Simplify! Or the only New Year’s resolution you should make to turn your trading profitable in 2019
Today is the first trading day of a new 2019 year. I am sure if you one of those millions of people who started to trade stocks or crypro currencies in 2018 your main question now is how to make it work. What else should you do to start making money? You have read numerous books, watched endless youtube videos and tried following well known market gurus. And there were periods of time when you felt like you made it. Finally you got that feeling you got lucky to find a technique or a market guru that would make you a full time trader and reward you for all the efforts you had made. But that feeling turned to another period of painful losses and early optimism turned into depression and even desperation.
If you feel now like “enough is enough” and it’s time to stop trying I would encourage you to do that. Let me assure you that you have not missed any magic book capable of turning you into a successful trader. There is no a video course on trading that would make you a pro. If you quit trading now you will be able to spend more time with your family, you may go out more often and hopefully enjoy life. You would meet more people and come across new ideas that may open new opportunities to you. You tried trading and it did not work for you. That is a normal thing to experience in life. You have not become a movie star, an orchestra conductor, a neurosurgeon or a pilot of a commercial plane. You accepted the hard truth that is not your destiny. So simply add trading to that collection. That does not make you a loser. Instead if you are brave to cut what did not work you will feel like you’ve made a hard but the right decision. And pretty soon you will feel improvements in your life because all that stress associated with trading will go away and you start seeing new interesting and promising ways to grow!
If, in contrast, you feel like you are not ready to give up and you feel determined to achieve your goal to become a profitable trader I would strongly encourage you keep walking. Motivation, in my humble opinion, is the single most important ingredient of success in life. Motivation is the energy that focuses our attention and directs our actions towards our goals.
Now let’s talk what New Year’s Eve resolutions you should really make to achieve your goals in trading. You must have been thinking about that and you may have even developed a plan. You gonna try harder. You will keep reading books, try new subscriptions to follow smarter professional traders and spend more time on charts. Does any of that sound familiar? Great! Now let me explain you this is not what you really have to do!
I was lucky to have a great mentor in my life, a brilliant mind who managed to build several multi billion dollar businesses from scratch. He likes to say: “If some process does not work you should not add new elements but rather simplify it by getting rid of some elements”. If your trading business does not work you should not try to make it more complex. Do not add any additional sources of information. You should not try to follow new traders who sound like professionals. You should stop buying every new book about trading. And, finally, you should not be adding new indicators or techniques to your toolbox. Instead you should simplify! You should focus your attention on something which you have already discovered and tried. You should devote your time to practice skills you have already learned.
Stop looking for the better trading strategy
People make and lose money by using a broad range of trading strategies. You may use Elliott Waves, moving averages, Japanese candlesticks, pivots or Gann’s theory and either make money or break your account. Because what really matters is not the technique per se but how proficient and confident you are in execution of that specific technique. If any of those commonly used techniques delivered superior results it would have long been the only one dominating school of thoughts in the market. The reason why all of them have followings is that each of them can make money.
By now you may have tried several of the above mentioned approaches to predict market moves. Which one you should focus on? Pick the one you intuitively like more. Pick the one that looks to you the most reasonable and founded on clear rules you will be able to learn and follow. But most importantly pick a mentor from whom you will be able to learn. A great trader is not necessarily a good teacher. And at this stage of development you need clear instructions and explanations about specific rules of a strategy. And then dive into that. Re-read a good book and subscribe to a video course. Make notes and ask questions. Ask a host of the course about two most reliable setups and learn them. And then start watching the real charts and try to find that setup again and again.
To become an expert you should keep practicing a setup to the point when you see it on a chart at a quick glance. It happens when you automate execution of a skill through numerous repetitions. Remember how you drive a car to your office or a local supermarket? You have driven that road so many times so you barely pay any attention to the road. You could drive and simultaneously talk over the phone and think about your next important meeting with your boss at the same time. You have been doing that hundreds of times and never got into accident. Because you have overlearned that specific task of driving that particular road. Now if I told you to go to another newly opened supermarket located in an unfamiliar area you would not be able to perform that new task in such an effortless way. You will devote all your attention to the map trying to stay on course. You will maintain focus on the road and it would be challenging to you to talk over the phone and switch your attention to other thoughts. But if you keep driving to that new place in a week or two you will learn that road as well and automate that new skill of driving it.
Follow not more that three expert traders on twitter.
Make a list of professionals you follow. Now keep only three of them and unfollow everybody else. Keep not the ones who brag the most about their wins. Keep those who practice the technique you decided to learn. You should follow those who share insights about their trading. Who explain how they make decisions. Keep those who answer your questions and from whom you can learn.
Believe me, following other traders will never make you rich or turn you into a professional. You should follow other traders only during initial stage of learning technical skills.
Lower your expectations
I knew what you think. You keep so many guys in the loop because you are afraid of missing some great setup that some of them may post. You can also think it’s a clever approach to seek confirmation of a setup by several traders. And both ideas are wrong. First, let’s come to an agreement that you follow some traders to learn not to copy their trades. Every trader uses his own rules or technique. How your brain can learn three foreign languages at once? Second, if different traders practice different approaches why would you expect them to be in agreement about some particular setup? One trader may find it attractive because it looks nice on his favorable daily timeframe. He is looking for a setup with a potential gain of 10% within next 30 days. He would be ok if price keeps falling lower for another 3%. And another trader may trade on 30 min chart. For him that particular setup may not make any sense because he plays for 2% gain and is not prepared to take risk of 3% decline. And in majority of cases traders do not directly communicate the principles of their trading. Because the majority of them never thought about those details. They keep doing what works for them effortlessly executing skills deeply embedded in their long-term memory by extensive repetitions.
Finally, you’ve got to admit you gonna miss the vast majority of great setups. You are not there yet to get them. You are in the process of deliberate and effortful learning. You should get rid of expectations of trading at par with guys whom you follow. If you happen to make some money in the process consider it as your hefty tuition. This approach is called “reappraisal” in psychology. You change your perspective to make the same experience less stressful. You should focus on positive potential payout of practice rather than on current shortcomings in your performance.
Cut down on number of sources of information you follow.
I want to assure you that you do not need to read anything at all to make money in trading! And you do not need to watch business TV channels. All you need to watch is charts. Charts have all the information you need to identify commonly played patterns and make predictions about direction of the next move. Charts give you information required to come up with a high probability target for the expected move and to calculate your risk for a trade. Novices do not watch charts but rather CNBC or Bloomberg because they hope that some smart guys in expensive suits will tell them what to buy or sell. Those talking heads on TV are not in the trading business, my friends! Their business is to keep you glued to screens so they could show you paid advertisement to make their living. To make you stick they amplify the drama focusing on dramatic moves by some stocks. This is how they make it entertaining! By watching them you waste your time for explanations of why it DID happen. You overload your brain with tonnes of irrelevant information. Doing that you let your attention get distracted from what really matters in trading business. And that is what is happening in the market right now.
Spend less time by the screen.
That may sound counterintuitive but you really should spend less time watching the market. You have to keep detached yourself from the emotional drama. Unfortunately, ability of our brain to perform any forms of self-control is limited. When we deliberately learn new skills, perform complex cognitive tasks or try to control our behavior we drain a limited pool of cognitive power.
When you start trading you try to find a technique that can be replayed at home. You assume that successful traders follow some specific sequence of steps that ensure they do not make mistakes and make money. If you happen to read good trading books you may have got such rules. But then you realized that quite often you did something that directly contradicted the rules you pledged to follow. Then you blame yourself for being stupid and pledged again not to deviate from them. And then you mess up once again destroying self-confidence and ending up ruminating about your failures.
That happens not because you are stupid or unable to follow rules. That happens because we generally overestimate our ability to stay focused and deliberately control our actions in a step-by-step fashion.
Every time you open your trading monitor set a timer on your smartphone for 45 min. This the time when you devote your attention to what happens in the market here and now. And I mean undivided attention. During that period of time you should isolate your brain from any irrelevant information unrelated to the task at hand. You should not check your email, pay attention to notifications from messengers or answer phone calls. Once 45 min expires feel free to walk away from the screen, get some snacks and chat with friends or colleagues. That period of time is more than enough to identify a good pattern to trade. If you do not see a pattern to trade it means that it either is not a good time to enter the market or you just do not have enough skills. In both cases it does not make any sense to keep sitting and watching. Because that first 45 min of your efforts to maintain undivided focused attention will substantially depletes your will power. And the following 45 minutes you will find it harder to resist immediate temptation to make some spontaneous trade you did not plan to do. Take some rest, have a walk, switch to some different activity not associated with cognitive load ( like listening to music or doing some physical exercises) and restore glucose level in your blood with some snacks. Now you are ready for another 45 min productive session of trading.
The best advice I have ever been given was to decrease an average size of my trade. You should do that every time you lose confidence and start questioning your decisions. Trading smaller literally puts pressure off your shoulders. The phenomenon of deteriorating performance when stakes are perceived very high is well researched in professional sport. When professional athletes play in important finals sometimes they do unthinkable mistakes. Psychologists call such sub-performance “choking under pressure”. You may have traded some setup hundreds of times but when a substantial part of your capital is at stake you become very careful with what you are doing. And instead of performing a well learned procedure you degrade to playing step-by-step instructions. You pay efforts to engage costly self-control to watch your steps. You do not longer fly. You come back down the the beginners level. You are slow. You are not confident. You are prone to making mistakes when transition from one step to the next one. When you scale down and decrease your trade by 50% you stop to care about that specific trade. And you come back to effortless execution where you do not trade but rather watch yourself trading.
The photo is by Fabian Blanc on Unsplash.