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.

8 thoughts on “The Steps to Success (2)”

  1. Hi Ray,

    How does a discertionary trader validate a trading plan? When you say about knowing the performance metrics do you mean applying the plan a given historic perid (e.g. Previous year)and measuring the outcome in terms of Avg win , Avg Loss etc? Just interested in the roadmap to valiation.

    Thanks for the great work recently, I’m using the blog in parallel to The nature of Trends’ – the blog is helping to not only put meat on the bones but also illustrate how many more technique are required in use of market profile etc. Fascinating stuff.

    Ryan

  2. Hi Ryan

    Thanks for your compliments and an interesting question.

    Below is my approach; others may do it differently.

    Validation for me is a test of the setup I think will make money over a large sample size. I have a 3-step process:

    1) Our testing software has the abilty to define the trend of a timeframe including sideways trends (Nature Of Trends).

    I test the setup pattern e.g. in an uptrend, if ‘xyz’ occurs, buy when ‘w’ happens, exit when ‘r’ occurs. Notice that we do not consider zones. The tests are carried out with money management rules and on a portfolio basis.

    If the result shows that the setup has merit, I take it to the next stage.

    2) We trade one-contract over a number of instruments and timeframes for 30 trades. We then compare the results of the 30 trades with the raw data looking for robustness.

    3) If that passes, we then trade the setup. At the end of 12-months, I compare the results with the ones I am using and make a final decision whether ot not to accept into my plan.

  3. Great Post!!!

    I can recognize my own struggle in this words.

    I have two things to mention:

    1. I often see, that most new and intermediate traders think, that their lack of success is due to their psychology, when in fact, they neither have a promise market/time frame or a promising trading method. I think psychology plays only a role if u have a statistically proven edge in the markets. So ironically they focus on problems only relevant to already successful traders…

    2. maybe this post can also be helpful to some traders: http://theimpatienttrader.blogspot.com/2008/01/stages-of-trader-by-bo-yoder.html

    Best wishes from Germany,

    Florian

  4. Hi Florian

    I agree. Too often ‘poor psychology’ is blamed for a lack of a trading and/or money management plan.

    Thanks for the link. I’ll certainly have a squiz.

  5. Hi Ray,

    Many, MANY thanks for this blog, and all your excellent articles with their careful and detailed analysis and explanations.

    I have worked in business, in large and small companies for over 20 years, and know how rare it is to find a person who can teach, is willing to teach and is insightful as well.

    You possess all three qualities.

    It is hard for a student to find his teacher, [especially among millions of web pages] but I was especially lucky today.
    >

    Happiness and Prosperity in all you do,

    Susan W

  6. Ray,

    I am no newbie to trading, having traded 6 years now. But I still get so much from reading your blog, and I’m grateful that you are consistently making posts like this. Even experienced traders need to be reminded of these things.

    Respectfully,
    Jeff

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