The response from Bill's blog post from yesterday was so positive, I asked if he would be so kind as to delve deeper into the topics of escaping dependency and dealing with information overload. Please enjoy the article and comment below and feel free to check out Bill's site here.
I want to thank everyone who commented on the previous discussion about the challenges facing traders today, especially forex traders.
In that recent posting I was talking about the Black Hole of dependency that has a strong hold on forex traders right now – but I didn’t really take enough time to delve deeper into that subject and broaden it enough to help struggling traders.
Today, I want to follow along that path.
First, as we talked about previously, between the masses of robots and other automated systems out there, we already showed how easily people fall into the trap of dependency. Buying and trying (and buying and trying) multiple systems is a sure bet for failure as a forex trader.
The question is how does a trader, once he realizes he’s in this cycle of dependency, break free from it? After some research and discussion on the topic, I believe this is what happens to many people:
They begin in the mode of dependency and after months (and sometimes years) of failure, they finally realize they can’t be successful in that way. Oftentimes this occurs when the trader has spent a significant amount of money, or lost a significant sum on either trading systems that didn’t work or on accounts they traded to zero.
These traders then turn to self-directed learning, figuring they can’t do any worse on their own. They’ll grab countless books, reports, articles; watch videos and subscribe to free forums and seek out other no-cost outlets of information.
Unfortunately, I believe this is just as dangerous, if not more time consuming than the cycle of dependency even though I completely understand the mindset of this type of trader. That’s because I was once like them – I sought out as much free (or very low cost) information as I possibly could (back in that day, the Internet didn’t exist, so the public library was my good friend).
This type of trader ends up in a tornado of information – and they become unable to make any sense of it. Consider if you will, how many different websites, articles, videos, reports, exist on the internet today just around forex. There are millions of them, right? Now, try to create a viable trading strategy out of that morass – in truth, no trader can. It’s simply information overload and that causes trader paralysis.
And that paralysis causes traders to complicate theirforex trading. The reason is because that free information is usually either counter-intuitive or contradictory (one person tells you to use moving averages one way, another teaches a different way).
Here’s a suggestion for those struggling in this space:
Keep it simple.
Here’s an example of a Three-Step plan I recently shared with a struggling trader:
Step One: Create and execute a trading plan. Whether you want to day trade or trade at the end of the day, or once a week -- decide what fits BEST in your daily schedule and then determine what sources from #2 and #3 below best align with your plan. Don't try to apply day trading methodologies to end of day trading and vice versa, as you'll likely discover they don't and won't work.
Step Two: Seek out 2-3 reputable education sources that fit with your trading plan. If you want to day-trade, research the best day-trading education sources. The goal is to identify one or two that you can understand and trust. Learn everything you can from those sources. Then, learn to apply it on your own.
Step Three: Learn from and test out multiple methods for trading. You are unlikely to succeed without some basis in trading methodologies, especially when utilizing technical indicators.
In this way, the trader determines for him/herself what style of trader they can be, when they can trade (with enough time to focus on the activity) and then use reputable sources to provide them with the learning base from which they can begin and grow.
But I think the hardest part of the sequence today is finding the right trading method (or creating one). Again, in my experience, simple is better.
Any good trading method will avoid using too many technical indicators, or, avoid using the wrong technical indicators. The importance here is simplicity. Any method that weighs a forex trader down with too many indicators is more likely to confuse them, or, create conflicting trade information.
I believe it rarely requires more than 3 or 4 indicators working together to accomplish this. If a forex trading method is using more than that, then I believe traders should be cautious.
As well, any method should not be 100% mechanical. By mechanical, I mean no room for market interpretation. A good trading method will allow the forex trader the flexibility to see the larger picture - for example, is a forex pair in an extended downtrend? If so, is now the right time to buy an uptrend? A mechanical system may 'signal' buy - but a forex trader who doesn't apply the bigger picture or direct interpretation of what's happening in the market may blindly follow such signals and be at risk of significant loss.
A good method should use simple indicators to identify a trending forex pair, and use them in such a way to provide higher probability profit potential and lower risk.
Last, a good forex trading method should provide objective rules that help the forex trader establish trading discipline. On discipline, I’m referring to the actions of trading -- buying, selling, setting stops, etc. If too many decisions are left to the forex trader, they are too likely to be indecisive, afraid or unable to pull the trigger on their trading actions. Therefore it is imperative that the rules of a trading method be simple and easy to follow, but allow for some interpretation about entering a trade.
With these additional keys, a forex trading method is more likely to provide a successful trading experience for the forex trader, but traders should add in: Expect to fail, learn to succeed.
That means failure is a part of the learning process. Moreover, you won’t grow as a trader, nor will you better understand the markets and trading if you don’t learn from your mistakes and failures. I’ve had them; all traders have them. We all make mistakes. The traders who learn from those mistakes are the traders who reach successful trading faster.
And that is a much better outcome than spending years trying to make sense of the excess of information out there today.