The Truth About Trading - Part II
Part II
How Amateurs Approach the Market.
edited by Carl Futia
(original source unknown)
This post is for people who are
struggling with their trading, not being profitable and finding themselves
working extremely hard to no effect.
I found very interesting a
recent post 'Who uses stop losses?' and the various replies about how stops are
necessary, professional, business-like, etc. That post and the ensuing comments
confirmed what I already knew: the retail trading crowd thinks and acts like a
flock of sheep. Books and information about trading all say the same things.
They emphasize money management, tell you that it is stupid to average down,
tell you to use stop losses, risk 1% of your account, and other common
propaganda.
The interesting thing is that
people who talk about the value of stops, money management, etc. appear to have
gotten their ideas from a book. This include the authors of those same books! It
is a never ending process, a constant recycling of bad ideas. I think that those
who write trading books that explain how to trade aren't particularly good
traders themselves. Why? I think you must embrace uncertainty to succeed as a
trader. Those who write books, teach seminars and so forth are just trying to
find a way to make money with certainty because they can't trust their own
trading to do it or because they cannot live with the ambiguity and uncertainty
of constant involvement with the market.
These ideologies that trading
books offer are accepted as trading wisdom in the community of amateur traders.
I was fed all this when I was learning to trade. But I got lucky. A very
successful trader told me early on in my career that 95% of traders fail.
Therefore, to succeed he said that you have to do the opposite of what they do,
you have to think outside of the box. I've always tried to think in a unique and
different way from other traders and I believe this is in large part responsible
for my success.
- High probability setups +
Discipline = Success
- Always use stop loss orders.
Have a specific risk-reward ratio in mind. Know exactly what you will risk in
every trade
- It is stupid to have a
risk-reward ratio of less than 1:1
- It is stupid to aim for very
high win percentages
- The entry price is the most important detail.
Almost all amateur traders buy
into this ideology. Why? These rules produce the illusion of certainty in the
market place. You know your risk and that's it. There is no chance of
becoming emotional because you failed to use a stop and therefore busted out you
brokerage account. You don't have to worry about having to explain to your
husband, wife, or friends that you are not as big an idiot as you seem to be,
that trading is still something worth doing.
But in the market certainty
doesn't exist. Any rule that produces the illusion of certainty just makes it
easier to fail as a trader.
Admittedly I went through a
phase of having a set risk-reward ratio (1:2) and risking 1% of my account, thus
calculating my position size must be (x). My stop loss was frequently hit. I was
going nowhere fast.
I printed off all the trades I
ever did and analyzed them in detail, trying to find what went wrong.
I came to some
conclusions.
1. I'm buying high, I'm buying
on a higher close, buying in a late signaled uptrend rather than buying on
falling price.
2. Price is volatile. My stop
is getting hit. I can't forecast price fluctuations with enough precision to be
able to place a 5 pip stop loss.
I concluded that using a stop
loss represented my effort to predict the market's short run fluctuations, to
treat the market as if its movements were certain. But I couldn't do it.
I tried to move away from this idea and explore how I could trade without a stop loss.
I tried to move away from this idea and explore how I could trade without a stop loss.
During this learning process
the fact 95% lose was a uppermost in my mind. Whatever traders who were losers
wrote I would turn on its head and try to do the opposite. This was my way of
thinking outside the box. And I believe that you shouldn't follow the flock.
I began to see trading as an
art instead of as pure calculation. It is less about certain maths and more
about movement. It's about watching the market dance, letting it move up and
down without placing too much significance on any particular jiggle. I decide
that I just wanted to take a piece of these constant fluctuations and not try to
predict them.
I concluded that trading is not
about having a certain risk-reward, not about applying the same risk to every
opportunity, not about exiting at a pre-determined level. It is about making
adjustments as the market produces new information, as it moves move around on
your mental map of its behavior.
It's extremely hard to make
money from the common wisdom you find in trading books. But if you look past
such "wisdom" you can see trading doesn't have to be so complicated and
time-consuming. Volatility can produce profits for you without you having
to be a prophet! All the prop firm traders I know who are successful
understand and base their methods on this insight. All the successes I have had
in trading arise from this observation.
Professional traders win by
applying their own judgment and experience to judge the market's position on
their personal market maps and then letting the market's
natural volatility work for them. They don't waste their time
back testing strategies.
So how can you change your
current quest to trade for a living?
1. Read my previous post about
how to learn to trade, I seriously think if traders learn to read the markets,
they will be successful. Read the market, take in the new information is gives
you each hour and each day.
2. Try to escape from common
wisdom and general public beliefs. Start thinking outside the box, Start looking
into volatility, high win percents and try get past your human fears and
uneasiness with ambiguity. Don't use hard stops.
3. Average down and pyramid
with risk management.
4. Enter when price is
falling.... In an uptrend.
I strongly believe averaging down, as long as it isn't done due to fear or because you are losing (If done as a planned strategy) is an easy way to profit... That is from personal experience and it is expressed in my account balance.
Thanks for reading.
I strongly believe averaging down, as long as it isn't done due to fear or because you are losing (If done as a planned strategy) is an easy way to profit... That is from personal experience and it is expressed in my account balance.
Thanks for reading.
Glad to help.
