As an added Guest Blogger bonus, Bill McCready from Futures Trading Secrets, has a very informative article on the mental aspects of trading, that I think we ALL can learn a little something from. Bill's been trading for a long time, and a long time successfully, and his knowledge and wisdom is widely appreciated. Bill also hosts widely attended webinars that I think you'd appreciate, learn about the webinars here.
I have decided that after ten years of posting the same trading patterns and working with hundreds of students, that the trading signals are not the problem. Most students have trouble trading mentally and emotionally. Here are the topics that are the most important.
Learning the Trading Game
The basics are the basics. Here is what you absolutely must know and master.
1. Goal Setting that is realistic and possible
2. Finding your trading edge with patience and discipline
3. Using both Fundamental (News) and Technical Analysis
4. How to see in Four Dimensions
5. Money Management and High Probability Trades
6. Using a Trading Plan and adjusting it in a Game Plan and trading it as a System
7. Why and how to avoid overtrading
8. How your past experience affects your trading
9. Setting new habits into motion for profitable trading
10. The 10 Essential Elements Necessary to Learn the Trading Game
You cannot just jump in and expect to be an expert with one course, one book or one seminar. You must treat trading as a profession similar to an engineer, doctor or lawyer. School teaches you basic principles, but it takes 3 to 5 years of additional practical experience and continued study to become qualified in your profession.
I know from a standing start it took me four years on top of all my other business and venture capital experience to become competent in my field. Scientific American recently had an article on how many repetitions it takes to have complete muscle and mental control of a repetitive action. The study said 10,000 repetitions. This is one very good reason to use a SimBroker before you start live trading.
Recommended book: "The Path of Least Resistance", by Robert Fritz is excellent on how to set your mind up for repetitive success and get out of self destructive habits.
The 10 Essential Elements Necessary to Learn the Trading Game
There are several things that you absolutely must know how to do.
1. Know Your Computer: You must know how your computer operates, how to fix problems with the basic operating system, and how to secure it from threats. At a minimum, while using Windows XP or Vista, you must know how to move files around on your computer. We outline most of the security issues on our website.
2. Know Your Charting Program: You need to know everything about your charting program. Practice with the SimBroker until you get to at least a 70% rate of correct directional calls and at least a 2/1 win to loss ratio.
3. Know Your Trading Platform. No matter who you trade through you must completely understand how to execute and cancel orders.
4. Learn Your Trading System. If you have purchased a course or a service, learn the signals and how to trade them until they become automatic. You must test, understand, and apply the principles covered. As a surgeon, you would not read a book, watch a video and then attempt heart surgery. What makes you think a quick once-over will do the trick in trading?
5. Trade Small Initially. The reason we set our risk to 2% of your account is to give you breathing room for the inevitable losses that occur initially. My mentor busted out after 20 years of million dollar profits because he admits to not following his own system. Take your time, trade and think small, think of just preserving your capital in the beginning.
6. Be Well Funded: Do not trade with money you cannot afford to lose and NEVER trade if you need your trading account to live on. That is a disaster waiting to happen because you put too much emphasis on the money, and losing scares you into revenge trading and trying to make up losses.
7. Keep a Trading Log: You must keep a log of every trade! What you did right, what you did wrong, what corrections you need to make. This includes all SimBroker Trades! A torpedo or missile makes constant corrections as it heads for a target. You need to do the same thing.
8. Set Realistic Goals: You are not going to make $1,000,000 on a $10,000 account your first year. Our 2 net points a day plan is the safest and best way to learn to trade. If you can make 2 net points on one contract you can scale up to 2 or 4 or 20 later. If you start thinking about the money on a 20 contracts (-$1,000 per point) and exceeding the 2% risk of your account balance per trade then you are trading too large. Back off to your personal comfort level.
9. Use Proper Money Management: If you use a bracket trading system of a 2/1 ratio you only have to be right on one third of the trades to break even (minus commissions). Think about this! It takes the stress out of entries and exits.
How to Apply these Principles to Your Trading
Simple: READ, STUDY, PRACTICE, TRADE, then RINSE AND REPEAT. Keep your eye on the DREAM, review your GOALS, constantly monitor your PLAN, and never, never question the PRICE you have to pay for the work you have to do! If you question the price then your dreams are either pipe dreams or your goal is too big for you to believe, Go back to the beginning and start over.
Patience and Discipline
Traders are always looking for an edge. Faster and better data, the "Holy Grail" of trading indicators, etc, etc. etc. After a long and hard search most find that the real key to success in any area of life is Patience.
The Search for Perfection
No one likes to take a loss, lose at a sport, or fail in relationships. We all lose everyday but cannot seem to get that we will have losses when we trade... Trading leads us into the depths with an urge to win every trade. Two of my students once called and complained because they only had 13 winners out of 15! Their problem was actually money management, but I think everyone would agree to accept two losses once in awhile.
Another student who has been averaging well over 20 points a day simply hates losers. He suddenly has a few losses and he feels he is a terrible trader. Not really. This is a game of probability and you need patience and discipline to wait for the high probability setup. In other fields like baseball or poker, the big winners all use patience and discipline to out last their opponents.
Patience and Discipline
Discipline is the hardest attribute to work on. You have goals, confidence that you know what you are doing, and yet you take exactly the wrong trade direction at exactly the wrong moment. Why? Because you either hesitated to get in on a long move up or down and now you just "know" the market will keep running. Resist this urge and look at longer time frames to get the big picture.
You have to understand completely that you are working in an environment where the future is unknown and unpredictable. Even with a system biased in your favor by 70%, you forget that there are 30% losers from these signals, too. So you need to protect your capital and your self confidence. If you take a loss, get up and walk away for awhile. Have the self Discipline to analyze the loss and proceed cautiously with the next trade.
Patience and Discipline only come with losses. That's right. You only learn patience and discipline from your losses, so welcome them as part of your education.
Money Management and High Probability Trades
Of all the skills you can acquire, a proper understanding of money management and the will power to use it ALL the time is critical to your success as a trader. A thorough understanding of probability and odds is critical.
There are many books on this subject and I will recommend a few that are about trading.
“The Trading Game" by Ryan Jones, "Against the Gods", by Peter Bernstein, and "Trade Your Way to Financial Freedom", by Van K. Tharp are three of the best I've read.
Remember that you are always looking for at least a 3 to 1 potential before you take a trade. Because you cannot predict the future, and after you get a signal, look and see where you are on a longer range chart.
You need to know your trading style. Do you find yourself always early in and early out of a trade? (EIEO) is a symptom of greed, jumping the gun and fear of loss of profit. If you are late in and late out (LILO) it is a symptom that says you do not believe your own signals. Any other combination and you need to call a shrink or hit yourself with a hammer.
In summary, trading is 90% mental management, 80% money management, 10% signals and 100% belief in your trading system.
You can review Bill’s entire mental and money management approach by clicking this link to his free webinar.
Bill McCready has been trading since 1996 after receiving a trading course from his venture capital partner. He has degrees in Math, Physics, and an MS in Nuclear Engineering. His website is FuturesTradingSecrets.com.