From the Trading Notes, An Archive thread..............
From: Susan G Sunday, Jun 2, 2002 9:17 PM
Reality Check #1
By Teresa Lo — Sunday, March 31 2002 @ 10:07 AM EST
This is the first of a series of essays that will address what we consider to be popular myths in the world of trading.
Trading is a BUSINESS
Many of these myths continue to be perpetuated by the brokerage and the trader education community. Fortunes can be made by peddling “advice” or “support” because traders are willing to pay anything in the belief that “the edge” can be bought. While this may be true to some extent, as there is no substitute for knowledge, most often overlooked is the fact that trading is a business, one that demands a certain amount of capital. It takes money to make money. There is no way around this. The majority of would-be professional traders begin trading with accounts much too small, profit goals much too large, and immediately experience psychological difficulties of every kind.
Another common reason why traders fail – perhaps the root cause of it all – is the motivation to go into trading in the first place is to get away from some other problem such as a bad job. We have seen this over and over, people becoming traders as an escape from something else. The urgency to escape generally gets the trader into the market before he is fully prepared and dooms him from the start. The mad rush typically leads to trading before one has acquired the necessary skills, before one has amassed sufficient capital, and most importantly, before one has organized the family’s financial affairs to weather the ups and downs of the market.
Rather than acknowledge this as the reality of why many traders experience extreme psychological difficulties, we find that the majority of those who are in the for-fee advisory or support business continue to pretend that winning traders have some sort of magical personality profile or special indicator. Paying admission to see the show or gaining an audience with the guru will not solve the problems of undercapitalization, which is a business issue. No amount of positive thinking or mental exercises will make this go away.
We are writing about this today because last week, I was asked to participate in an online panel discussion about discipline in trading at another web site. I posted some thoughts, and because the market was basically going sideways, Victoria and I brought up the subject in trendVUE Live! for discussion. I returned to post the transcripts of this discussion since it was relevant, and was censored.
I went ballistic! What? It was fine to talk about disciplined trading, but not OK address the real reason why many, many traders can never achieve it? We surfed the site a bit, and realized that they will shortly be offering to teach the lucky few how to achieve “mind over markets” for a princely sum of $15,000! Holy Geez! While it is fair to be paid a reasonable amount in exchange for knowledge, charging hefty fees to deal with insurmountable structural problems such as the pressures of undercapitalization is going too far. Furthermore, the people doing the coaching at these prices probably don’t trade, or worse, no longer have trading as a primary source of income, and this makes them far removed from the problems they are being paid to solve? It boggles the mind.
Without further ado, here is the material that I wanted to contribute to the discussion but was prevented from doing so. Please note that there were other aspects of this discussion that were conducted using the voice chat portion and is not contained in this transcript.
ispec_js: mikei_1 Maybe T is not seeing typing. How much you trade depends on the amount of risk you are willing to take. For example if T trades 4 NQ contracts a time with a stop loss of 5 points that is 20 points or $400 at risk. That's about 1% of $50000
Teresa_Lo: YES
ispec_js: That's why she likes doing stock trades using options instead of buying the stocks themselves
mikei_1: yes T thanks
Ke11yy: Your risk tolerance & objectives should determine your position sizing
Ke11yy: How many people T really even older traders have the psychological aspect figured in, & have worked it out to a specific trading plan?
Victoria_Pearson: I think it is very important
Ke11yy: I believe very few realize the impact of this!
Ke11yy: T you have your psychology from past experiences, & also due to your system & following the rules, it for you now is unconscious competence. A level very few will ever reach.
Teresa_Lo: The answer to mikei_1 question is that one should make be careful that all the 3% positions do not end up in the same direction so that if they all don't work out, then you lose 9% of your account in one day.
Ke11yy: Yes your then fearful of pulling the trigger even though it is there, yet you focus on the losses, instead of the process.
Teresa_Lo: Personally, I think it's important to manage expectations.
Teresa_Lo: IF you know the trade set up in advance (a retracement/a test/a breakout are the only three setups no matter what anyone says) you can calculate the risk/reward prior to going in.
Teresa_Lo: So your expectations are managed before hand.
Teresa_Lo: And there will be no surprises.
Ke11yy: Don't your expectations come from being based on your beliefs of what may occur & positioning yourself accordingly knowing your risk upon entry?
Teresa_Lo: What V is talking about is pressures outside the trade itself.
Teresa_Lo: It's the pressure of the wife, the kids, the relatives, etc.
Teresa_Lo: Because civilians don't understand that trading is the same as hunting.
Teresa_Lo: You can only shoot if the target pops up.
Teresa_Lo: And sometimes nothing pops up for a long time.
Teresa_Lo: When the market is going sideways, etc.
Ke11yy: Yes all the external pressure, but then we allow to be in conflict within ourselves until we learn how to neutralize them.
Teresa_Lo: The bottom line here is that we can only make how much the market allows us to make.
Teresa_Lo: So when the market is slow like it is now, and even relatively illiquid, we CANNOT trade more.
Teresa_Lo: We HAVE TO trade LESS.
Teresa_Lo: And look for other timeframes and other markets if necessary.
Ke11yy: V that is so true, & that is why T has stated before, that knowing ONESELF, & another I know preaches that this the most critical aspect of all!!
Teresa_Lo: There is another issue here too...
Teresa_Lo: ...that trading is a business.
Teresa_Lo: And you know that most small businesses fail - like 90% of all small businesses.
Teresa_Lo: And the top two reasons for small business failing is due to lack of capital and expertise.
Teresa_Lo: And so many people come into trading with no expertise.
Teresa_Lo: And also they have no money.
Teresa_Lo: For example, I did not "professionally" trade until I actually retired from 12 years in the brokerage business.
Teresa_Lo: Well AFTER I had all the money to pay for the kids, the nanny, living expenses, etc. for YEARS.
Teresa_Lo: This way, we can afford to eat what we kill.
Teresa_Lo: That is trading.
Teresa_Lo: We eat what we kill and there will be times when there is not much game, like winter.
Teresa_Lo: Bad weather, etc.
Teresa_Lo: And if you have a lot of outside pressures like high living expenses, it's a total killer.
Teresa_Lo: It's hard to convince the wife and kids to eat what you kill, because it goes against everything that North America stands for, in a way.
Teresa_Lo: Kelly - If you can't make money on PAPER, it will not be possible with real money.
Teresa_Lo: That's the first step.
Ke11yy: Overtrading transaction cost will kill your acct., even if you have small losses.
Teresa_Lo: The bottom line is that you don't need discipline if you know what you are doing.
Teresa_Lo: It's the start of your trading career that you need it, when you have no idea.
Teresa_Lo: And of course, it's not a good idea to do something when you have no idea.
Teresa_Lo: In the first place.
Teresa_Lo: And don't forget that when you go into trading, you are going in to trade against professionals...and be a feeder fish for the sharks.
Ke11yy: O.K. paper trade, & have the expectations that that is how it really is, & doesn't work out that way, you can't get the experience. Like training in a simulator & then having to drive or fly the real thing, it prepares you in part, there is nothing like the actual experience.
ispec_js: A good intermediate stage between paper trading and real trading is simulated trading - especially using the actual platform you will be using. It helps you to get used to the mechanics of actually placing trades. However, it's definitely a different ballgame when your actual money is on the line!
(01:44 PM) Zentrader: other idea -- keep a record of all trades and the type of trade -- then after a couple months you will have a large enough sample size of each type of trade to analyze how you would have done with varying the position size
The Bottom Line
Becoming a trader is a process, not a declaration. As we mentioned many times in the past, both Victoria and I became traders quite by accident. We were both employed in the brokerage business, and with time, learned what we know, and by the end of our days in the industry, we were ready to go out and trade professionally. While it is not necessary to work for years in a brokerage firm to become a trader, I believe the time spent in the business provided valuable insight into various aspects of trading.
I often say that I learned everything NOT to do during my twelve years in the trenches, from watching the herd – the brokers, traders and clients – in action, and by the end of it, there wasn’t much left TO DO, and it was the right thing. By the time I began trading for a living, I had already made every costly mistake that was out there. When it was finally “showtime”, it was not a difficult transition at all, unlike the experiences of many who just jump in to trading as an escape, out of the frying pan, into the fire!
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