The Steps to Success (3)

The trader in this category here has probably been trading for five to seven years. In NLP terms, he ranges from consciously competent to consciously, unconsciously competent. Most of your good trainers fall into the latter category.

At this level, the trader is now or has been producing consistently profitable results. It’s not that his ‘rat brain’ doesn’t from time to time seize control and cause damage to his account; but the effect of the impulse trade (i.e. a trade that breaches his rules) is limited. Rather than causing a blow-up, the impulse trade may cause a loss of one or two percent.

A trader in this category is continually honing his skills. Some of the areas of improvement include:

The point I am making is we never stop learning about ourselves and about the market. One of the benefits of teaching is it hones my trading skills forcing me to articulate some instinctive trades. I can’t tell you the number of times a question from a student has led to a profitable line of thought, research and validation. Dad taught me the moment we start thinking we can stop learning and improving, that’s the moment we start our decline.

The Steps to Success (2)

In ‘The Steps to Success“, I introduced the idea that newbies face formidable barriers to their success. Chief among them is the unreasonable expectation of what is possible and the underestimating of the effort required to achieve their dreams. Add to these two more facts:

  1. at the beginning newbies are unaware of what they need do to make it and
  2. are encouraged by the industry hype to persist with their unrealistic expectations.

Frankly, I am amazed that so many of us survive the 12 months to 18 months period most of us need to bring us to the next stage.

For most of us 12 months to 18 months after we begin trading is the crucial period. We were on the way to attaining success if somehow, and from somewhere or someone, we learnt that the secret to our success lay in the use of appropriate tools that created an environment enabling us to consistently execute our risk management and written trading plans,

For most of us, this is not the road we’ll take. And, for most of us, we’ll fail in this game. I survived because I was lucky in two respects:

  1. I had a wife, Chris, who put up with seven years and A$750,000.00 of failure and
  2. At the right moment in my learning, I came across Pete Steidlmayer and his works.

Not everyone is so lucky.

Why do so many fail after this period? Because we entrench the patterns of failure.

  • we seek to be right, rather than to ensure that our expectancy is positive;
  • we seek to hit a home run every time at bat, rather than accept singles until the right ball for a home run comes along;
  • we overtrade either because our position size is too large relative to our capital and/or we trade too often;
  • we trade without keeping metrics of our performance even though subconsciously we know we should – usually we are just afraid to face what the metrics will reveal;
  • we persist in ways that have not succeeded, throwing good money after bad.
  • we trade without a plan or if we have one, fail to take the trouble to validate it so that we have no idea of its likely performance.
  • we have a plan but we honour it by not trading according to its rules.

If you have been trading for 12 months – 18 months, ask yourself: does the above sound familiar? If it does, what are you going to do to change it? Einstein once defined insanity as: ‘doing the same thing over and over again and expecting different results’.

This comment is only partially true: it’s true if you have been at something for a while (some call that persistence) and have produced the same results. You have had 12-18 months and the results have not changed. So what are you going to do to change it?

In this seeking for change, it’s important that you change the essence of what you do. In my quest for success, I tried therapy, seeking self-awareness and knowledge. One among several of Dr. George Lianos’ comments has stayed with me: “If repeated behaviour leads to the same results, look to understand the relationship between the behaviour and the results rather than the reasons given for the behaviour – no matter how reasonable those explanations may be”.

I don’t know you so I can’t advise you on what behaviour is causing the results you don’t want. But you know what changes you need to bring to the table:

  1. Start with a validated simple trading plan. By validated, I mean know its performance metrics. If you don’t know how, then have someone do it for you. Whatever it costs, it will be a lot less than trading with a plan that has a negative edge.
  2. When testing the plan, test it with your position sizing rules and on a portfolio basis (the latter if you are trading more than one instrument).
  3. Have a money management plan that includes risk per trade, portfolio risk at any one time, and rules relating to when to increase and decrease size.
  4. Check your open risk daily. Remember your open equity is not where the market is trading but where you have your stop loss.
  5. Check your metrics at regular intervals.
  6. Have a plan to minimize your stress. Look to understand your strengths and weaknesses; in this regard, I find it’s invaluable to keep a journal that is cross-referenced with my equity spreadsheet.
  7. Spend time preparing for a trade. We are traders; when we have completed our analysis it boils down to this: we need to know where and when we will enter and exit a trade. Unless we are scalpers, even day traders need to have some plan of action if only for the first trade of the day. I have found visualization of the plan for the trade very useful in avoiding impulse trades.
  8. Seek to understand the context in which you are likely to break your rules (i.e. take impulse trades); if you identify the reason for the limiting pattern so much the better.

At the end of this process, you’ll have a risk management and trading plan supervised by a process that encourages consistent execution. I have written about 900 words – and they have been relatively easy to write – and even easier for you to read. But to have the knowledge to write them has taken 30 years of trading. Here’s what I’d like from this blog: I’d like this blog, the most important I have written, to help one trader find his way to success – I hope its you.

The Steps to Success

In the next series of blogs, I shall be considering the steps traders need to take to succeed.

There is no universal formula for success – much depends on where you are on the traders’ evolutionary scale. In this blog, I’ll consider what a newbie can do. For me a newbie is anyone who has had no trading experience to one who has been trading for no more than 18 months. An essential condition for a newbie is to be a trader who has not experienced trading success.

  1. Does this sound familiar: you trade without a plan, taking large losses and small profits; before you know it, your capital is gone?
  2. Or this: you do no wrong in your first trades, and succeed in making money, hand over fist. Then wham, you give it all back and more?
  3. Or this: you read a book or attend some course and experience either (1) or (2). In short, nothing has changed.

Here’s how to change those experiences.

Accept the fact that the challenges facing a newbie are formidable. He must bring to the table a passion and love for the process of trading; in other words, he loves trading for its own sake – he is not in it just for the money. Without a passion and love for the game, it is unlikely he’ll survive the trial and tribulations he’ll face en route to success. He must also bring to the table ‘realistic expectations’.

In this context, ‘realistic expectations’ means you accept that you will take time to build the foundations for your success. One of the best resources in this area is: The Cambridge Handbook of Expertise and Expert Performance. The book sets out the pre-conditions for mastery. One of the steps is deliberative practice of the fundamentals; the other is time spent in practice.

It amazes me how often otherwise intelligent humans lose their sense of perspective when it comes to trading. I have mentored doctors, surgeons, solicitors, two Queens Counsels, even pilots and other professionals. If I had told them that they could become successful doctors, surgeons etc in six months or less, they’d have laughed at me and shown me the door. Yet, they truly believed they could become successful traders in six months or less, and with little effort. Incredible!

Newbies also underestimate the process they need to go through to attain success. But here, they have a lot of encouragement for their belief.

Too many ‘educators’ push the line: ‘Spend $X’ with me and you’ll attain quick returns and easy success!’. I have seen ads for books and courses that ‘guarantee’ results by spending a mere ‘x’ minutes (10 minutes is popular) per day. Many newbies have spent the $X and have little to show for it. The result is a scepticism that is almost as damaging  as their  naivete. I met a chap who went from preview to preview to glean pockets of wisdom! He wasn’t going to pay for an education – not him! He genuinely believed he could learn what he needed in this way. Incredible!

There are facts a newbie must be willing to face:

  • You need to put in the right effort. Before you begin, research what instrument is best suited for you: Options, Stocks, FX and Futures. If the latter I’d seriously consider CFDs to learn to trade and move on to Futures once I know I can win. CFDs are  similar to Futures, but  for beginners trading CFDs means  trading smaller size.  For example, the e-mini is US$50.00 per point. The minimum dollar per CFD tick is US$1.00. That’s quite a difference.

Options are usually best suited to those with a mathematical bent.

  • Know or find out whether you are best suited to a digital method (e.g. Buffett) or a visual (charting) approach.
  • Discover whether you are more comfortable with a short-term (day trade) or a longer time frame.

How do you do this? There are a couple of coaches who conduct evaluations e.g. Dr Van K Tharp. I took his evaluation and found it useful. This is not an endorsement for the rest of his products – I have not been to any of his seminars and cannot comment on them.

Once you have an idea of your nature, then pursue an education in accordance with that nature. Remember this is merely an idea; as you gather more information, be willing to change the initial ideas to accommodate the new data.

  • It is going to cost you dollars to learn. The only question is how much and to whom will the dollars be paid: will you pay the markets or will you pay an educator?

Where educators are concerned, you will need to perform some sort of due diligence – diligence to sift  the wheat from the chaff.

I wish I could say that you can tell just from the price and the ads. Unfortunately, this would be untrue. In Singapore Mirriam Williams’ ads are everything I hate in ads – ‘quick easy money’ variety and the cost is about S$6000.00 (US$4300.00).
So would I say the course  is value for money? What do you think?

I have seen the material and I am impressed with it. I’d say the content of the course is value for money.

I also have seen the content of other courses, courses that would not represent value for me – even though they cost less than S$6k. I say this because I find the proposed plan flawed (or non-existent) and the position sizing either non-existent or too aggressive. Here I am venturing a personal opinion – others may not share my view.

  • How about using popularity of a course as a guide? Unfortunately, there is little evidence that it’s a good guide. Sometimes popularity merely means the educator has a well-oiled marketing machine – the educator is teaching little of substance; sometimes, on the other hand, popularity does give a heads up to value for money.

So the newbie will have to face the fact that sometimes, some of the fees spent will be wasted. I guess a good guideline would be “if it sounds too good to be true, it probably is”. If you are looking for courses, the best advice I can give you is ensure the course covers the triumverate of trading: ‘plan + money management + psychology’.

  • Speaking of money management, know that some trading systems while sound, require large chunks of capital; make sure your pockets are deep enough to handle the system. Here the average dollar loss will and the average number of trades per annum will be of help. And…..
  • …Speaking of capital, make sure you are adequately capitalized to trade your instrument of choice. For a newbie, a reasonable algorithm is the Turtle one: (% risk x Capital)/$ Value of ATR.

Let’s look at what the minimum you would need to trade one contract in the e-mini. Let’s use a popular ATR value of 10 and assume we set our stops on a daily chart. The 10-day ATR is 28. So how many contracts could I trade with US$10k assuming a 2% risk?

(.02*10,000)/50*28 = .04

In other words, you need more than $10k account to trade the e-mini futures. (But note. you can trade 20 CFDs). Using the formula, we find that to trade one e-mini you need at least US$25k.

So, let me ask you: are you are trading the e-mini overnight? What’s your capital base? Are you under-capitalized? Are you over trading (i.e. the result of the formula is less than 1)? Day-traders can also use the formula. Just use the ATR of the time-frame in which you set your stops.

To find success you need to:

  1. Know your preferred instrument (Options or Shares etc)
  2. Know your time frame. By the way, lack of capital is not a good reason to day trade. You day trade because it’s a time frame that suits your personality.
  3. Know your approach; digital, visual etc
  4. Have adequate capital
  5. Get an education
  6. Have a plan with an edge + money management + winning psychology. Of necessity (you’re a newbie), the plan will be a simple one – a first step. At this stage, it’s a robust one based on your current knowledge. As your knowledge of self and the market increases, so will the effectiveness of your plan.

I hear you saying… trading is hard! Yep, trading is not easy but it is definitely worth the effort. Tomorrow I’ll look at the intermediate trader.

The Quality of Our Decisions Part 2

In ‘Think Better’, author Tim Hurson suggests a business decision-making model that evolves my process. Firstly he suggests that we alternate between right-brain and left-brain activity; secondly within his seven step model, he has some very useful tools. Whenever I brainstorm I use Mind Mapping software called Mind Manager. A free version of a mind mapping software can be found at:

Let’s consider an example and let’s say we are looking at yesterday’s ESZ7 12-m (yearly trend). We’d start with his first step, the one he calls: “What’s Going On”? Here he aims to use the right-brain to identify the critical factors. In our case we’d be brainstorming to probe for the factors that will affect the probabilities of our trade. A couple of useful questions he uses are:

  1. What’s the Itch? And
  2. What’s the Impact of the Itch?

Once we have a list, he suggests we verify our ideas by asking: “What the Information?” and drawing a distinction between what we know and we interpret. This is a useful distinction. For example:

Yesterday in the ES we had a directional day on lower than mean volume; the Profile showed a 3-i day down. That’s what we know. I’d interpret that by saying that the directional day favoured more downside to come; the lower than mean volume suggested the down move was coming to an end and the 3-i day suggested that in the 1st 90 minutes of trading, if we sold above the value area, we should be able to at least scratch the trade.

One of the questions that immediately arise is: “What does it mean if today we don’t get free exposure?” Another question would be: “What does it mean if today, we fail to make a lower low?” etc. In drawing a distinction between what we know and what we postulate, we are more likely to trade with an open mind: the process stimulates our ideas and reduces the risk of myopia – seeing only what fits our pre-conceptions.

Once we have a list of possibilities, we fine down to one or more critical questions that the Trader’s Timeframe will need to answer (in yesterday’s post the 18-d). The questions are answered by creating scenarios and assigning probabilities. We’d then use Decision Tree software to arrive at a solution. When using the software I like to see the conclusions hold over a range of values. If the Decision Tree software changes its decision over a narrow range, I consider it too close to call.

The attachment is the example I use on the video on the Decision Making Process. In that Tree, a change in the probability of success from 12.5% to 21.4% altered the decision. I would consider that too close to call and would stand aside.

Decision Tree


For a free Decision Tree Software go to:

Tim Hurson’s book is a great read and one I think you’ll find useful – but you will need to adapt some of the ideas to trading.

The Quality of Our Decisions Part 1

As traders, we spend much time in seeking more knowledge on the markets, knowledge that will provide us a distinction, a distinction that will lead to a greater edge.

But there is an area that most of us tend to overlook when looking for that edge; indeed usually when I introduce it in my public talks, I can see the audience glaze over and can almost hear the audience think: “Get over this quickly! I want the good stuff!” Well folks, “this is the good stuff”.

And the topic (drum roll please..): A Better Decision-making Process.

If you reflect on this, you’ll see why this is so important to trading, and to life. The quality of our trading, and life, ultimately depends on our actions and our actions are a by-product of our decisions.

So on what does a more robust decision-making process rest? Behavioural Finance? Logic? Creative Thinking?

None of the above. We need to go beyond Behavioural Finance; it does a great job for identifying the blocks to better decisions but some have taken a view that because we can never totally eliminate our blocks, we are doomed to poor decisions. The question is ‘poor’ compared to what? It’s like saying because we are not champion ‘traders’ we are doomed to being merely ‘good’ traders. So?

I consider myself not particularly talented in the trading arena – not a champion by any means; but that has not stopped me from making a better living than I probably could have made from any other profession and certainly better than one I would have earned from the law.

Similarly even if we never totally eliminate the psychological barriers to robust decision-making, this does not mean we should not try to make the best decision we can in the circumstances. And this implies seeking ways to improve the process.

Luckily for us, in recent years new discoveries have been made that lead us to think better. One discovery: the better decisions come from a synthesis of the right and left brain. Recently a discovery was made that an even process is to alternate between right and left brain activity. Since I read about the theory, I amended my decision-making process to incorporate this idea. It’s too early to report if there has been a bottom-line impact but it certainly feels more comfortable.

My previous decision-making process began with the right brain ‘stream of consciousness’ thinking. I would start with the 12-period monthly swing chart (yearly trend, 12-M) and work down to the 18-period daily swing chart (monthly trend, 18-d). The purpose of this step was to seek the critical question/questions relating to an instrument. For example in the S&P, on Monday November 19, the critical questions for me are:

  1. Whether the low at 1438.53 marks the termination of the correction.
  2. If not whether the end of the Zone marks the end of the correction (For those that have read the Nature of Trends this is the Primary Buy Zone marked by 1555.9 and 1370.6).
  3. Whether the high at 1576.1 identified a 13-w Upthrust Change in Trend Pattern or an Irregular Correction.

Using the various tools at my disposal, I would seek the answers using my Left-brain. The result of this process would be a strategy (buy/sell) and tactics (zone, entry and exit strategies). The final step would be to review the decision against my Behavioual Finance checklist to ensure I was not making some simple error in thinking e.g. anchoring an exit price.

I have just described the previous process. Recently I read “Think Better” by Tim Hurson and have adopted his model. I believe it is superior to the one I am using. I’ll deal with this in tomorrow’s post.

Welcome to the Inaugural Post

Welcome to my Inaugural post. I’ll be using these pages to post my thoughts on the three elements for success in the markets: Winning Psychology, Effective Money Management, and Written Trading Plan with an Edge. I’ll also address the oft-omitted subject in trading literature: the generic element for success.

What do I mean by that?

Peter Steidlmayer, whom I credit with turning my trading around, taught that the principles applicable in life are the same ones that apply to the markets. In life, there is a wealth of literature on what it takes to succeed

  1. Create a VISION
  2. Set Goals to attain that Vision
  3. Set plans and routines to take concrete steps to achieve the goals
  4. Review the effect of our actions: those that move us towards our goals do more of; those that move us away from our goals discard after seeing what can be retained.
  5. Recycle to step 2 and/or 3

I have been teaching now for over 19 years and I am amazed still by the refusal of students to move past their comfort zone. Unless we are willing to do that, we are doomed to wallow in failure. Let’s put it this way, if whatever we are doing is producing negative results, throwing more resources without changing our behaviour will only result in the same negative result.

The extreme example of this behaviour: “I’ll keep within my comfort zone no matter what” was exhibited by an Indian man at a presentation I once gave. He told the class that he had lost around S$1.7M over 3 years. When I asked him to change, what he was doing, he said: “No I won’t. It may come good!”

What chance of that happening? As Aussies say: “Buckley’s!” (i.e. no chance). A great definition of insanity is: “Doing the same thing over and over again and expecting different results”.

So if something is not working for you, change your behaviour. So ask yourself: “Is what I am doing producing the results I want? If not what behaviour will I change?”

The change that we need to make will be determined by our VISION. Vision is our compass of where we want to be within a specific period. I see it as a motivational one-page document carefully crafted with word-pictures. For most of us, pictures provide the primary stimulus. To fulfill its function, our VISION statement needs to arouse our emotions.

We all need a VISION statement, no matter how experienced we may be…..

…In the period 1998 to mid-2001, I suffered the most prolonged drawdown to date. Everything I did was wrong. If I bought, the market went down and if I sold, the market went up. The maximum drawdown was around 22% over the period. I credit my VISION statement with providing foundation to continue. The same can be said for the period mid-2002 to mid-2003. My VAMI hit a peak of about 130,000 and dipped to 80,000. Again, the VISION statement proved its worth; the changes I made allowed me to move to a current VAMI high of 246,000.

(VAMI stands for Value Added Measurement Index and tracks the increase or decrease of a theoretical $1000.00 over the life our trading. The initial capital of $1000.00 in 1990 is now worth $246,000.00).

VISION without action remains a dream. Action presupposes a plan i.e. Goals. I’ll deal with this subject in future posts but for the moment know there is a wealth of material on the nature of goals and how to set goals, much of it free. Google “goal setting” and you’ll see what I mean.

I have found that while Goals remain more or less fixed, the way to achieve them is fluid. Sure, we’ll set our plans but like our trades, we need to constantly scan and assess the horizon for stimuli that will favourably (or adversely) affect our actions. Consequently, the REVIEW process is critical.

This process of VISION, Goals, etc finds its counter-part in our trading. I’ll deal with this in tomorrow’s post.