I was 80% through my journey to profitability. But for months, I couldn't seem to get to my goal. Then I made four fundamental changes to my trading. This is my story.
Since you are probably a trader yourself, I don’t need to tell you about the pain and frustration that most of us experience during our quest to become consistent, profitable traders: large, shocking financial losses; many sleepless nights spent thinking about trading, wondering if success in this business is just an illusion; the feeling that you are just about to turn the corner to profitability but somehow you just never seem to quite get there. Invariably, these are phases that most traders go through. In the end, most aspiring traders either give up or they run out of trading capital. But there are some that make it. I have decided to share, by means of the Dukascopy fx community, the four fundamental changes that I made to my trading in the summer of 2011, which marked the turning point in my journey from an inconsistent loser to a consistent winner.
While money management is undoubtedly one of the most important aspects to master when it comes to lasting as a trader, it is not something that I will talk about in this article. The only thing that I would like to point out- again, from personal experience- is that knowing what is good money management is very a different thing from practicing good money management. How did I overcome this challenge? This brings me to the first fundamental change.
#1 When the pain became too much, I started doing what I had always known was right
Like many traders, I knew the theoretical importance of “patience” and “discipline.” I had nice post-it messages plastered all over my monitor reminding me to be patient and disciplined. But like many traders, I wasn’t patient and I wasn’t disciplined. I didn’t wait for the setups, I didn’t manage my risk, I revenge traded, I doubled up on losers, I did all the things that the books tell us not to do. All along, I knew that my analytical skills were good and that my real problem was inside my head. But I kept repeating the same mistakes. And I kept searching externally for a trick or a method to deal with my problem. I talked to other traders and I read dozens of books about trading psychology. One day I had a very large loss and I felt that I had finally reached my pain threshold. I couldn’t handle more losses. I was losing my hard-earned savings. I came to the realization that I must either stop trading – which would have been a tremendous defeat – or I must simply do what I know is right because from now on there would be no second chance. I was certainly not going to quit, so guess what: I simply began to be patient and disciplined. It is that simple. I decided that I needed to be patient and disciplined, and that is what I did. You see, all along I knew that I had the answers inside my head, but yet I kept searching for a solution in the external environment. To conclude, I suppose that if I were to give a piece of advice it would be this: If you are still struggling with the psychological aspects of trading, stop reading books about it and just do what you know is right.
#2 I stopped searching for the Holy Grail and focused more on flawless execution
I spent over two years searching for the perfect system. I was in a variety of trading rooms and trading courses, spending thousands of dollars in the process. It was not until last year that I truly began to understand that searching for the perfect system was just about the least important factor in achieving success. I realized that just about any system can be traded profitably if the trader learns to see price action through the lenses of that particular system. I had a couple of good systems (or better, methods) but my real problem was that I didn’t execute flawlessly. Any edge in trading is susceptible to poor execution; it usually doesn’t take more than one or two poorly executed trades to cancel out an edge. It was not until this truly sank in that I - coupled with better patience and discipline – began to see improvements in my results. Again, I knew it all along but I didn’t truly understand the implications of it.
#3 I accepted that trading is an art, not a science
One of the psychological traps that I fell into was to think that if I worked hard enough, I’d eventually figure out a way to beat the market. I had a successful academic background and in general I had succeeded in most of the endeavors that I had cared about in life. So I should be able to figure out trading as well. While beating the market is possible in the sense that you can execute an edge over a long period of time, any single trade can be a total failure. But it took me years to accept this. On many occasions, I would plan the perfect trade only to get stopped out after six minutes. I got frustrated, I got angry and I lost control of my emotions. And I lost my accounts. Today, I accept that there is just about a 50% chance that my next trade will be a winner and I will NEVER be able to precisely calculate what the market will do next. Trading is an art, not an exact science.
#4 I began to protect my emotional capital
This final point embodies the previous three concepts. When I realized that achieving success in trading was all about how well I executed my edge and about how good I was at remaining patient and disciplined, I began to focus more on how I could protect my emotional capital. By emotional capital I mean the psychological conditions that are the foundation for good trading: confidence, calm mind, positive attitude. I began to identify certain habits that had a negative effect on my emotional capital. This included taking too many trades even though my risk was acceptable (I now only take max. 1 trade per day); spending too much time in chat rooms and allowing my mind to get confused with too much informational input; reinforcing bad risk management habits in trading competitions (err.. sorry Dukascopy); keeping too many indicators on my charts, etc.
There were four fundamental changes that helped me become profitable. If I were to phrases these changes in the form of advice, I would recommend traders to think about the following:
- Stop reading books about psychology and just be patient and disciplined
- Focus on flawless execution, not on searching for the perfect method
- Accept that trading is an art. Any trade can be a loser, regardless of how good it looks
- Protect your emotional capital by eliminating bad habits in your daily routine
End note: I am very passionate about trading and I have a lot more to say about the subject. I very much enjoy talking with other traders. Please leave your feedback or contact me directly through a direct message. Thanks for reading and good luck with your trading.