Looking back, I now realize that what allowed me to finally establish consistency into my trading was not a better trading strategy or a different method, but something I never expected when I started out as a trader.
In today’s society where the average attention span has dropped to 8 seconds, where 140 character tweets seem too long (#TLDR) and people skip YouTube videos after just a few seconds, we easily lose the connection to ourselves…
The concept of “self-awareness” has a woo woo ring to it and most traders will not listen to you if you start a trading conversation by referring to self-awareness. However, if you really want to make this work and if you want to finally realize your goal of becoming a pro trader, you have to listen and I am 100% certain that you will be able to relate to my story as well.
What is self-awareness? Forget the spiritual mumbo-jumbo
Unfortunately, most people, and especially traders who are often numbers driven and very rational, associate the term self-awareness with something spiritual and connect the wrong assumptions with it. This is very unfortunate because I have never met a successful trader who is not also very self-aware. You’ll see soon that self-awareness is something very different from what you believe it is.
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It’s easy to understand how there might be a pattern in the market that shows we have an edge or a reason to put on a trade. Maybe some combination of factors or patterns shows us that a market is more likely to go up over a certain time period, so we buy it. That’s pretty easy to understand, and it’s how most people think about trading.
There is another way to think about patterns, and I think this is more powerful. We can take a pattern, and then think several steps ahead. Through much the same process a beginning chess player might go through, in which he thinks “ok I move here and then maybe he moves here… and when he moves there I’ll do this… but wait… if he does this instead, then I would do this…” We can play a similar game with the market, looking at how prices and patterns are developing, and thinking a few steps ahead. Take a look at the chart below, which shows the S&P 500 futures a few days after a sharp selloff. I’ve also highlighted two possible scenarios, in light orange and blue, that might have played out. Here’s the chart:
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- They risk too much to try to make so little.
- They trade with the probabilities against them.
- They think trading is easy money.
- Instead of focusing on learning how to trade they focus on getting rich.
- They blow up due to improper position sizing.
- With no understanding of the mathematical risk of ruin they are doomed after the first long string of losing trades.
- Blindly following a guru that leads them down the road of destruction.
- They don’t do their homework.
- They trade opinions not robust systems.
- They go looking for ‘trades’ instead of a methodology.
- They have no trading plan.
- They attempt to piggy back on the trades another trader but don’t understand the risks.
- Most new traders quit when they realized how much work is involved in trading successfully.
- Most traders quit when they learn how many losing trades they will have to have to get to the winners.
- New traders quit if they do not have a passion for trading itself.
- Many new traders will give up the moment they realize that trading does not have guaranteed income, you are an entrepreneur.
- They are not willing to pay the tuition to learn to trade in time, study, and losing trades.
- They are crushed by the learning curve that they do not work hard enough to get through.
- We lose a lot of new traders when they realize that trading is actually harder than their job.
- The traders that don’t make it quit when they were tired, frustrated, and stressed out, the winning traders quit after they had figured trading out.
The original article appears on newtraderu.com and is penned by Steve Burns. It can be accessed here.
George Soros, founder of Soros Fund Management LLC
Traders tend to be overconfident and discount what they don’t know about the market and individual securities. They see patterns instead of random noise. And they have a hard time admitting their losses and focus too much on gains.
In summarizing the science of behavioral finance, Statman says we’re pretty much hard-wired to consistently make these mistakes — and lose money. Since we tend to think of ourselves as better than average on most everything from driving to investing, it clouds our rational judgment. A body of research has found this to be particularly true when it comes to amateur stock traders.
Statman said that average returns of frequent traders “lag those of infrequent traders and the average returns of infrequent traders lag average returns of investors who abstain from trading.”
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If you are confused about how to trade / invest when you have an opinion or follow one then you do need to get yourself a lesson in trend following. Elliott Wave analysis is meant for market forecasting but actual trades have to be taken based on classic technical tools that give you levels to manage a trade. It is my belief in this process that I do not give calls or tips. I do the difficult part of taking a view and take the flak for it when wrong.
However to successfully make money you will need to add Position sizing to either your investment decisions or trading decisions so that you can minimise losses and maximise gains. So I would expect you to learn some of that. In today’s note, I will give you a head start on this.
If you do not know how to trade at all then you first need a lesson in trend trading however if you want to know which trend to trade you have come to the right place. Learning to trade involves knowing.
1. How to buy/Sell
2. Time to monitor trades, to get out of losing trades
3. Understand support resistance
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