Four Principles of Successful Trading
Why do successful traders keep making money year after year, while newbies lose everything within the initial couple of months? What is it that a lot of beginners get wrong? How can successful traders know what's right?
My colleagues and I tend to be asked how exactly to flourish in trading. Actually, we have been asked this question so many times, that I have finally decided to create a trading report; a written report that will provide you with straightforward and easy-to-follow advice on how best to develop into a better trader.
Unlike most trading advice articles, this report is written in an obvious, plain-English manner. I'm going to explain the very essence of the situation in a concise and coherent way. You will find out about major mistakes that prevent traders from earning money and learn the essential principles that took successful traders years and thousands of dollars to discover. All the facts in this report derive from years of observation and may be easily verified.
Perhaps you have felt like you've finally learned just how to predict market moves after a winning trade? And then felt desperate just a few days later - after a devastating loss?
Now imagine the feelings of a trader who spends years studying price movements, buying expensive indicators, following qualified advice, and attending seminars. However, this trader keeps losing money until almost all their savings are gone. Then raises more funds, loses everything again - all the time wondering why, unlike most of the guru promises, he can't turn NovatechFX into a profitable business. Nevertheless trading is equally as understandable, predictable and profitable as some other business.
Just imagine that if years dedicated to trading you still won't be able to understand how markets work. How frustrating would that be?
Or even worse: what if, driven by emotions, you lose control and, consequently, your entire savings? Have you got a crisis plan to safeguard yourself?
How quickly do you think you can recover from heavy losses, whenever?
Not just beginners but also 'experienced' traders often ignore or just forget about taking steps to safeguard their capital against these kinds of catastrophes - until disaster strikes. At the same time it's too late and the damage is done.
But That Could Never Eventually Me!
After working with over 2000 individual traders and institutional customers in Europe and the USA, we unearthed that 9 out of 10 traders will experience some form of losses that can become costing them between several thousand a number of million dollars.
This doesn't include money spent on manuals, trainings, seminars or months of painstakingly analyzing the market.
Losses incurred in poor trading practices differ in each particular case. However, whatever those losses may be they are always excessive for the trader involved. Generally, people lose each of their disposable money. Even worse: sometimes they go even more and get dragged into debt.
Have a look at these statistics:
90% - 95% OF ALL TRADERS LOSE MONEY (Source: Ryan Jones, the author of The Trading Game, Playing by the Numbers to Make Millions)
70 percent of day traders lose money (Source: 1999 study conducted by the North American Securities Administrators Association (NASAA))
95 percent will fail in the first two years (Source: Harvey Houtkin, February dilemma of Securities Regulation and Law Report)
What Do These Statistics Mean for You?
The important points above clearly demonstrate that many people underestimate the risks of trading. In most cases, they are simply misled by advertising from brokers and consultants. As a rule, brokers don't value your long-term success because their goal would be to quickly earn back the amount of money dedicated to attracting a new customer. That's why they need you to start trading the moment possible. To make this happen goal, brokers provide beginning traders with minimum information that's just sufficient to create trades (and thus to generate commission that brokers live on) and let them fly blind in the market. Such unscrupulous practices have even drawn attention of numerous governmental agencies supervising and monitoring securities trading. Unfortunately little success has been achieved in curbing these practices.
The sad truth is that a lot of trading consultants sell trading methods that don't work. Obviously, these methods are presented not merely as working but additionally as highly profitable. Generally, a possible client is shown the few occasions when an indicator (or various other analysis method) happened to predict a good trading opportunity. What is left from the picture are all the occasions once the method resulted in disastrous trades.
Furthermore, trading gurus avoid selling their strategies as a couple of formally defined objective criteria to enter the market. The main argument is that indicators must certanly be applied differently in various situations. Gurus claim that no algorithm-based system can substitute human intellect. Needless to say, this kind of reasoning is very convenient. Whenever the advertised trading method brings disastrous results they blame the trader not the system. Since everything depends upon the trader's subjective determinations, it's impossible to prove that it's the technique that doesn't work. You're the only real person to be blamed for anyone losses.
What's most exasperating about this situation is that many of these disasters andunnecessary costs might have been completely avoided or greatly mitigated easily and inexpensively with only a little analysis and proactive verification.
Why Are Beginning Traders Particularly Vulnerable
Today's markets are becoming increasingly efficient. To survive in this highly competitive environment, unconventional tools and methods are called for. However, unlike wise practice, beginning traders don't even try to utilize the latest market analysis tools. Instead, they choose methods that worked very well 30 years back but are totally useless nowadays.
Institutional players, on another hand, are equipped with state-of-the-art methods and technologies. Trading futures is really a zero sum game. In this game, newbies invariably fall prey to the more advanced players.
$45,000 Spent Simply to Discover That a System Doesn't Work
Certainly one of my customers purchased a couple of indicators from the well-known and respected trading expert. The strategy consisted in waiting till all of the indicators showed a good indicate enter the market. Obviously, such trading opportunities don't appear every day.
You'd believe that good sense must have told this customer to paper-trade his method first - to see how well it works in the true market. Unfortunately, emotions and the expert's convincing arguments proved stronger. He took several trades that emptied his $45,000 trading account.
I tried to persuade the trader to own those indicators coded into a thorough and objective system and test drive it against historical data. My reasoning was simple: what didn't work before probably won't work in the future.
Out of pure curiosity I coded those indicators right into a system and tested the machine on different trading instruments and resolutions. The tests proved that the device didn't work.
If the above trader had spent $900 on a back-testing program and $200 on coding his system, he could have saved $45,000!
How Slow Reaction Once Cost Me $2,000 in 5 Seconds
At some point, I was combining software development with trading FOREX. This active trading gave me a great feel of the tasks and conditions that traders face and allowed me to develop software to enhance my own results.
I was once trading something on the basis of the Federal Reserve System interest rate announcement. My strategy correctly indicated the entry direction. Unfortunately, in the past I wasn't using automated trading and had to manually adjust the stop loss as soon as industry started moving in the favorable direction. The broker I was using didn't support trailing stops, so manual adjustment was the only method to trade with my method.
As soon as the profit reached the required value I began adjusting the stop loss. Unfortunately it took me too long and a potentially lucrative trade was closed with a loss. Industry gets highly volatile following news releases, therefore 5 seconds for manual correction was much too long. If I had managed to regulate the stop within 2 seconds, I could have made $2000.
Automated order execution allows reducing the reaction time. It will take your computer 1 second or less to react and modify an order.
Thus, a one-time investment in automating my strategy worth just 1/10 (or $200) of just one single losing trade would have completely changed the outcome. And who knows how many similarly unsuccessful trades will occur in future?
Six Consecutive Losing Trades Made a Trader Give On a Working Trading Method and Miss a Rare $35,000 Trade
The manager of a 50 million dollar investment fund said about a loss that wouldn't have happened if they had adopted the well-known practice to diversify traded instruments. Richard, one of many fund's analysts, was trading on exotic markets having an automated trading system. The machine had been tested before and had proven reliable and profitable. Tested against historical data, it had never shown more than 4 successive losers, that was normal for this specific system.
However, in real-world trading the machine generated 6 consecutive losing trades and Richard made a decision to drop it. He found it psychologically difficult to use the method that seemed to possess stopped working - even though he knew that the marketplace was being sluggish and the system's behavior was totally natural under the circumstances. As soon as he stopped utilising the system, industry entered a growth stage and this trend-following system started working again. As a result an excellent opportunity to earn $35,000 about the same contract was lost! This costly mistake may have been easily avoided, if they had been trading a portfolio based on uncorrelated markets. It would have ensured a constant profit growth irrespective of the conditions about the same market. Other profits would have nullified 6 losing trades on this specific instrument.