrating on following your rules
flawlessly. When you can operate on this level not only do your profits
soar over the long run but it takes away all the stress of trading.
Think about it. No more are you watching the quotes intra-day thinking
"wow! I have just made enough to buy a new car," or
"uhhh.. I've just lost my holiday money" This kind of trading is emotionally
draining. No-one can succeed like this. This was me in my early days.I would
be so down when I checked my quotes during the day only to find I had lost
£500. And the next day when I found I was up by £500 I was the life and
sole of the party. Even if I could have made a success by trading this way
I wouldn't have enjoyed it and I would have given up.
Nowadays with my low risk/ high reward trading system I check the charts
at the end of day in 5 minutes and that's it. I simply ask my-self:
" Should I buy, sell or hold according to my rules?" I give my-self ten
seconds to answer and do what has to be done. I am not a trader any more
but a rule follower. That's how I feel. ( why do you think I have so much
time to write?)
Reading Market Wizards I and II it was a prominent feature I noticed
with all top traders. They never saw the markets as a cash box but simply
as a way of operating a business. the name of the business was to follow
their rules and score the points. It's not possible to become a top trader
if you view every tick in the market as money lost and gained.
If making and losing money leads to emotional distress and joy and
emotions are one of the most potent destroyers of successful trading then
common sense dictates that in order to be a Highly Successful Trader you
must eliminate all emotion from trading. How is this done? Easy, follow
the rules. How do you follow your rules? Make it THE most important
element in your trading. Forget about the money that will take care
of it-self it's all about those rules and how well you can follow them.
If you ever just read one book on the stock market then please let it be:
" How I Made $2 million" by Nicolas Darvas
I love this book so much because when you have read it as many times as
I have (50+) you begin to realize how well this guy turned his trading around
from an emotional losing trader into a robotice, disciplined, money, generating,
machine. What made his success possible? Apart from the usual accepting
complete responsibility, developing a system that fitted him, planning his
trades and lots of initial groundwork. The real reason he made so much money
was because he never counted the money in the general sense. He had a set of
rules and when it flashed a buy he placed on a percentage of his capital.
It made no difference whether it was $5,000 or $500,000, it was all the same
to him. He stopped counting money and flawlessly followed his rules.
If I could just describe a section that had profound effect on my trading.
In one trade Darvas bought $350,000 of a share at $53 1/2. The share then
climbed to over $100 and his broker telegrammed him with the message:
"profits now $250,000" Darvas now realized that whilst he had been so busy
concentrating on folowing his rules he has forgotten all about the paper
profits building up. When he received the telegramme he now knew if he sold
out he would be rich for life ( this was the 1950's) Every fiber in his body
was saying "sell. abandon your rules and take the profit."
So he walked around Paris trying to work out what to do. Questions and
thoughts such as will the share fall back? Should I sell and take the sure
profit? Shall I just break my rules this one time? Kept repeating them-selves
time and time again.
Finally he decided not to sell and to stick with his rules. It was
anything but easy to do. But he was proved right. In the weeks ahead
the share continued to rise and making that decision to stick to his
rules he was able to hold on and make much more profit.
Had he have constantly been calculating his trades on a day to day basis
in money terms I doubt he would have had the nerve to stay in so long.
Amazing story and one definitely worth reading.
You see how theory is all very well. Every trader worth his salt knows
the Wall Street sayings :
"cut your losses"
"let your profits run"
"trade with the trend" blah,blah,blah
But it is another ball game to do this in the heat of battle.
Time and time again when I enter a trade I want to bend the rules,
"just this one time." But I have gathered enough experience to realize
I can NEVER break my rules. Not one trade can be the exception. I
have learned to do this by counting in terms of points scored and not
money.
What separates the winners from the losers? It's certainly not
knowledge? I believe what really separates winners from losers is
the ability to follow your rules without exception, regardless of the
circumstances. Very few traders have the discipline to do this.
I know there are threads here which give similar advice but i think the first few paragraphs highlight the basics but with a different analogy. Hope it helps.
Please forgive me i am not trying to contradict the more experienced and veteran traders here, who may have better advice than given in this article.
This is no different from any other trade. Would you expect to
become a brain surgeon after attending a week-end seminar and reading
a few books? Yet, why do so many people expect to become a Market
Wizard within such a short period of time?
At some point, if they last long enough, all traders discover that successful trading is not the ivevitable result of a good trading strategy or a system. If all we needed was a good system or indicator we would all be successful traders. Yet we are not, far from it, there are very few traders making their living consistently.
If Stephen hendry, the snooker champion, borrowed me his cue, would i be able to play like him? I doubt it very much, on the other hand if we could borrow Tiger wood's golf clubs, would we be able to play as good as him?
If you ever have the privilege to ask questions to a successful
trader you'll realize just how much effort, time, determination and
lost money it took until they arrived at where they are. Being a
consistent stock market winner is no different from being a top lawyer,
Doctor or businessman.
First you must decide that you really do want to trade. Ask your-self
is trading the stock market something I am genuinely interested in or
are you lured by the potential money it has to offer you? I always
remember reading a book called " Grow Rich With Peace of Mind"
Napolean Hill. Whilst interviewing the top people in a number of
professions he came to the conclusion that these people loved their
chosen fields. They would have done it for no money.
Trading is the
same. If your number one goal in trading the markets is simply to make
as much money as possible then I doubt you'll make it into the super
trader status. If you are simply chasing the money it can be a
motivation as long as you are motivated to learn and work at what
really works in the market and NOT keep chasing the latest hot new
trading idea that exploits peoples love of money to make them act.
I am amazed at the number of traders who have not even read a
number of very basic stock market books. It seems it is too much
effort for them to read a book and learn some basic principles.
Yet, these people will blow a £10,000 account in less than 6
months chasing the pipe dream.
Get real! Successful trading requires
not only a lot of ground work but on-going effort in order to keep
at the very top of your game.
In market wizards' I and II you will find that ,all but one trader,
went through years of trial and error, not to mention huge amounts
of effort until they became consistent, successful traders. Why
should it be any different for us? Are we saying we are better than
they are? Make no mistake, just like it takes many years of intense
studying to become a top lawyer, to become a top trader is no different.
If you are new then don't expect to strike out and make 80%+ returns
from the day you start.
Consider the first three years of your trading as going to University. The stock market is the
teacher and your initial account are your fees ( so keep it small)
So, what does it mean to work hard at your trading? I have broken
it down into two sections:
Firstly you will have to spend much time on analyzing your-self,your personality, find a trading style you are most comfortable
with, learn how to trade properly, read, study, ask questions.
Basically, you are going to have to start from scratch and build
a system that fits you. It will take a couple of years at a minimum.
If this sounds like too much effort GOOD. You have just saved
your-self a lot of lost money. Forget trading and move on to
something which genuinely interests you.
If doing the above ground works sounds good, and you can't wait
to get started then may-be there is hope.
Once you have developed a trading system that fits you and you
have the iron clad discipline to follow your plan then it is a
constant battle to stay on top of your trading. As a trader you will
never get there, you are always getting there. You must strive to keep
improving. Never be satisfied with your trading system. Whilst I
don't say "keep looking for fault," I do say every system and trader can
be improved. The markets change their character over time, so keep
working on what impacts new developments have on them. Strive to
become even more disciplined and keep working on your mistakes.
Yes, even veteran traders still make silly mistakes.
Look at Jesse Livermore ( and I suggest you not only read this book, but
study and fear the way this guy operated). Livermore was a stock and
commodity trader way back in the early 1900's. He ran a small shoestring
account into several millions but kept losing it. On the one
hand he was one of the greatest traders to have ever lived, yet on
the hand he was dangerous in that he could not control his emotions.
Having run an account up to millions and then losing it, one would
think this experience was painful enough so as not to be repeated?
Yet when he painfully started from scratch, built his account into
several million again, only to lose it in one bad trade, then the
alarm bells should have been ringing. Any-one can make a mistake
but to not learn from it is fatal. Sadly, after repeating this event
one more time he could not face the thought of making a come-back
again and took his own life.So whilst Livermore was a top, top trader he never worked enough
on his own psychology. Had he worked on a sound money management
plan and strictly followed a plan for every trade he would not have
created this situation.
The lesson? Even when you have made it to become a successful trader
that one fatal mistake is lurking in the dark waiting to hit you.
Only by keeping on top of your emotions and working on your trading will
you avoid running into a catastrophe.
How long does it take to become a competent trader? There is no set
time but i would say as a general rule here are some guide-lines:
(0-1 yrs)
* Work on finding out whether you are willing to put the time
and effort into finding a system that not only works but fits your
personality.
* Read some basic books on the stock market. Don't just read them
and think "hmm that’s interesting, nest one.." Really try to get
inside the traders mind. Get a feel for how much time and effort
was put in before they became successful, how many times did they
go down closed avenues? What characteristic made them such a good trader?
* Attend a couple of seminars. But not -ones where the "Secrets of
the Stock Market are Revealed" The secret is there are no secrets.
Give them a wide berth. Go to seminars about basic chart reading skills,
psychology of trading, money management, etc.. and if the lecturer knows
his stuff then get his contact information and keep asking as much
information as possible.
* Using a very simple charting package, start looking at some bar charts
of shares and the markets. Do nothing but observe
* Buy a self help book. Could be a motivational book or similar work
and work through it. My trading and life has become so much better since
I started working on my-self. It will definitely help in finding a system
that fits you.
you should know whether trading is for you. And a
certain kind of trading technique should appeal to you more than others.
Go with this natural feel, it is the one that fits you personality.
If you find trading is not for you? Great! You have saved a lot of
time and money. Move on. It's not for every-one. I personally know of
some traders who will have to go back to the start if they wish to
succeed. In the meantime they keep handing money to the market.
It's sad because they've been trading for years. When will the penny
drop?
YEAR 2:* Open an account with a small amount of cash. This is your learning
fees. Expect to lose it all as part of your fees.
* Keep reading, studying, attending seminars and asking successful
traders.
* Develop a style of trading you are comfortable with. Back test it
by hand and get a feel for the size, regularity and number of trades
your system gives out. Try to determine how many streaks it comes out
worth. ie did it have 5 successive losing trades? Did it have 7
successive winning trades? That way in the heat of battle and your system
has just given you 5 successive losers you know there is nothing wrong.
Get a feel for how it reacts in certain market cycles. Every system acts
better in certain market conditions than in others.
* Develop a plan. (re-read section 2) Try to accommodate for every
possibility.
* Keep observing the charts. I am not a great believer in paper trading
in order to find how much progress you have made in trading. Simply
because you have no emotions whilst playing games and it is controlling
emotions that separates the winners from the losers.
But what I am a great believer in is playing simulation games so as
to get a feel for how money management plays such an important role and
for you to get a feel for how any game of chance can and will have streaks.
This is what i do from time to time.
Get a hat or jar and place 100 marbles inside. I paint the winners blue
and the losers red. I paint a HR (home run >10 * Risk gain) on just four of
those marbles and I paint a BL ( big loss >4 * risk) on four of them. All
the rest are either 4 * Risk gains or 1 * risk losses. Here's the
interesting part. Start risking different dollar amounts on each trade
and see the difference in your results after 100 trades. This should
really hammer home the importance of money management.
Firstly, say you start with a £10,000 account risk just 2,5% on each
trade. Therefore, risk per one trade is £250 or R = £250. If you draw a
losing marble your account is debited £250. If you draw a winning marble
your account is credited by 4 * £250 = £1,000. If you hit a "Home Run"
then your account is credited by 10 * R = £2,500. On the other hand if
you hit a "big loss" trade then you are debited by £1,000.
Put the effort in and give this a try. You'll be amazed at the difference
position sizing can have on your account after 100 trades. You'll see even
in a 50/50 you run into streaks of winners and losers. Having 5 successive
winners and losers is quite common. Not only that try to imagine your-self
trading this system. How are you going to be feeling after taking 5
successive losses? Will you be feeling something is wrong. What happens if you
risk £500 per trade and you start off with a "big loser"? That's a £2,000
loss. Can you come back from this? Be pro-active and play around with the
figures it's a great simulation.
* If you feel comfortable trading make a trade.
The whole point of trading is to follow your rules. Making or losing
money is not the important point. Trade with such a small amount it
hardly seems worthwhile. What you want to know here is:
How do I react when my money is down?
Can I follow my rules?
Is my system working in the long run?
Year 3
You should have your own system that fits you and starting to take
small gains out of the market. If you still find your-self lacking the
discipline to follow the signals ask why? Keep playing the simulation
game as though it was your system and see why taking four or five
successive losing trades is acceptable as long as you can manage the risk.
Year 4
By now, if you are still trading, you should be pulling consistent profits
from the market and know your-self well enough to continue learning.
Consider learning to trade like taking a degree in the stock market.
Are you willing to sacrifice 4 years in order to learn the trade? If not, then
walk away now. If you are then get to it.
If you want to be a top trader there's a lot of work involved.
Don't be fooled by all the trade magazines saying you can pull 100%
out of the markets year in and year out with no effort. It isn't going
to happen. But if you really do keep working at it the rewards can be
amazing.
5. Positive Self- Belief:
" All truly wise thoughts have been thought already thousands of times;
but ro truly make them ours we must think them over again honestly,
till they take root in our personal experience."
- Goethe
Iron clad belief not only in the system you are trading but also in
your discipline to execute both entry and exits flawlessly are essential
to your success in trading.
The top traders know it is the discipline displayed in following their
rules that is the important thing in trading and the money rewards are
secondary. For if you can not execute your signals, on both entry and exit,
without question it takes just one mistake to give all those hard earned
profits back to the market.
Positive self-belief is built from repetition after repetition of
following your rules. Extensive back-testing of your system and
constant self analysis.
You'll never be able to follow a system if you have a doubt in your
mind. That's why so many people who buy other peoples systems fail.
When that system goes through a losing period the person who purchased it
will throw it away and search for the next system. Yet the trader who
has rock solid belief will be aware that the system does display periods of
losses. He's seen it all before and sits it out waiting for the conditions
to become more favourable. When they do he gets back in and makes a ton
more cash. The person who purchased the system in the meanwhile is now
losing more money with the new system because that too has just come into
a losing streak.
Only by doing the groundwork in section four will a trader have confidence
in a system. You must strive to work through as much market data as is
possible with any system so as to know what is normal and what isn't.
This is why even the top famous traders have losing streaks and they never
batter an eyelid. Every-one seems to be aware that George soros is the
greatest trader alive. The guy made billions in the 1980's and 1990's,
yet he as also had some amazing losing periods. His fund has also lost
billions and posted big negative returns. Did it bother him? He knew
that his style of trading will go through losing periods. Just as dawn
follows dusk, a losing period is usually followed by a winning period
and vise -versa. Yet too many traders throw in the towel after taking a
couple of successive losers. They are never around when the system kicks
into a big winning period.
What you believe is what you get. If you look at your problem areas you'll
find they are rooted in faulty and limited beliefs. So if you are having
problems with your trading results examine your beliefs about trading. If
deep down you have negative feelings about trading, or making money or you
lack complete confidence in either the system you are following or your-self
then you have to stop trading and go back and find out why.
A person who is a compulsive gambler will never make it trading the markets.
I'm sure when they lose a substantial amount of their capital then every-one
else will be to blame, but deep down if they analyzed their beliefs about trading
they would probably admit they see it as a big casino. If your beliefs about
making money are negative then how can you expect to make money in stocks?
I have heard of traders running accounts up to a ceiling figure, say $1 million
and then losing it all. They have repeated this several times before seeking help.
Usually, it is found that some deep seated, negative belief about making a lot
of money has caused them to push the self-destruct button. As Ed Seykota ( very
successful professional trader) says, every-one gets what they want from life.
You'll find in trading you'll get what you want.
You have to ask your-self what are your beliefs about trading? Are you told
continuously that trading is a no win game? It's a gamble? You can't win?
Trend following doesn't work? etc... Do you believe any of it? Write down
what you believe about trading. What kind of returns do you think are possible?
How much time and effort do you believe you must put into a day's work to obtain
a day's pay? When I first started trading I felt I needed to work hour after hour
every day. I checked on the quotes continuously, phoned my broker, read reports,
listened to the news, etc.. Why? Because I believed I had to put in hard work to
receive pay. It took a long time to shake that belief out.
If you believe it's relatively simple to make 50% p.a from the stock market
year in and year out, with very low risk and with just ten minutes work per
day then good, because it's possible. Then this is what you'll work towards
( I know many people will disagree but first ask whether these people are in
a position to pass comment).
On the other hand, if you believe just working ten minutes per day for a wage
is a lazy way to success and you feel uncomfortable with this then you will
have to resolve this conflict before you can obtain these results.
Choose your beliefs wisely. In all problems with your trading you are both
the problem and solution. The top traders know this. If they go through an
extensive period of losers they'll start analyzing their beliefs. Looking
inside and not out-side for the answers.
How do you develop poitive self-belief?
Foremos,t it has o be said it takes a lot of work (refer to the previous chapter.)
You will have to start with accepting total responsibility for your trading ,be
willing to put a lot of work into finding and testing a trading system.
The rest is built from experience. It takes years of experience for you to
develop the belief. A bit of a catch 22 but how do you gain experience in
trading? By staying in the game. Trade with such a small risk in the early
years that it hardly seems worth your while. View trading as a 20 year venture
and not a "get rich quick scheme."
It is only when you have total confidence will you be able to view your trading in
terms of points rather than money. Once you are on this level the rewards can be
staggering. Which brings me on to the next chapter.
6) View Trading as a Score in Points and Not In Money:
Really what I am saying is "follow your time tested rules which you
have complete belief in and forget about everything else"
How can you do that when it's money we are trading with? Use some
imagination. Pretend it's not money but simply a game your playing
and your account represents points scored. Stop counting dollars every
time the market moves and start concentrating on following your rules
flawlessly. When you can operate on this level not only do your profits
soar over the long run but it takes away all the stress of trading.
Think about it. No more are you watching the quotes intra-day thinking
"wow! I have just made enough to buy a new car," or
"uhhh.. I've just lost my holiday money" This kind of trading is emotionally
draining. No-one can succeed like this. This was me in my early days.I would
be so down when I checked my quotes during the day only to find I had lost
£500. And the next day when I found I was up by £500 I was the life and
sole of the party. Even if I could have made a success by trading this way
I wouldn't have enjoyed it and I would have given up.
Nowadays with my low risk/ high reward trading system I check the charts
at the end of day in 5 minutes and that's it. I simply ask my-self:
" Should I buy, sell or hold according to my rules?" I give my-self ten
seconds to answer and do what has to be done. I am not a trader any more
but a rule follower. That's how I feel. ( why do you think I have so much
time to write?)
Reading Market Wizards I and II it was a prominent feature I noticed
with all top traders. They never saw the markets as a cash box but simply
as a way of operating a business. the name of the business was to follow
their rules and score the points. It's not possible to become a top trader
if you view every tick in the market as money lost and gained.
If making and losing money leads to emotional distress and joy and
emotions are one of the most potent destroyers of successful trading then
common sense dictates that in order to be a Highly Successful Trader you
must eliminate all emotion from trading. How is this done? Easy, follow
the rules. How do you follow your rules? Make it THE most important
element in your trading. Forget about the money that will take care
of it-self it's all about those rules and how well you can follow them.
If you ever just read one book on the stock market then please let it be:
" How I Made $2 million" by Nicolas Darvas
I love this book so much because when you have read it as many times as
I have (50+) you begin to realize how well this guy turned his trading around
from an emotional losing trader into a robotice, disciplined, money, generating,
machine. What made his success possible? Apart from the usual accepting
complete responsibility, developing a system that fitted him, planning his
trades and lots of initial groundwork. The real reason he made so much money
was because he never counted the money in the general sense. He had a set of
rules and when it flashed a buy he placed on a percentage of his capital.
It made no difference whether it was $5,000 or $500,000, it was all the same
to him. He stopped counting money and flawlessly followed his rules.
If I could just describe a section that had profound effect on my trading.
In one trade Darvas bought $350,000 of a share at $53 1/2. The share then
climbed to over $100 and his broker telegrammed him with the message:
"profits now $250,000" Darvas now realized that whilst he had been so busy
concentrating on folowing his rules he has forgotten all about the paper
profits building up. When he received the telegramme he now knew if he sold
out he would be rich for life ( this was the 1950's) Every fiber in his body
was saying "sell. abandon your rules and take the profit."
So he walked around Paris trying to work out what to do. Questions and
thoughts such as will the share fall back? Should I sell and take the sure
profit? Shall I just break my rules this one time? Kept repeating them-selves
time and time again.
Finally he decided not to sell and to stick with his rules. It was
anything but easy to do. But he was proved right. In the weeks ahead
the share continued to rise and making that decision to stick to his
rules he was able to hold on and make much more profit.
Had he have constantly been calculating his trades on a day to day basis
in money terms I doubt he would have had the nerve to stay in so long.
Amazing story and one definitely worth reading.
You see how theory is all very well. Every trader worth his salt knows
the Wall Street sayings :
"cut your losses"
"let your profits run"
"trade with the trend" blah,blah,blah
But it is another ball game to do this in the heat of battle.
Time and time again when I enter a trade I want to bend the rules,
"just this one time." But I have gathered enough experience to realize
I can NEVER break my rules. Not one trade can be the exception. I
have learned to do this by counting in terms of points scored and not
money.
What separates the winners from the losers? It's certainly not
knowledge? I believe what really separates winners from losers is
the ability to follow your rules without exception, regardless of the
circumstances. Very few traders have the discipline to do this.
.
