My Take on Trading
In simple terms, trading is the process whereby we regularly buy financial products, primarily in a market (more officially referred to as an exchange), and then sell them later for a higher price. This simple concept makes a lot of sense and is probably the main reason why people generally think that trading is easy money.
The financial product that we buy and sell may be stock in a company, a futures contract or even a foreign currency, for example. Many markets offer the opportunity to take advantage of and financially benefit from a falling price as well. This is often referred to as trading ‘short’, as opposed to the aforementioned and more commonly known ‘long’ trading.
Trading can be a very exciting and worthwhile endeavour and there are several attractions for most people (not including ‘making money’ which is obvious).
Some of the advantages of trading include:
- Self employed – you are your own boss
- Geographical freedom – technological advances are making this easier every day
- Minimal capital outlay – compare this with purchasing a franchise or establishing a new retail store in your nearest shopping complex.
- Unlimited potential for profit – financial freedom is what most traders aim for
- Flexibility with time – you choose when you trade and when you don’t
- Almost anyone can do it – if you are old enough (usually 18 or 21), you can open a trading account and begin
There are of course some disadvantages which include:
- No guaranteed success – many people don’t make money trading
- Can be stressful and emotional – when you are ‘playing’ with your own money, this is almost inevitable
- Solitary existence – trading can be a very lonely profession
- Takes time – like many endeavours, consistently profitable trading takes time. I list this as a disadvantage because I believe many newcomers don’t recognise this, nor do they fully appreciate what is required to develop the skills and attributes for successful trading.
There is one thing you need to be aware of, however. Trading has a greater potential for reward than investing but with that extra potential for reward is greater risk. Those who trade well have been well educated and prepared. Very seldom does somebody start trading and make money from day one. Often you will hear the saying ‘Only Educated Traders Survive’.
Having a Trading Plan
I can assure you all consistently profitable traders have a trading plan that they implement with confidence. Furthermore, they have a trading plan that suits them.
“If you fail to plan, you are planning to fail!”
The trading plan model I always use is as follows:
Some people will use terms other than what appear above (eg. Trading Psychology for Mindset / Risk or Money Management for Money / Trading System for Method), however I like these terms as they are easier to remember. The 3 Ms!
Unfortunately, many traders are not successful! There are numerous reasons for this and I want to tell what they are. I want to help you avoid making the same mistakes. Hopefully the articles on this site will help you. The articles are broken into three areas:
One of the main reasons is that many people don’t have a trading plan. When you don’t have a plan, your trading decisions are largely based on hunches, instincts and emotions – chances are you will not achieve long term success.
Having a written trading plan provides you an edge over most market participants and in an arena where most people fail, how can you afford to not give yourself an edge?
What is a Trading Plan?
Unfortunately for a lot of people who start trading, many will find success difficult to achieve. One wonders what the minority are doing right that give them the advantage over the vast majority who leave the market with less money than what they had when they started trading. Sadly, a lot of those who fail walk away with very little of what they had originally.
So what is it that separates the successful from those who fail? If you ask anybody who has studied trading for any period of time, they will answer ‘psychology’. They will add that ‘your psychology’ is what will make or break you as a trader. Essentially, your mental ability to manage losses and profits, the good times and the bad, your capacity for risk management, and the self-discipline necessary to avoid becoming too greedy are all subsumed beneath the heading of ‘trading psychology’, along with many other similar skills and abilities. If we are naturally inclined to break all of the time-tested trading rules, how can we overcome those natural tendencies and therefore control our mindset?
One of the biggest reasons that our mindset is such a factor of our trading success is that our emotions influence our actions. Irrational emotions have little place in our trading; however, removing our emotions from our decision making is easier said than done. It is our emotions that cause us to break the trading rules that have been proven to work over hundreds of years.
Must Suit You
First and foremost for a good trading plan is having a plan that perfectly suits you and is right for you. The best traders have discovered an approach that they are very comfortable with and confident in … however most importantly it suited them. None of them have found any magical solution nor have they found that perfect trading approach that gets it right every time.
Then of course, how can you possibly develop an approach that is right for you if you really don’t know yourself? I believe that the first part of assembling your trading plan should be to conduct a self-assessment.
A good trading plan suits who you are, and many other factors including even the seemingly unimportant things like how much time you have to commit to your trading, your level of computer proficiency, your environment and your tolerance to risk. The last one is important.
Most people have a different tolerance to risk and managing risk is a vital part of trading well consistently. So if we all have a different tolerance to risk, clearly we won’t all have the same level of comfort and confidence in the same trading plan. Therefore, we all have to discover that approach that suits us as an individual person.
Some of the more important factors include your personality traits like patience, confidence, decisiveness, emotional stability, mental agility, and probably most importantly, your attitude.
Another key ingredient to the trading plan is the ease in which you can execute it … over the years, I have had the pleasure of speaking to thousands of traders from many countries and during this time, I have learnt many things. Based on these conversations and my own observations, I am convinced that generally people fail at trading for two main reasons.
First, the majority of actions required for success are counter intuitive and if people are not aware of this, they often consistently make poor trading decisions. Second, and backing up my point here about ease of execution, when people realise that trading is not as easy as they thought it would be, they tend to overcomplicate their trading plans which often causes further problems. Software now available with a myriad of technical indicators probably doesn’t help this situation.
Keep It Simple
Whenever I speak to people, I mention that a trading plan needs to be simple as it makes it easier for us to follow it. Furthermore, simple approaches have proven over time to work.
When you think about it, the time tested trading rules like cutting your losses, letting your profits run, follow the trend and keep trade sizes small (just to name a few) are based on very simple concepts.
For example, after you enter a trade, if the price moves down to your pre-defined initial stop loss point, then close the trade and cut the loss. It sounds simple because it is. The others are just as simple. Don’t over complicate your trading plan – it doesn’t need to be.
Finally, some advice for putting one together … obviously having a trading plan facilitates your decision making by helping reduce the influence of your emotions from the equation and, therefore, will hopefully make you trade more efficiently. The best way to ensure you get the most from your trading plan is to write everything down. I believe your trading plan should take into account the same three broad areas I mentioned earlier, as follows:
- your trading mindset (or psychology)
- your money management (position size, setting exits, pyramid strategies, and so on)
- your trading method (requirements for trade initiation, filtering processes, daily routine, and so on)
One thing I have experienced over the years is many people who accept that a trading plan is an essential requirement to trading well, yet they don’t know where to start to put one together. I accept that it can be overwhelming at first to tackle this issue.
3 Key Decisions
So let me simplify this for you. There are three key decisions you need to make when trading and if we think in these terms and your trading plan answers each question, then you may have the makings of a simple yet robust trading plan. Despite what I listed previously as the three broad areas in your plan, your trading boils down to the following:
- Under what circumstances will you enter a trade?
- How much money will you commit to the trade?
- Under what circumstances will you close the trade?
Never picture your trading plan as a detailed document containing pages and pages of information because then it will overwhelm you and may deter you from compiling one in the first place. Think in the simple terms above and once you have answered the above questions, then you can add some detail to it as time goes by.
A trading plan should be simple, easy to execute, and most importantly suits you and your personality.
Many people think that trading is easy money – it may be the hardest easy money there is! Trading has relatively straight forward concepts, yet is amazing how many people make a mess of it.
I want you to gather knowledge and acquire skills that will empower you to develop a trading plan that is right for you and that you will implement with confidence.
I wish you well with your journey and hope the information here empowers you to trade well and profitably, and to change your life forever.
What Can I Do for You?
As a private equities and FX trader, best selling author, trainer, and coach, I have worked in the financial services industry for over 20 years helping companies all around the world.
I have written detailed market commentary of equities, foreign exchange, indices and commodities for several leading brokerages around the world. I offer detailed technical analysis providing a real traders perspective on price action, trends and key levels in order to assist clients make more informed decisions.
I have spoken at trading and investment expos all around the world speaking anything from VIP clients in small groups of under 10 people over dinner to large gathering of over 500 people. I have spoken live in front of tens of thousands of fellow traders from Mumbai to New York, Melbourne to Beijing, Tokyo to London, and many places in between.
Staff and Client Training
I have conducted extensive training to brokerage staff and clients alike. The staff training is to enable them to provide a better client experience and better understand the frustrations their clients face, while the client training provides them the tools and information to develop a trading plan they can implement with confidence.
Contact me to find out how I can help your company.