How to Become a Successful Trader, part two

“Here’s the thing about finding a trading method: It doesn’t need to be perfect, it only needs to work.”

In part one we talked about how the Capital markets are bound together by grouping its participants into three categories (Commercials, Large speculators, and Small speculators). We also said that being successful at trading requires to sustain a delicate balance between Methodology, Psychology, and Money Management.

So let’s start by describing what Methodology is. Your job as a trader is to identify high probability setups and execute your trading plan. Any method you use to do this, being systematic or discretionary, comprises the Methodology aspect of trading. Whether you’re mechanically waiting for the crossover of two moving averages to enter a trade or establishing supply & demand imbalances through volume, you’re complying with Methodology.

Now, a trap we see a lot of, specially in newcomers, is the hunt for the perfect trading method. We’ve seen a lot of people starting to use a particular method, run into a few losses, dump that method away and jump into something completely different, like pursuing a quest to find the holy grail of trading which simply doesn’t exist. These pleople need to know that every single method on the planet will have periods of drawdown; there isn’t one out there that doesn’t go through a string of losses.

So here’s the thing about finding a trading method: It doesn’t need to be perfect, it only needs to work, so pick one, learn it and master it. Experience will eventually bring you to know a whole bunch of methods and you’ll probably end up using just a few, picking out one over the other depending on market conditions. So finding a method shouldn’t really be too difficult because there are so many different ways to trade the markets. Some methods are better than others, and of course there’s also skill.

Keep in mind that every method will render scrapes and have scenarios where they just don’t perform well, but you should be able to distinguish bad luck from a change in market structure by constantly keeping an eye on conditions such as volatility (learn what VIX is), level of participation by the professionals (Commercials and Large speculators), overall economic and political scenario, etc. You should also be checking if support and resistance areas are being treated differently after your method is reporting low accuracy and risk/reward ratios (more on these ratios when we discuss Money Management).

Speaking of professionals, don’t turn your back on volume. Volume is not just another technical indicator feeding price data into some math formula like the Stochastics or MACD, it’s new data, so learn what volume is and what it’s not and put it in your charts. This way you’ll be able to spot supply & demand imbalances when building your trading plan and defining your bias or edge before each session, which you are required to do independently of the method you’ve chosen to trade with. Building a trading plan shouldn’t take you more than 15 minutes and will basically state things like “if price reaches this area, I’ll be looking to buy; if price reaches that area, I’ll be looking to sell”. This defines your bias for the day (NOT your entry and exit points, that’s defined by your method).

We said in part one that Large speculators trade the markets in a complete different way than Small speculators. This is because in order to move around their huge pile of money, they’re obliged to gradually absorb the available supply if they are buying or discretely dump into the available demand if they are selling; otherwise their enormous amount of orders would move price against them while letting others openly see their intentions (as it happened by accident to Knight Capital in 2012). So notice how Large speculators need the other participants to be standing on the other side of their trades, and that’s why they’ll try to deceive the herd of Small speculators into thinking that they are doing one thing when they are actually doing the opposite. They’ll turn on their buying algorithms to rapidly absorb supply, disguising weakness as strength with the sole intention of dumping their loads when the buying fever hits the herd. Since volume is something they can’t hide, knowing how to read it will allow you to avoid these traps and get a better sense of how professionals are maneuvering, easing your job of identifying high probability trading areas. Forex traders may use tick volume in order to overcome the lack of real volume data. By the way, Large speculators love news and financial data releases to empower their activities, so keep an eye on them. If you’d like to improve your chart reading skills, we recommend studying Volume Spread Analysis which is a great tool to acquire a solid understanding on volume and learn about the four stages at which Large speculators make money (accumulation, mark up, distribution, mark down).

VSA short entry setup on a no-demand bar after selling efforts by the professionals were seen on high volume up bars

Another pitfall we see many traders fall into is leaving a method aside because they’re getting bored with it, no matter if it’s being profitable or not. As if their attention span moves off to something else because of boredom. Let us tell you that there’s a point where trading becomes a little bit boring and you have to have a ridiculous-work-ethic persistance where you just keep at it, specially if you’re doing good. Show some loyalty to the method, let it work before you hunt up something new bacause you had a couple of losses. Focus, discipline and persistance; that’s probably why so many ex-millitary people make such excellent investors and traders when they get the right training for it.

Lastly, be always aware. Have a constant learning mindset (the more you learn, the more you earn). Study how supply relates to resistance areas and demand relates to support levels (remember, volume is your friend). Try to look for the confluence of more than one technical data before entering a trade (e.g. VSA background, trend analysis, Fibonacci retracements, etc.). Be patient with your winners and impatient with your losers. Don’t rush things, let your trading plan lead your sessions while allowing yourself to be flexible when the market moves unexpectedly. Timing the markets is impossible, don’t try to call the absolute top or bottom; you’ll be fine by making money out of the middle portion of a price shift. Learn the markets that you’ll be trading; if you’re into options, learn the greeks; if you’re trading futures, learn about contracts and expiration dates, etc. Don’t take a trade based on financial news. Avoid confirmation bias and respect your losses; learn from them (Money Management will explain how). Don’t get frustrated with your losses if you’re being disciplined; don’t celebrate too much on your winners either. Being profitable is not about the one trade, it’s about the many trades (keep that in mind). Over time, you’ll notice that skill flows naturally. In our next post we’ll be covering Psychology and how to deal with your emotions, because your brain is genetically wired up to conspire against you having success with trading.

TradingLog is a tool we developed to assist with the Money Management aspect of trading and we’ll be covering it as well in our following posts. Feel free to give it a look and follow us on Twitter to receive new posts announcements.

Please consider sharing this article by clicking any of these links: Facebook, Twitter.

See you next time, earn well.

Like what you read? Give TradingLog a round of applause.

From a quick cheer to a standing ovation, clap to show how much you enjoyed this story.