For the longest time, I was under the impression that you had to trade all the time to be successful. The more you were active in the market, the more opportunities you would find and the more chances you would have to be successful. This couldn't be further from the truth. What I managed to find out is that I opened myself up to more chances for error, less time to plan my trades, and even less time to plan my exit strategies.
Over the years, I have learned about my risk tolerance, my strengths, my weaknesses, and my emotions when it comes to trading. In the beginning I was placing stupid trades based on what I thought was an intelligent mix of fundamental and technical analysis. I made a little bit of money at first, but as time went on and my trade frequency increased, I lost more than what I made after the first few trades. I attribute my primary winnings to beginner's luck, and my subsequent losses to my lack of education. While on my self-imposed baptism-by-fire I was only trading stocks and options. Both of which provided me with fantastic ways to generate commissions for my broker and realize losses in my trading account.
Some people, myself included, call this introductory period "market tuition," and they do so for good reason. When I started, all I wanted to do was trade. There was such a thrill in clicking the 'submit' button and seeing my order get filled. The adrenaline kicked in, the market did its thing, and then when the stop-loss would trigger, anger would set in. I never liked losing, but it's part of the game. On a side note, have you ever noticed how drug dealers and brokers offer the first few samples of their product for free? They know just how addicting their products are. They market their products to your weaknesses and they know you will keep coming back for more.
After doing the basic math, I realized that I was generating hundreds of dollars in commissions for my broker while additionally generating hundreds of dollars in losses for myself. This lead me to realize that I was doing two things wrong. First and foremost, I was trading too much. Secondly, I wasn't trading properly. During this period of introspection, I started to read more books about trading, but I was also trading less. I was carefully picking my battles and adapting my strategies over time so that I would place trades that were more favorable to me than to the market-maker on the other side of the equation.
I also started delving into the history of finance, banking, and the underlying structures of globalism while also exploring how I could utilize professional money-management and trading techniques to my advantage. I learned about where our money comes from, how it is created, how it gets destroyed, and how 'the system' truly works. Without this knowledge, my naiveté would have kept me from learning the skills needed to start trading properly and effectively. You're probably wondering why this matters, and I'll tell you now: Wall Street is in business to make money. The markets giveth and the markets taketh away. These guys don't own the tallest buildings in every city in the world by losing money. In order to swim in a sea of sharks, you have to learn how sharks think and act so that you don't get eaten alive.
Aside from learning about how the big boys play their game, I also did significant reading about how to manage risk and how to keep track of my trading. There are two books which I attribute to my 'recovery' and they are the following (both by Dr. Alexander Elder):
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Both of these books are worth their weight in gold for the simple, yet important lessons they offer with regards to becoming a serious trader. These books offer insight into technical analysis, trading systems, and trade accounting among other things. Dr. Elder's strategies regarding risk are directly reflected in my risk calculator and I also utilize his approach to looking at multiple timeframes for charting. After reading these two books a few times over, I managed to change the way I looked at potential trades. I started to discipline myself more, and I kept track of every single trade. Furthermore, every two weeks I plot my account equity on an "equity curve" and look at how my account has performed over time.
Additionally, I started thinking about the market differently. The market is not some happy place where you earn an annualized 8% return over 20 years. The market is a war-zone and I am the commander of my trading army. My dollars are my soldiers. Every time I send them out to battle, I expect them to return with some of the enemy's soldiers as the spoils of war. After reading these books, I learned how to pick favorable battles, how to keep track of my army, how to lead my soldiers into an attack, and how to make sure that I know exactly how many I can sacrifice before withdrawing my troops from battle.
Some battles take days, some take weeks, others months, and sometimes even years. However, all battles are planned ahead of time. To this day, the greatest thing I've learned throughout all of this is to be patient and to enter the battle only when the odds are tilted in your favor. In the same way a general uses terrain maps to learn the lay of the land, a trader uses charts to gauge the markets. In future articles I will discuss the types of charts I use, and how I use them to pick advantageous trading opportunities over multiple time-frames and asset-classes.
Feel free to leave any comments or insights you may have. Let me know of any books you think are worth reading.
