Trading For A Living – What Is Your # 1 Goal?
My answer. Simple – TO SURVIVE.
You can find a lot of articles online about common denominators among successful traders. It’s well and good, to read those sorts of things. There are a lot of valuable insights to be had.
But, for a moment, indulge me. Let’s look at things from a different perspective. Of all the thousands of people who attempted to trade for a living in last year, and who no longer trade, all of them, 100%, have something in common. And that is, they all, 100% of ’em, didn’t survive.
Is that just a silly observation – good just for a chuckle? Read on.
As your journey toward becoming a successful trader evolves, you’ll find yourself getting lost in the learning process. Trust me, you will. There are dozens of instruments to trade, dozens of markets, and each has their own eccentricities that are important to learn. Trading systems come in hundreds of flavors, and each takes a particular mental attitude to execute properly. And then, overlaid on top of all that you need to learn about the mechanics of how the markets work, is the challenge of learning your own psychological and philosophical worldview, as it pertains to being successful trading.
Unless you’re the rare individual who found their niche and was successful from day 1, you’ll find yourself a bit lost & overloaded. And wondering where to invest your time and efforts.
A thought: when you find yourself confused, circle back to this question: How do I survive the learning curve?
I think, for the purpose of understanding what it takes to survive, it’s helpful to think that you, as a trader, have just two assets, your Financial Capital and your Emotional Capital. Losing either will put you out of the game. To survive, you need to preserve both. Your Financial Capital can’t drop below the minimum required to do whatever sort of trading in which you’re engaged. And your Emotional Capital can’t drop below the minimum level of conviction and level-headedness needed to conduct trading properly.
Certainly we all have a friend or two that “blew out their whole account” trying to learn to trade. Me, personally, I have many, many more friends who took a stab at trading for a living, and gave up because they lost their Emotional Capital, not their Financial Capital. That is they lost their conviction, or were making emotion-based trading decisions. I think it’s more important to focus on preserving and nurturing one’s Emotional Capital, than preserving your Financial Capital. Among many reasons, one is that, I’d bet, in a lot of cases where folks blow out their accounts, the actual root cause was that they were making silly trading decisions, based on “heat of the moment” emotions, so effectively losing their Emotional Capital caused them to lose their Financial Capital.
Let’s just very briefly list a few tools for preserving your Financial Capital, before moving on what I believe is more important, preserving your Emotional Capital.
1 – Trade very small size, gain experience with real trades, while minimizing down side.
2 – Trade for a month, reflect & learn for a month, trade a month, learn a month, rinse and repeat.
3 – Seriously limit your leverage, so that you can financially survive more losing trades.
4 – Suspend trading during draw downs & instead focus on learning for a few weeks, then re-initiate trading.
5 – Trade vicariously through someone else.
Each one of these tools, properly discussed, is a long book chapter – please forgive the bullet point treatment here.
Now let’s explore some ideas about preserving your Emotional Capital. That is, let’s figure out how to Not Give Up.
1 – Set your expectations properly
2 – Understand the size of the noise in the market, relative to your trading edge
3 – Periodically look back at those who have fallen
4 – Understand the emotional impact of winning %, vs making money
5 – Resist wanting to be right
6 – Be very sentimental about your first real trade
7 – Be even more sentimental every time you learn something significantly helpful
#1 – Setting your expectations properly. Trading is not glamorous. Or sexy. Or even, really, fun. And until you really know what you’re doing, it’s actually very taxing. And, drum-roll – it’s not anywhere near as profitable as what you’re likely to be assuming. Once you’re past the learning curve, if you’re trading a system with a typical edge, it sort of turns into drudgery. Yes, there are high moments. And there are good days, when you think you’re a rock star. But, when you average everything out, it’s a job like any other, with rewards that aren’t all that far out of alignment with other investments. If you want to Not Give Up during the learning curve, it could make sense to reel in your expectations. And, definitely, forget the image of your tanned body on a lounger pool side at some tropical resort, reaching over occasionally to plink a few keys on the laptop, making millions each day, all before tea time.
#2 – Understanding the size of noise in the market. I remember Signal Theory class in college – it was an engineering course. The concept of noise fascinated me. When you’re designing circuitry for things such as radios and radars, you can make some valid assumptions about noise, you can filter it out. It even fascinated me that you can use random environmental noise as a carrier signal, and transmit, say, a radio station on top of noise. Noise, in the natural world, is a weird and fascinating thing. But it’s been tamed by years and years of engineering, so it’s well understood, and it’s straightforward to isolate it, to filter it out, to do with it electrically what you want. In a way, you can be noise’s Master, and have it do your bidding.
Not so much in the world of trading. In trading, noise is *your* master. It’s outside of your control. And, as frustrating as it is, to have noise create a loss on an individual trade, it’s even harder to stomach how much it impacts your overall equity curve. And it does impact your overall profitability, significantly. The unfortunate truth is that the effect of noise will be nearly as big as the effect of your trading edge. Let’s contemplate that for a moment. If your trading system gives you X amount advantage, but noise introduces, say, .75X amount of random variability, then, at least in the short term, your results will seem (they’ll “feel”) frustratingly random. And, in fact, your system can be solid & performing well in the long term, but your actual results will be negative in the short term. As a trader, when you look at your results over a short period of time, they will almost always look random. To stay in the game, it helps to understand this, and remember it when you’re struggling to see promise in your equity curve.
#3 – Periodically looking back at those who have fallen. This might sound morbid, but it’s helped me. Say you started trading on Jan 1st of a year, and you know that only a certain percentage of traders last, say, a year. If you’re still in the game on Feb 1st, no matter how well or poorly you’re doing, you’re still doing better than all those that have fallen during the month. And if you’re still in the game on March 1st, you’re still in the group of “survivors.” With each month, that pool gets smaller, and your chances of ending up being a success are much greater. Think of a tournament with 100 entrants. When you enter the tournament, your chances are 1 in a 100 of winning, but if you make it to the final four, then your odds are way higher. I think it helps one stay in the game, to, each month, reflect on the fact that you’re still in the game, still plugging away, and that much closer to being a successful trader.
#4 – Understanding the emotional impact of winning %, vs making money. I think that there is so much literature out there, that talks about a trader’s % winning trades, as though it’s the same thing as profitability, that many people equate the two. They’re not the same. You can make truckloads of money with a system that only has 35% winners, and you can lose money with a system that has 90% winners. A more proper metric is Expectation, but of course, most all the literature for beginning traders doesn’t mention that, so in many folks’ minds, they develop a strong emotional connection to % of winning trades. The travesty is that, once conditioned that way, you can feel really bad about a week that had 40% winning trades, when in fact you made money that week.
Another effect is the conditioning we all had, going through school. You have to get 90% for an “A,” so we feel bad about ourselves if we get 85%. In the world of trading, you have to learn to judge yourself on only what matters. Your % winning trades, effectively, doesn’t matter.
#5 – Resisting the want to be right. Let’s say you’re trading a system that fades the high of the day. The underlying concept of the system, let’s say, is that when a certain daily range has been put in, additional range extension is unlikely. Let’s say on some day, you short the market when it hit a new high, at say, 11:00 US eastern. And, like your system predicted, price pulled back, hit your target, and you made money at, say, 11:23. But then at 11:30, the market started rallying again, hit new highs at 12:00, and continued higher all afternoon, for a big trend Up day. How do you feel about this? Any of your non-trading buddies, if you told them about the trade, would say obviously, your were wrong – their comments will make you feel bad about yourself, that your system thought it would be a more range-bound day, when in fact is was a big trend day. Clearly, they’ll say: You. Were. Wrong.
At least, that’s what human nature, and your insensitive friends, will have you believe.
Also, consider the converse case, where your system was “right,” but your trade lost money. Were you “right” then?
The real answer, like we’ll see again and again, is that it’s all different in the world of trading. In trading, it helps to think that there is no such thing as being Right or Wrong. (At least insofar as short term results, and certainly daily results, are concerned.)
There is a huge disconnect – between basic human nature making us want to be right, v.s. just simply making money, no matter how it happens. As you progress through the learning curve, it makes sense to avoid becoming emotionally invested in being right.
#6 – Being very sentimental about your first real trade. You will only have your first real trade once. Let’s say you’ve dabbled for years, but one day decided to get serious, and traded your first “real” trade, using an actual system & rules, on, say, Feb 1. Remember that date. Remember what you did and how you felt about it. Remember the emotional roller coaster that it was. Even if it was a disaster trade. Even if you made 5 errors on the trade. It’ll help later on, when you do things like #7 . . .
#7 – Being even more sentimental every time you learn something significantly helpful. Have you ever listened to a person, who describes the whole process of how they got really good at something? They almost always have some point in the story where they very modestly say something, “and then one day, I finally figured out BlaBla, and everything was so much easier and successful from there on out.” You’ll have those moments. Right now, since you haven’t yet had all the epiphanies, you’ll not know which one is going to be the Aha moment, that is the pivotal change to your journey.
By remembering where you were when you started (#6) – establishing a baseline if you will – and celebrating each subsequent significant learning experience, you’ll eventually see a pattern of improvement. And you’ll be developing the positive self-speak that is so important to fueling your confidence. And, bonus, you’ll already have practiced the story you’ll tell, when you’ve made it big, and someone asks “how’d you do it?”
I hope all this helps.
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