No Guarantees in Trading
In the movie, A league of their own, Tom Hanks proclaims that: “there is no crying in baseball”; similarly I will proclaim to new traders that: “there are no guarantees when it comes to trading!” In my years of experience as an educator, I have found that it is actually much better to understate expectations to students rather than to inflate them. When students realize that it is an uphill battle, they are better prepared for the challenges of trading and the psychological rigors involved. When they understand that trading success is neither easy nor quick, they are more likely to be patient and persistent. Having realistic expectations about their trading journey allows them to plan better, to persist and persevere on the path to success. As a matter of fact the vast majority of traders that usually fails or gets discouraged do so as a result of their false expectations of ease and immediate success.
Trading is an extremely challenging endeavor; it requires an extraordinary level of discipline and psychological emotional control. Learning to read and understand the market is a piece of cake compared to the psychological challenges involved. The psychological obstacles are especially difficult to overcome if you are trading with money you cannot afford to lose or trading to generate money to meet your living expenses.
Trading With Your Own Money
I will share with you the experience of three bright colleagues who worked as professional traders for a major insurance fund. All three were extremely successful trading at their company. They had a stellar trading record for over ten years; they were in fact the company’s top three traders. Tired of office politics and the company’s meager salaries compared to the profits that they were generating for the company, they got together and decided to leave the company and to trade for themselves.
They pooled their own personal capital funds, rented and furnished a beautiful new office and started their own private trading fund. Confident and proud they began their venture with great hopes and even greater expectations. After all, unlike the amateurs out there, they actually had a proven track record of success.
Unfortunately, one year later, their venture had lost over one half of their capital and they were at each other’s throats. Each blaming the others for the losses. Their venture failed and each of them is now working for a different company.
It’s one thing to trade with someone else’s money and it is another to trade with your own. No one should ever trade with money they cannot afford to lose or trade because they need money to meet current expenses.
Naturally, no one trades to lose money but if you are trading for income and you start to lose your own hard earned capital, your fear and emotions will dramatically influence your trading decisions. We are all humans, as human beings, whether we like it or not we have emotions. More often than not, our emotions control us in a powerful way. This is why in recent years more and more professional trading activity is being turned over to machines. Computer algorithms now control the decision making process to completely eliminate any human emotions from the process. The most profitable traders in the market today are high frequency traders. These high frequency traders simply rely on algorithms that read order flow and react at lightning speed. Some of these high frequency trading firms make tens of millions of dollars in the market each day. They rarely have a losing week or month.
However, these types of profits are not available to the small individual trader. New traders and beginners need to have realistic expectations about the market. First of all they need to realize that learning to trade through a trial and error is the most expensive way to learn to trade and usually the fastest way to losing your precious capital.
Don’t Ever Get Overconfident
While a good education certainly helps to put traders on the path to success, traders need to understand that even with the best of education and coaching it takes time and practice to become consistently profitable. Naturally, the time it takes to become successful as a trader will vary from one individual to the next. However, as a new trader if you are profitable after your first year of trading count yourself among the lucky few. You need to realize that you are probably doing better than 98% of all other traders that started at about the same time.
The more realistic you are about your trading goals and expectations the more likely you are to succeed. In my approach to trading education I use a goal post approach or milestones for the learning process. Students must first learn basic trading concepts, once mastered they begin to practice using paper trading, once consistent profitability is established with the paper trading drills they are ready to begin trading live with very small positions. Once they are consistently profitable with small positions, students start to gradually increase their position size. Students are taught to continually document, evaluate their performance and work to refine and improve their results. One of the biggest challenges I continually face with new students is that once they are armed with new knowledge they are overly eager to rush and implement it in the live market.
Knowledge without discipline and skill is extremely dangerous in the market. Confidence is a great virtue but overconfidence can be devastating when it comes to trading. Overconfidence leads to carelessness, poor risk management and sloppy execution. Successful traders are always humble and continually aware of the markets risks and dangers. I always instruct my students to focus on learning properly first before they begin to ask questions about how much money they will make in the market. Once you begin to learn and practice you will be able to determine for yourself how much money you can reasonably expect to make in the market. Allow yourself the time to learn, to practice and to develop your skills as a trader before you count your profits. Manage your expectations according to your own performance and pace. Preservation of capital, Patience, Practice, Persistence and a Positive mental attitude are the five “Pees” or key pillars of success.
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