I have been trading (part-time) for 25 years and had my fair share of experience. From blowing my account (and then some) during the 90’s dot come era, to riding epic bull and bear markets, from great winning runs and periods of poor trading practice, I think I have seen a thing or two.
More importantly, I have spent the past 10 years writing a weekly newsletter where I converse frequently with my members. During that period, I have been a mentor and a sounding board to members, many of whom have gone through some real-life changing trading events. Writing a letter and working with members has given me a unique peek into the mind of the retail trader.
What you have below is a list of some of my lessons learned, whether through personal experience or through the repeated experiences of my members. Experiences listed here are deemed important enough to me that I classify them as lifelong lessons, understood, but never mastered. I do not claim to be a superior trader or investor, I have met far too many people I know who are better. But I know I am personally far better than I was five, ten, and twenty 20 years ago. And I expect I will be able to say the same again in five- and ten-years’ time.
Many of the topics I share are not new and I am not the first to have experienced or discovered them. They are experiences I have found to be impactful to me or my members, and by sharing them I hope they provide some benefit to you on your personal journey.
In no particular order:
- Nobody knows everything, including the “experts”.
- Timeframe is everything. All views, some opposing to others, can all be right or wrong on given timeframes.
- Know your timeframe. Some people are just naturally better suited for a specific timeframe, know where you perform best and focus on developing your strategy around that timeframe.
- Generally, the shorter the timeframe, the harder it is to be successful. When I first started out, I did not have the discipline to stay in a trade, regardless of my trade objective. It was more about the thrill, an eagerness to speculate. As I’ve matured, I’ve found moving further out the time-frame has provided better clarity and afforded me the luxury of better discipline.
- Most traders are simply gamblers, they just do not know it or are not honest with themselves. They are fodder for the markets and the exchanges. Many of you reading this article fit this description. Those seeking a trading thrill are net losers, by a wide margin. If you are ever going to make money in trading, you need to transition to the point where you view this like a business.
- If a trade idea came from someone else, it is more likely to fail “for you”. Every idea or tip you receive lacks all the background data and motivation needed to successfully execute on the idea. Use other’s ideas for learning purposes.
- Shit happens, and often. Expect the unexpected at all time, because eventually it does come around. I have seen countless people lose entire accounts while caught in a capitulation/panic or face ripping rally. In times of extreme volatility, you’re best to head quickly for the side-lines.
- The market is illogical and you’re certainly not smarter than it. Trying to understand the why behind certain moves and developments is the job of CNBC and the likes.
- Do not impose your “fundamentals and macro” views on your trading, especially the shorter timeframe ideas. There is no correlation between macro and shorter time-frame moves, yet so often we build a macro narrative to support an ill-conceived shorter term strategy.
- When you think you have figured it all out, then you’re ready for the next level. Trading and investing are skills that can never be fully mastered. It is ridiculously layered and reaching a plateau is an achievement, but also a wakeup call to take it to the next level. Generally, you will have to pay a price for your newfound confidence to appreciate that you have more to learn. Meaning you will always need to adapt and grow to be successful.
- Get comfortable with losing, and often. I do not care who you are who you claim to be, we all lose and sometimes for long stretches of time. Be humble, not accepting and taking losses shows you have not accepted that the market is smarter and bigger than your ego. Embrace losses by managing them well, understanding that for every big winner you generally need to experience smaller setbacks along the way. It’s just the process.
- It’s on everyone’s “tips list” but learning to manage losing trades really is the #1 task for a trader. Knowing losses are going to be a frequent occurrence, your job is to embrace losses and control how much capital you keep at the end of it. My biggest breakthrough in trading came when I fully embraced managing risk. I have since become a risk mgmt. fanatic in my trading and believe wholeheartedly superior performance can only be achieved through extreme discipline around risk.
- Going against a longer-term trend or picking big reversals is attractive to the “speculator”, but, is difficult and rarely profitable in the long run. Contrary to popular opinion, the market or herd is generally right and for longer that you expect. The dominant trend has a way of bailing out even poorly constructed or executed ideas. Thus, the saying “everyone is a genius in a bull market”.
- Calling yourself a contrarian is often just wanting to be perceived as better than the masses. The key is to ride with the herd, but understand you are doing so for the momentum and strength it provides, ready and able to reverse course quickly. Most “contrarians” ignore the herd and can never find themselves to be part of the move. To them, it goes against the ethos of being a contrarian. A broken clock is right once a day and the same applies to perma-contrarians. The smartest folks I know take advantage of an extreme market AND maximize the gains by jumping off at the right time.
- You can be right and still lose big. The details matter in the end. Trade setup, execution, and management are too often neglected in favor of the larger right/wrong narrative on direction or a good looking chart setup.
- During periods of extreme volatility, getting out of most or all positions will save you. Most of the big account losses or blowouts I hear about occur during such periods.
- “Cannot get worse” – “has to turn” – “Cannot go higher/lower” – famous last words of the degenerate gambler before account liquidation.
- Generally, options are a mugs game. If 80% or so of traders lose money, I would estimate 98% of options traders lose. I’m talking about the long put/call trader who is late to the party, pays extreme amount of premium, and is simply using the option as leverage.
- Most ideas take more time to develop than you expect. The impatience or speculative trader falls victim to chasing the trade.
- I never kept a detailed trading journal. But I always review my trades to understand my reasoning and thinking versus the outcome. I found that trades I formulated that same hour or day worked far less often. I found that trades which fit into a developing narrative/theme worked best. Trades need to align within a strategy you have developed and for which you are most comfortable with. Once I started greatly reducing my trade frequency and became much more selective, my performance went up. I also found that such trades offered more clarity and allowed me to be more disciplined.
- This will get some disagreement, but contrary to what many people online will lead you to believe, trading alone is not a way to riches. Sorry to be the bearer of the news. People spend far too much time trading (dart throwing really) and not enough time focusing on “growing income”. Whether through a better job, career, business, or additional side income. Focus on growing multiple sources of income and increase your capital base. You will then start to see trading for what it really is.
- If a trade does not feel right, just get out. Most trades that hit my profit target generally went to plan from the start. Too many people are afraid of cutting a loser early in the hopes it turns around. It is not a soccer game, you don’t score points for a win versus a loss. What matters is cumulative net capital gain/loss, not the win/loss ratio.
- Performance is often streaky. Poor periods are often a result of situations occurring in your personal life or a period where you are not adhering to your strategy and process. Early identification (and swift correction) is needed to avoid suffering a large equity drawdown. During poor periods, if it means mandating a 14-day freeze on all trades, do it. For streaks of outsized performance, try to stick with what has been working and not become over-confident. Good streaks end prematurely when you begin to feel invincible.
- Amatuers focus too much on the reward potential of a trade, ignoring the amount of risk they’re taking to give them a shot at that reward.
- Find out what resonates and works best for you and focus on developing that style/strategy. There is no magic strategy or indicator, it’s how you build your strategy around it that matters.
- Specific asset volatility needs to be understood. Knowing what an asset can do even under typical environments allows you to better frame an idea.
- Anyone boasting of nothing but winners and big profits is lying to you, has insecurities, or is selling you vapor ware.
- Most people lose in the market. Beating the market averages consistently is exceedingly difficult. Anyone claiming averaging >25% y/y of “consistent” returns is not being truthful.
- If you can’t show good positive performance without using leverage, you’re certainly going to lose with it!
- Hedging sounds sophisticated but is generally a losing idea. If you are looking to hedge, you’re probably just balls deep into the position to start with. Reducing your exposure is a better strategy.
- If you constantly dream about the markets or your positions, you’re in too deep. Emotional stress over trading leads to poor decision making.
- If the first thing you do when waking up is look at the markets, then you are addicted. I try to impose a full 60-minute hold from looking at quotes upon waking up. Creating detachment from the markets puts me in better control.
- “Analysts” know little more than the rest. They are marketing click bait for their firm.
- “Institutional money” is not any smarter they are just ahead of you in line.
- If a random anonymous social media account is talking about a stock’s gains, you are probably too late to get involved.
- If you have more than 3 or more indicators on the chart then you’re just creating unnecessary noise.
- Sadly, most people start with a biased narrative, and then find charts, patterns, or indicators to satisfy that bias. Flip that process around.
- I found that pursuing hobbies and interest outside of trading, and looking after your health, had an incredibly positive impact on my trading performance.
- Everyone carries some form of bias in trading. The more married you are to a narrative, the more likely you are going to execute it poorly if outcomes do not match.
- Correlations add unnecessary complexity. Understanding one asset’s price action is difficult enough, let alone trading them successfully. People love to find correlations where they do not necessarily exist because they are just short-term events with no real relationship.
- Everyone wants to be Nostradamus and predict price. Amateurs are obsessed with just being right. That is why you see so many “chart predictions” on social media. Successful traders focus on all outcomes, not afraid to state competing/opposing expectations and having viable plans for all outcomes.
- Predictions should just be framed as possibilities, with no emotional attachment to that outcome, understanding that the market can and does behave irrationally.