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.

7 thoughts on “The Steps to Success”

  1. To All readers

    Following the publication of Wiley’s The Nature of Trends, I have been receiving enquiries as to whether Ray holds any seminar, and if so, where and when.

    I am happy to say I have been assisting Ray in organizing his annual seminars for newbies in Singapore, to which I have already received pre-registrations of more than 50% of the class to be held at the Singapore Management University on 23 & 24 August 2008. Among them are attendees of Ray’s presentations at trading conventions in Southeast Asia eg Vietnam and China recently.

    So, if any reader would like to attend this annual seminar to be held in Singapore in August, please send me an email at:

    yintrader08@gmail.com

    and I shall send you all the details pertaining to the seminar.

    For your added information, Ray is giving this 2-day no-frills seminar for a steal at SGD440 per attendee. This is his way of contributing something back to the trading society.

    You may also take this opportunity to visit Singapore, my beautiful island and adopted home.

  2. Ray
    Even Pilots think this…..unbelievable.

    If you get a chance, would it be possible to elaborate upon defining and evolving an ‘edge’. I gather it must change and evolve as you mature in trading.
    How unique must your edge be, as, if the majority of traders aquire the same edge, then, the life cycle of that edge is now in decay, hence, past its usefulnes.
    Would it be reasonable to say that some fundamentals of market behavour are intrinsic, and won’t change over time (trends, distribution for example) and other characteristics are anomolies that can be capitalised up, for a period, until the masses/institutions jump aboard, and it no longer works.
    Can ‘edges’ be defined into the same two broad categories?
    Regards Stuart

  3. Stuart

    I thought only mechanical systems have a ‘use by date’ whereas discretionary analysis or an edge would not suffer decay .

    Perhaps, Ray has the answer to your questions.

  4. Hi Stuart

    Thanks for the question because it allows me to explain a confusion I see in the way traders use the word ‘edge’.

    One meaning is: what is the extent of the positive expectancy of my trading?

    For example, mine is .58% of initiating price. This means that on a large sample size, on a one contract basis, I can expect to make .58% of the price that initiated the trade.

    So in this sense edge = outcome.

    Another meaning is the main personal attribute that produces the positive expectancy.

    For example in my case, I see my main strength as being the ability to identify core patterns that exist in reality. By core I mean ‘essential’. This strand of my DNA will always be there but will improve or weaken depending on what I do to exercise it.

    In addition, the ‘core patterns of reality’ are what you identify as funadamentals of market behaviour. I agree that they are unlikely to change over time.

    Aligned to this is the meaning that relates to the sub-atttributes that produce the positive expectancy: discipline, honesty, accountability etc. Like the main attribute they stregthen or atrophy with use.

    Finally we have the meaning in the last sentence of your comment: the short-term patterns that work till they stop working – what Pete Steidlmayer called ‘behavioural parameters.

    So we are in agreement. Great minds think alike!

  5. Hi Ana

    We agree because you are using what I call a behavioural parameter and what Stu calls ‘anamolies’

    Since we all agree, does that mean we are wrong (G)?

  6. Perfecto…….
    That clears the fog very nicely. My trading plan has lacked the corect definition of ‘edge’. I have struggled to define mathematically my edge. Now I see that is my ability to asses and adjust (aggressively, neutrally, or defensively) my delta neutral option positions.
    Ahhhh, the world is now in order again.
    Grazi

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