Having spent the better part of my adult life (we’re talking chronological years—certainly not any semblance of maturity) in and focused on the markets, I’ve managed to pick up a bit of insight here and there. I’ve seen all kinds of markets, witnessed a fair amount of manipulation, tested strategies and indicators from A to Z and shared with loads of traders, new and seasoned… a few best characterized as rather haggard.
The experiences throughout the journey have taught me much and served quite well. One lesson learned long ago is amongst the best ever imparted on me… one I believe is critical to any trader hoping to last in this biz, be they newbs or those that have been around but find themselves struggling to get their legs.
I mentioned haggard traders for a reason, because it was one such rather surely, haggard fella who was kind enough (can’t say he was kind in his approach—abrasive would be a better fit) to “tell me like it is.” His advice, delivered with a gin-soaked finger stabbed menacingly in my chest, was to quit trading like a chicken sh_t.
Can’t say the advice hit home that night, but fortunately he took to me over time and we established a friendship…in spite of his penchant for cheating at poker and stiffing me for bar tabs. He shared much with me over the next couple years, but most important of all was a lesson that seemed simplistic… yet one that I’ve learned is critical to success in this biz—you have to find a way to chase the fears or you’ll wash out, plain and simple.
In time I learned there were a number of important factors that would allow me to chase the fears, but the most important thing my bud harped on was creating a solid trade system, even if you had to back up to do so. Frankly, I didn’t like hearing at that time that I hadn’t done so satisfactorily, but he was able to prove that was the case.
He made it clear that you have to focus on learning about what makes for a good trade system and then go about creating a solid one you trust in your gut versus making the mistake of starting out focusing on learning as many strategies as possible and spending your waking hours screening trades and scribbling charts.
Now I know the majority are sitting with glazed eyes thinking you’ve heard and covered this before and know it’s important. Fair enough…then this should be painless. Ask yourself if you’re able to enter each and every trade without fear? Do you understand how each trade (or trade passed up) plays into your system? Have you weighed /examined probabilities and mapped their impact on your projected P/L statement and within your overall pro-forma business projections? Do you view the amount risked on each trade as the cost to try to obtain a projected gain that justifies the trade to begin with?
At a more latent level, you’ve certainly experienced drawdown and losing streaks, but when doing so did you continue to feel confident or did you instead experience some real doubt? Perhaps even some serious “pucker factor,” as it were?
If the answer is yes or maybe…or just makes you a little uncomfortable, you better back up and take heed. Fear and doubt, no matter how small, undercut your ability to execute a plan, and in turn strategies. You cannot trade unemotionally and in correct fashion with fear… period!
It’s the Process
So what makes for a good trade system? A solid trade system is comprised of a network of rules and conditioned, disciplined actions. Yeah, yeah… you’ve heard it all before, I know. Set up an account management system based on rules, such as trade sizing, risk per trade, using a 1 or 2 percent rule, a daily/weekly walk-away limit… yadayadayada…
Here’s the rub—the rules are the easy part. You can find reams on good rules. Belief in their ability to keep you on the straight and narrow is what allows for the conditioned actions. It is the lack thereof that undermines most peeps systems. For some a general lack of discipline is the problem…and they have no business trading. For most others, it’s a matter of not having spent the time digging down to understand how those rules work, what they do for you, consequences of breaking them, etc. Doing so is what allows you to start to trust them.
Okay, simple enough… we’re done here. Quick question though—how come most wash out? The unavoidable truth is they put the cart before the horse and start out focusing on the wrong things. Strategy focus is the biggest culprit. Hey, they’re sexy and cool and others are out there bagging sweet gains using this or that strategy. Makes sense that’s where you need to be focused.
Not so much…
A good trader knows that strategies are nothing more than a specified or formulated approach to a given set of market conditions. Believe me, I’m not minimizing their importance in the least. You need different strategies for different markets and conditions. The problem most make is placing nearly all their emphasis on strategy. They fail to recognize that the entire underpinning for what they do is based on utilizing a system that they implicitly trust and faithfully execute.
Do you fall into the aforementioned camp? Take a moment now to contemplate what your system is and how you came about formulating it. The process of creating a good system is in fact more important than the system itself in a number of respects. While you can gain insight from others regarding what a good system entails, you can’t really begin to trust such a system without going through the process of examining why one is necessary, determining which elements are critical to any system and gaining insight into how it works to both protect you and to guide you toward profitability.
Bet this sounds like some Zen exercise and next I’m gonna suggest drawing concentric circles in the sand with a needle, enabling you to obtain a higher consciousness that will chase those dragon fears…
No, that’s not the case at all. I too believe this is simplistic. Frankly this is nothing more than common sense to me. There’s no voodoo magic or some archaic concept that only a card-carrying Mensa member can grasp. Simply put, the major component of gaining trust in a system comes about from going through the examination and actual process of putting the system together. Despite the importance of doing so, my experience tells me (backed up by the wash-out rate in trading) that most pay plan creation simple lip service—yet it’s the underpinning of running a successful trading business.
A good example of not spending your “own” time and thought in the process is that of the small business person failing to put together a plan at all (disastrous, so no need to discuss) or paying someone like myself to create one for them, which I’ve done for years.
Well, truth be known (and please don’t tell anyone—bad for my consulting biz…Doh!), while I am damn good at creating exhaustive business plans and doing so has richly rewarded me over the years, they really do nothing at all for the recipient. Shocking, huh! Why is this? Because I went through the process and gained the knowledge that would allow me to understand the risks and run the business.
Now before you starting tossing stones… Sure, I always pass that information on to clients in the form of a holistic plan. And in theory they gain that knowledge by reading and studying the plan (which is still not enough in my view), but frankly I’ve never had someone come back and ask more than a couple cursory questions about a plan I submitted. This tells me they aren’t really reading them, let alone using them to gain intended benefit.
Instead, the shiny new plan is a possession and goes on the bookshelf. They now have a plan and they can check it off their “to do” list…but they didn’t gain the expertise—I did. In reality they paid for peace of mind— but this is illusory, because you can’t have peace of mind without gaining trust in something you’ve examined and know with certainty (inside your bones) will work through good and bad times.
Peace of Mind
Bottom line, faith in the system and the ability to be free of fear are byproducts of having gone through the process of creating a good system… end of story!
Beyond chasing fears, a solid system provides a basis of understanding of how trading success is achieved. It’s your roadmap on how to operate from trade to trade, so that each trade is but that, a single trade with no more or less value than the previous or the one to follow. This understanding provides the basis for trust in your system when times get tough, which inevitably they will. The understanding and the trust work hand in hand.
The takeaway from all this drivel is that you must recognize that everything starts and ends with the system, making it the most critical element of your trading business. No matter how great the strategies employed or how good you are at sniffing out opportunities or picking stocks, they can’t (big emphasis on CAN’T) work without a solid underpinning system. That system chases the fears that inevitably cause you to break rules and to cheat your strategies…inhibiting them from fully playing out and taking advantage of the probabilities they were created and instituted to exploit.
For now, I’d encourage you to start by reviewing why it is you are not where you want to be. I’d bet a good bottle of vino that the real answer lies not in strategies you’ve used, but instead in the failure to have created, AND IMPLIMENTED EACH DAY, a system that allows for the business of trading to unfold in a profitable fashion… one you trust and that will allow you to quit trading like a chicken sh_t!… 🙂
Louis entered the biz in the late 80s and spent over a decade working as a trader, instilling him with unique insight into trading and the markets. In 1998 he switched gears to become the group editorial director for a large network of award-winning, trading-focused newsletters. In 2002 he became the founding editor-in-chief for two financial trade magazines—each served approx. 40,000 independent financial advisers nationwide. He’s appeared on business TV, in the business press and on numerous biz-focused radio programs in the past. He writes market commentary and analysis most days and trades on a daily basis.