Four Principles of Successful Trading
Why do successful traders keep making money year after year, while newbies lose everything within the first few months? What is it that most beginners get wrong? How do successful traders know what’s right?
My colleagues and I are often asked how to succeed in trading. In fact, we have been asked this question so many times, that I have finally decided to write a trading report; a report that will give you straightforward and easy-to-follow advice on how to become a better trader.
Unlike most trading advice articles, this report is written in a clear, plain-English manner. I am going to describe the very essence of the problem in a concise and coherent way. You will read about major mistakes that prevent traders from making money and learn the basic principles that took successful traders years and thousands of dollars to discover. All the facts in this report are based on years of observation and can be easily verified.
Have you ever felt like you have finally learned how to predict market moves after a winning trade? And then felt desperate only a few days later – after a devastating loss?
Now imagine the feelings of a trader who spends years studying price movements, buying expensive indicators, following expert advice, and attending seminars. However, this trader keeps losing money until all their savings are gone. He then raises more funds, loses everything again – all the time wondering why, contrary to all the guru promises, he can’t turn trading into a profitable business. Nevertheless trading is just as understandable, predictable and profitable as any other business.
Just imagine that after years invested in trading you still won’t be able to understand how markets work. How frustrating would that be?
Or even worse: what if, driven by emotions, you lose control and, as a result, all your savings? Do you have an emergency plan to protect yourself?
How quickly do you think you could recover from heavy losses, if at all?
Not only beginners but also ‘experienced’ traders tend to ignore or forget about taking steps to protect their capital against these types of catastrophes – until disaster strikes. By then it’s too late and the damage is done.
But That Could Never Happen to Me!
After working with over 2000 individual traders and institutional customers in Europe and the USA, we found that 9 out of 10 traders will experience some type of losses that will end up costing them between several thousand to several million dollars.
This doesn’t include money spent on manuals, trainings, seminars or months of painstakingly analyzing the market.
Losses incurred in poor trading practices differ in each particular case. However, whatever those losses may be they are always too high for the trader involved. As a rule, people lose all their disposable money. Even worse: sometimes they go even further and get dragged into debt.
Take a look at these statistics:
90% – 95% OF ALL TRADERS LOSE MONEY (Source: Ryan Jones, the author of The Trading Game, Playing by the Numbers to Make Millions)
70 percent of day traders lose money (Source: 1999 study conducted by the North American Securities Administrators Association (NASAA))
95 percent will fail in the first two years (Source: Harvey Houtkin, February issue of Securities Regulation and Law Report)
What Do These Statistics Mean for You?
The facts above clearly demonstrate that most people underestimate the risks of trading. In most cases, they are simply misled by advertising from brokers and consultants. As a rule, brokers don’t care about your long-term success because their goal is to quickly earn back the money invested in attracting a new customer. That’s why they want you to start trading as soon as possible. To achieve this goal, brokers provide beginning traders with minimum information that is just sufficient to make trades (and thus to generate commission that brokers live on) and let them fly blind in the market. Such unscrupulous practices have even drawn attention of various governmental agencies supervising and monitoring securities trading. Unfortunately little success has been achieved in curbing these practices.
The sad truth is that most trading consultants sell trading methods that don’t work. Of course, these methods are presented not only as working but also as highly profitable. As a rule, a potential customer is shown the few occasions when an indicator (or some other analysis method) happened to predict a good trading opportunity. What happens to be left out of the picture are all the occasions when the method led to disastrous trades.
Furthermore, trading gurus avoid selling their strategies as a set of formally defined objective criteria to enter the market. The main argument is that indicators must be applied differently in different situations. Gurus claim that no algorithm-based system can substitute human intellect. Of course, this kind of reasoning is extremely convenient. Whenever the advertised trading method brings disastrous results they blame the trader not the system. Since everything depends on the trader’s subjective determinations, it’s impossible to prove that it’s the method that doesn’t work. You are the only person to be blamed for those losses.
What’s most exasperating about this situation is that most of these disasters andunnecessary costs could have been completely avoided or greatly mitigated easily and inexpensively with a little analysis and proactive verification.
Why Are Beginning Traders Particularly Vulnerable
Today’s markets are becoming increasingly efficient. To survive in this highly competitive environment, unconventional tools and methods are called for. However, contrary to common sense, beginning traders don’t even try to use the latest market analysis tools. Instead, they use methods that worked quite well 30 years ago but are totally useless nowadays.
Institutional players, on the other hand, are equipped with state-of-the-art methods and technologies. Trading futures is a zero sum game. In this game, newbies invariably fall prey to the more advanced players.
$45,000 Spent Just to Discover That a System Doesn’t Work
One of my customers purchased a set of indicators from a well-known and respected trading expert. The method consisted in waiting till all the indicators showed a favorable point to enter the market. Of course, such trading opportunities don’t come up every day.
You’d think that common sense should have told this customer to paper-trade his method first – to see how well it would work in the real market. Unfortunately, emotions and the expert’s convincing arguments proved stronger. He took several trades that emptied his $45,000 trading account.
I tried to persuade the trader to have those indicators coded into a comprehensive and objective system and test it against historical data. My reasoning was simple: what didn’t work in the past probably won’t work in the future.