3 Valuable Trading Lessons I Learnt 10 Years Ago
As I reached my 34th Birthday last month, I wanted to share with you 3 important lessons or turning points in my trading career that I think any aspiring trader or investor could learn from:
Lesson 1: Your desire to “win” is the problem
They say that the worst thing in life is not death, but what dies within you while you are still alive.
Dreams are powerful things, and nothing is worse than when life makes them seem impossible to achieve. In the words of a famous 1980s song, dreams are like “china in your hand” – they can break easily.
I remember how when 10 years ago I first started out in the lucrative and exciting career of stock and commodity trading. I thought of the stock market as my best friend. Everything looked so easy: technology, advanced trading softwares and online brokerage accounts made trading seem like child’s play.
And then the worst thing that could befall a new trader happened to me: I started winning.
The markets began to reward me for trading without any discipline or proper planning. I would be skimming the Dow for a few points here and there – jumping in and jumping out like a trapeze artist, instead of risking 1% of my capital on each trade I would risk 20%, instead of honouring my stop-loss I would start to move it as soon as I feared I might be losing.
As I started to win more and more trades, I began to over-leverage and over-trade my position. And yes, the markets still rewarded me with money.
Not surprisingly, my good fortune did not last for very long. Within three months I reduced my beautiful trading account to 30% of its original value.
If you have experienced losses in your early days of trading, consider yourself very lucky. That should have taught you a very important lesson about risk – there are sharks and piranhas everywhere ready to take your money. More importantly the market has no responsibility to make you money.
John Carter of www.tradethemarkets.com says it best that if you take care of the risks, profits and rewards will take care of themselves. Just focus on following your trading plan.
Summary: Traders should focus on executing their trading plans and minimising their risks and NOT whether they will win or lose on any single trade. Profits will come to you if you take care of the downside.
Lesson 2: Your worst enemy – “Perfectionism”
Few things in life are ever perfect. But there are exceptions: holding your newborn baby for the first time or the smile of the love of your life.
The desire to get things perfect and “just right” may serve you well in other professions – but it is a curse when it comes to trading or starting any business.
I have seen traders follow a pattern: they go from over-confident to over-cautious. After a losing streak, they begin to question their system. Now a trade has to “feel right” to them before they take action and by the time the feeling comes it is much too late to enter.
And then begins the the search for the magic pill – a foolproof and easy trading system that gets you in and out at exact tops and bottoms and you never lose.
I spent 3 years of my life looking for such a “magic pill” – it does not exist so please do not waste your time. (I say this just in case you saw the movie “Limitless” which coincidentally was about a guy who swallows a pill and becomes a stock market genius. An excellent movie, but it’s not going to happen!)
Summary: There are no shortcuts to success – only hard work and adhering to a proper trading plan.
Lesson 3: Trade to make a living – NOT to make a killing
A question I often get asked in my trading seminars is “Can I trade a $5,000 account to be able to quit my job?” This is clearly not realistic. Another favourite is: “How do I turn $2,000 into $1million in six months?” Err… You’ve got to be kidding me!
There are companies out there who allow you to leverage your money through the medium of spreadbetting, CFDs or options. You could use $5,000 to trade on 100:1 leverage and if you’re lucky “make a fortune”. But that good luck only has to turn into bad luck once before you lose everything. It’s a bit like driving a fast car at ridiculous speeds down a small country road – you’ll only be a danger to yourself and everyone else.
Write this phrase down on a piece of paper and stick it on your computer so you never forget it:
Amateur traders focus on how much money they can MAKE, Professional traders focus on how much money they can LOSE.
Summary: The sole reason you should trade is for the purpose of becoming financially free – to be able to cover all of your monthly expenses and luxuries. The millions will come to you as a result of adhering to a solid trading plan with discipline.