If Everyone Knew so Much, Why Share?
Over the last 10 years I have had my fair share of ups and downs in the markets. I've read hundreds of books on pretty much all the strategies you can apply to the market and always asked myself: "Isn't there someone who can just tell me what to do?".
After a quick search on google for mentoring and trading signal services, I was bombarded with page after page of systems that promised to be low risk and have uncapped returns. I was overjoyed with the prospect of simply following a system and learning how to trade like the pros. Professional traders who had made millions in the market were apparently willing to share their entire trading systems - fantastic, time to quit that nine to five.
What started off as elation, soon turned to despair. Every month another €100 (or more in some cases) was leaving my account and lining someone's pocket. Furthermore, my Interactive Brokers account began trading in the red. My goals of trading for a living and making phenomenal returns were slowly evaporating and it hurt like hell. Although I recovered and came back from this multiple times, it was usually due to my own hard work on not depending on someone else's tips recommendations or services. The below phases highlight some of the pitfalls of amateur trading and how to overcome it:
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Phase 1: Dependency
Starting out in the market is a journey. It is exceptionally easy to consume content online and become hooked on other people's systems and ideas. Typically, new traders tend to believe that making money in stocks is easy. This is typically reinforced by flashy imagery and screenshots of monster profits etc. It makes them low hanging fruit for expert marketers who play to the rookie's confirmation bias. New traders get suckered in with nice cars, large homes and an allegedly simple system that gives them "highly profitable" signals that work out almost all the time. Or so they say.
"If you give your trust to a person who does not deserve it, you actually give him the power to destroy you"- Khaled Saad
As a novice, it is easy to believe what people are saying at face value, our brain wants to take us on the path of least resistance. You then become hooked on the information and think this may be the very service you were looking for. Even worse, it may work for a while and you get some results or quick wins. The brain is flooded with dopamine and a new habit is created. It's really that easy.
Getting the daily fix of information from a Guru puts us in a compromised state and the frustration cycle ensues.
The Drawbacks of Dependency
This is when it usually starts turning bad, and you have taken what was originally a quest for independence and handed the reigns over to someone who is a stranger. At this point you will begin developing an unhealthy dependency, just as a child who not weened off of it's mother at a young enough age - you begin relying on the trading signals instead of doing your own due diligence.
It happens at breakneck speed. And it becomes an unhealthy and expensive obsession.
The reality is that most trading signal services are novice traders who aim to generate revenue from marketing and have no clue about real trading. It's an instant gratification quick fix that burns out and results in frustration and loss of capital. Ask these guys for an audited account and I'm sure you won't hear from them again.
Dependency results in confusion, delusion and depression. Just like a terrible relationship, being dependent on someone with your money is a dangerous and highly personal affair.
Once Dependent Phase 2 Begins: The Blame Game
Once dependency on someones signals or advice is established I believe there is a second phase of the signal service downward spiral. This is first and foremost the lack of accountability for results. Depending on someone else to make decisions for you can turn sour very soon when things don't work out. If you don't fully understand the merits of the system sold to you or the theory behind why it works, it can result in multiple losses in a row. Although this may be a normal reaction or part of the systems probabilities, it can sometimes flare us up and make us blame the guru. Why isn't this working! It must be a scam!
We quickly turn to the supposed guru and blame them for the poor results, even though this may be a temporary setback or normal behavior. We've now moved from dependency to resentment and result to emotional trading decisions which begin straying away from the system. It's at this point where we feel 'we know better' and begin breaking the rules and straying away from said guru only to see the system turnaround and start working again - with us nowhere to be seen. Worse yet, we may get better results starting from the rules and then doubt the entire service. It's at this point we begin questioning if this was the right service or we should try another. And the cycle usually goes in circles.
To be an accountable trader you need to:
- Understand when to buy a stock and have specific entry criteria
- Know at what point to take a loss if it isn't working
- Set a stop loss that you can follow and understand it's merits
- Understand the probability of success over time with some basic probability
- Have a plan based on this strategy that you execute time and time again
It really is that simple. So simple in fact that thousands of newbies believe it's enough to start trading services. This is why the market is full of fraudsters. It takes time to be accountable for your results but these are some fundamental truths that can't be ignored.
Being dependent on a signal service without being an evangelist of the system and knowing why it works is a vicious cycle. Far too many friends and supposed traders I know depend on You-tubers, alert services and high risk systems that simply do not work. Real trading and investing starts with you. If you are shouting at the screen, blaming the market or blaming "them" - you need to reassess how you approach the game. Take back control, stop gambling.
Phase 3: Realizing we are all Different
In order to fully develop trading as a skill, knowing yourself deeply, working on consistency and discipline is far more valuable than a signal service. In fact, we typically post our trade ideas for free. People writing to me who are either extremely grateful for the recommendation or livid about the very same recommendation! It proves that signals themselves are pointless if you don't know how to trade them, respect risk and understand the merits of the strategy. This is where I truly feel I can make a difference.
All people are different. Some of us are built to follow trading systems to the T whereas others thrive in a discretionary environment making decisions on the fly. This is mainly due to how people react and are emotionally glued together. Our genetic makeup may be different but there are some fundamental truths that must be respected at all costs to trade well over time.
A few things to consider before getting a mentor or trading signal service would be:
- Risk - are you willing to use a system that has huge ups and draw-downs.
- Time - how much time are you able to put into the strategy in order to learn.
- Delayed gratification - can you wait or do you prefer to be active in the market.
- Is the methodology rule based. Have you written this down?
The above is just a taster of what one should consider when starting their trading journey. I will be writing up an entire section on building a trading system. I work with novice traders on an individual basis to ascertain if they can appreciate these points. Honestly speaking, I am shocked at how much risk traders take at such a young age. Amateurs all too often lay the groundwork for gambling habits and trading systems which result in loss. To trade well, we need to know who we are. What makes you tick? What kind of life have you had? Do you want to be a professional money manager or live in denial?
Phase 4: Taking Ownership
This may sound harsh but the day I knew I had no idea what I was doing changed trajectory completely. Using signal services was not providing me with any real skill. After using multiple signal services and getting similar results to when I was running solo, I decided to go back to the drawing board. I had read so many books and had so much to synthesize that my head felt like it was about to explode. One thing I did realise though - I needed a plan. A plan that I believed in and understood.
It was at this point I moved from being someone who thought they knew what they were doing (unconsciously incompetent) and realized I need to put in more work and better understand my trading style in order to develop it further. This was a revelation. We can't know what we don't know. Knowing we have little competence should not be negative, it should be liberating! This is a massive step in opening your mind. Knowing you have more to learn means you should risk less, step back and gather some perspective.
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I found that my trading results where sporadic. They came from a mixed bag of strategies and signal services. I was completely overwhelmed by the Tsunami of information available on the web. It was at this point that I said "if they can do it then so can I". If individuals could come up with their own strategies and find something that worked for them, why was I limiting myself and depending on others' advice?
Owning this for myself I decided to do the following:
- I threw away all the trading books that promised overnight riches
- I read more about psychology than trading
- All signal services were cancelled
- All the books that spoke to me were short listed. It was time to go over the ones I knew would work but was too lazy to learn
- I developed a simple strategy, wrote it down and committed to testing it
- I found a phenomenal trading mentor (Mark Minervini) who was expensive but legitimate
- My trading began again, with smaller positions and a lot less stress or anxiety about the money
- The process became important, not the money
Phase 5: Kaizen
Once you have been through the frustration and blame cycle you have two options. You can either go straight back in for more signals and Gurus, or make a far smarter and more mature decision. That is the decision of Kaizen also known as 'change for good'.
Kaizen is typically used in manufacturing and or running a large company, for a deeper insight into this philosophy you can head to Wikipedea as they have a comprehensive write up on it. In a nutshell, the philosophy of Kaizen is based on continuous and ongoing improvement within a process. Being an aspiring professional trader, this should be very attractive as the principles are the same.
Trading as it relates to Kaizen should look as follows:
- Measuring your trading results and using a trading journal with metrics
- Assessing whether or not you are truly following your rules and writing it down
- Using your metrics and results as cues to drive behavior
- Using these principles as the engine that governs how you trade and interact with the market.
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The Japanese Symbols for Kaizen (Change, Good)[/caption]
If this article has struck a chord. Please do not be disheartened.
Trading is a phenomenal way to create wealth beyond what we can imagine or comprehend. In saying that, it does not come easy nor should it. If you want to create long lasting skills and wealth it will take time and require long hours of work. Good trading should be boring. You need to have a repeatable, reliable and statistically sound system that you can follow.
Trading systems are the easy part. The hard part is knowing what you don't know. Don't be scared to admit this to yourself and face reality. Be objective, find the right people to help you and make sure you treat trading like a business. Create a process that can be measured and is sound. The money is sure to follow.
If you want to get in touch please contact me here.
If you are interested in expanding your knowledge check out 'Trade Like a Stock Market Wizard' by Mark Minervini