Trading the financial markets for a living is one of the most difficult tasks for any person to embark upon. We’ve all heard the stories about people making millions from nothing. However, for every one rags to riches story there are hundreds of stories about people losing their shirts (and sometimes a lot more) in the markets. The markets are littered with such stories.
The chances are that you or someone you know has possibly been one of the markets many victims. This is not to say that making money in the markets is impossible. On the contrary, proficiency in the markets can be had by all who are willing to put in the time and effort that is required for success. You also need to learn the correct principles too but this can be an almost impossible task with the many not so good options online these days.
Learning the skills you will need to be a success is not difficult. However, it’s definitely not something you can do overnight either. You must be dedicated to stick it out even if it means that you will have to go through some short term pain for long term profitability. If you are serious about becoming a professional trader for the rest of your career then it should mean nothing to have to put in a year or two to learn and practice until you are successful.
Your brain is programmed to do anything it can to avoid pain and gain pleasure. The tricky thing is that it will work far harder to avoid pain than it will to gain pleasure which can be difficult to overcome. With that in mind, you will no doubt run into rough patches in your trading career. However, what separates the true professional traders from novice retail traders is how they handle the tough times.
Traders, who attempt to take on the markets and fail, tend to fall short in at least one of these two major areas: Approach and Emotion. Let’s look at these individually in a bit more detail.
Approach
Many traders approach the market in an ad hock sort of fashion. Maybe they have read a book or have attended a weekend seminar and feel that making money from the markets should be easy. This type of thinking is plain crazy. These people are delusional and what’s even worse is that they have no idea that they are delusional. This is not exactly the best place to be starting you trading career from.
Think about this for a second. An engineer will go to school for at least four years, probably six years or more, before they ever design an important component that might be used in something sophisticated such as the navigational system of an aircraft. Could you imagine if a person took a two day course on advanced modern avionics then decided they had somehow garnered enough experience to design one of the most integral components on an aircraft! Would you feel safe travelling on that aircraft? Probably not very safe. This is not a rational or intelligent way to approach the market either. Sometimes it it blows my mind how some people think that trading the market for a living requires almost no experience or training to make it big when everything else we do in life does.
On the other hand, you can make a case that you can’t really blame these people too much because they have been programmed to believe mastering the markets is simple. There are literally thousands of news outlets online, print ads or on the television, where so many intelligent well respected professionals are willing to give their opinion away freely to anyone who will listen. These people are paid to talk, not to make you money. In fact, most of the people you may listen to on CNBC have clauses in their contracts that say they can’t actively trade or invest because it creates a conflict of interest to unbiased journalism.
So what we have is millions of people blindly trading or investing their financial security in the markets without any business plan or defined approach to track their results. They just copy what the so called ‘gurus’ say to do. Do you think a company like Apple got to be one of the largest market capitalization companies on planet earth without having a business plan and a defined method to track the results they were achieving? Oh, they do have a plan and they constantly adjust it to perform better based on the results they see.
The obvious question becomes, why would anyone try to enter the markets without a well-rounded education and a defined approach to execute that education? The answer is the second short coming of people in the markets: Emotion.
Emotion
This may sound a bit crazy but most people will develop a debilitating emotional experience while trading the markets simply because they do not have a well-defined approach to trade it. Please do not take this last statement lightly as understanding and accepting this is absolutely essential to success in the markets.
If you do not have a defined approach you open yourself up to become a slave to your emotions and consequently become a victim of the market. Make no mistake about it; the market will eat your lunch! It has been said that the market’s sole purpose is to remove you from your money and I tend to agree with this statement.
Put your thinking cap on for a minute. If you do not have a defined approach to the markets how can you have any confidence and complete conviction in what you are doing? Do you know why you are buying or selling at any particular time? Do you have a plan for how you will manage your trades? What are your reasons for entering the market? What will you do when the trade is not working out the way you thought it should? What will you do when the trade is working? How do you take your profits or losses? If you can’t answer any of these questions then you are in for a world of pain in the markets.
Not having a defined approach to the markets will throw you into a trap where you fear giving up even smallest of profits. This will cause you to grab at profits way too early. You might also find yourself too fearful to close a losing position because it will be easy to justify why the market is going to come back and erase all your losses. However, it rarely does come back and small losses tend to turn into large losses rather easily unless you have a plan to control this.
Once you are stuck in this cycle of taking small profits and large losses you will find that your emotions will go from one extreme of elation to the other extreme of depression from one trade to the next. Your past trades will affect your future trades leading to chronic hesitation, getting into trades far too late and getting out far too late. The emotions of fear and greed will control your every action and consequently control the trades you place in the markets. Needless to say, operating in the markets with these extreme highs and lows is not good for your emotional or physical health.
Controlling your emotions starts first with having a well-defined method and trading plan that you can have confidence in every time you place a trade. The next step to controlling the emotions of fear and greed will be in how you handle the results you get. You must make a plan to track and improve the results you are getting. How else are you going to adjust your plan for better performance if you don’t track the results?
Complete conviction in your trading abilities is the requirement for success and the only way to gain complete conviction is to do something consistently and profitably over a sustained period of time. There is a saying among personal trainers that says "You have to do your own push-ups" and the same is true of trading. You have to put in the work.
Conclusion
You won’t have to master every single aspect of the markets to be financially successful. Most new traders believe that they will have to accumulate a wealth of knowledge over countless years to become successful. In my experience the best traders focus on just one or two strategies instead of dozens. In essence, the best traders are minimalists. Sure, there are many successful traders that have mastered countless strategies but they are few and far between. It is best, especially in the beginning stages of a trader’s career, to focus on mastering just one or two strategies. Put strategies aside, what you really need to learn is the reasons that the market is moving.
Failure can be defined as the act of majoring in minor things. Most people will spend the majority of their time focusing on the things that offer the least value. This is the very reason the indicator revolution is alive and well. Most charting programs come with 200+ prebuilt indicators and the capability to create your own should you choose.
It seems like everyone has some sort of proprietary trading indicator that is supposed to predict future price movements with a stunning accuracy rate. If that is true, why then would these people want to sell it to you for a couple hundred dollars when it could potentially be worth millions to them? It’s all a bunch of voodoo! The fact is that almost all indicators that were ever created make complex calculations based on price and volume. If you are one of those people that like indicators then be very careful in choosing one because the EURUSD currency pair doesn't go up or down because MACD says it should. EURUSD goes up or down because of the prevailing fundamental economic situation of the country, its central bank and it's interest rate policy. Mix that with the current sentiment of the market and boom, you have a real reason for price movement.
Indicators are not necessary because you can see the true relationship of price and volume on the charts. If you are trading Forex, as we do, the most important things to focus on are central banks and their fiscal mandates revolving around interest rates. Focus on fundamental and sentiment analysis first and anything technical last. There is no need to complicate market analysis with a bunch of indicators because they are simply not the reason that the market moves the way it does.
Focus on developing conviction in your trading business. Conviction is confidence and the best way to build confidence is to succeed at something consistently over a sustained period of time. The only way to do that is to have a plan, follow that plan, track your results and adjust when needed. It’s pretty simple.
