1. FIRST THINGS FIRST
First, be sure that you really want to trade. As both Krausz and Faulkner confirmed,
based on their experience in working with traders, it is common for people who think they want to trade to discover that they really don’t.
2. EXAMINE YOUR MOTIVES
Think about why you really want to trade. If you want to trade for the excitement, you might be better off riding a roller coaster or taking up hang gliding. In my own case, I found that the underlying motive for trading was serenity or peace of mind-hardly the emotional state typi-cal of trading. Another personal motive for trading was that I loved puzzle solving-and the markets provided the ultimate puzzle. How-ever, while I enjoyed the cerebral aspects of market analysis, I didn’t particularly like the visceral characteristics of trading itself. The con-trast between my motives and the activity resulted in very obvious con-flicts. You need to examine your own motives very carefully for any such conflicts. The market is a stem master. You need to do almost everything right to win. If parts of you are pulling in opposite direc-tions, the game is lost before you start.
How did I resolve my own conflict? I decided to focus completely on mechanical trading approaches in order to eliminate the emotionality in trading. Equally important, focusing on the design of mechanical systems directed my energies to the part of trading I did enjoy-the puzzle-solving aspects. Although I had devoted some energy to mechanical systems for these reasons for a number of years, I eventu-ally came to the realization that I wanted to move in this direction exclusively. (This is not intended as an advocacy for mechanical sys-tems over human-decision-oriented approaches. I am only providing a personal example. The appropriate answer for another trader could well be very different.)
3. MATCH THE TRADING METHOD TO YOUR PERSONALITY
It is critical to choose a method that is consistent with your own person-ality and comfort level. If you can’t stand to give back significant prof-its, then a long-term trend-following approach-even a very good one-will be a disaster, because you will never be able to follow it. If you don’t want to watch the quote screen all day (or can’t), don’t try a day-trading method. If you can’t stand the emotional strain of making trading decisions, then try to develop a mechanical system for trading the markets. The approach you use must be right for you; it must feel comfortable. The importance of this cannot be overemphasized. Remember Randy McKay’s assertion:
“Virtually every successful trader I know ultimately ended up with a trading style suited to his per-sonality.” Incidentally, the mismatch of trading style and personality is one of the key reasons why purchased trading systems rarely make profits for those who buy them, even if the system is a good one. While the odds of getting a winning system are small-certainly less than 50/50-the odds of getting a system that fits your personality are smaller still. I’U leave it to your imagination to decide on the odds of buying a prof-itable/moderate risk system and using it effectively.
4. IT IS ABSOLUTELY NECESSARY TO HAVE AN EDGE
You can’t win without an edge, even with the world’s greatest discipline and money management skills. If you could, then it would be possible to win at roulette (over the long run) using perfect discipline and risk con-trol. Of course, that is an impossible task because of the laws of probabil-ity. If you don’t have an edge, all that money management and discipline will do for you is to guarantee that you will gradually bleed to death. Inci-dentally, if you don’t know what your edge is, you don’t have one.
5. DERIVE A METHOD
To have an edge, you must have a method. The type of method is irrele-vant. Some of the supertraders are pure fundamentalists; some are pure technicians; and some are hybrids. Even within each group, there are tremendous variations. For example, within the group of technicians, there are tape readers (or their modem-day equivalent-screen watch-ers), chartists, mechanical system traders, EIliott Wave analysts, Gann analysts, and so on. The type of method is not important, but having one is critical-and, of course, the method must have an edge.
6. DEVELOPING A METHOD IS HARD WORK
Shortcuts rarely lead to trading success. Developing your own approach requires research, observation, and thought. Expect the process to take lots of time and hard work. Expect many dead ends and multiple fail-ures before you find a successful trading approach that is right for you. Remember that you are playing against tens of thousands of profession-als. Why should you be any better? If it were that easy, there would be a lot more millionaire traders.
7. SKILL VERSUS HARD WORK
Is trading success dependent on innate skills? Or is hard work suffi-cient? There is no question in my mmd that many of the supertraders have a special talent for trading. Marathon running provides an appro-priate analogy. Virtually anyone can run a marathon, given sufficient commitment and hard work. Yet, regardless of the effort and desire, only a small fraction of the population will ever be able to run a 2:12 marathon. Similarly, anyone can learn to play a musical instrument. But again, regardless of work and dedication, only a handful of individuals possess the natural talent to become concert soloists. The general rule is that exceptional performance requires both natural talent and hard work to realize its potential. If the innate skill is lacking, hard work may pro-vide proficiency, but not excellence.
In my opinion, the same principles apply to trading. Virtually any-one can become a net profitable trader, but only a few have the inborn talent to become supertraders. For this reason, it may be possible to teach trading success, but only up to a point. Be realistic in your goals.
8. GOOD TRADING SHOULD BE EFFORTLESS
Wait a minute. Didn’t I just list hard work as an ingredient to successful trading? How can good trading require hard work and yet be effortless?
There is no contradiction. Hard work refers to the preparatory pro-cess-the research and observation necessary to become a good trader-not to the trading itself. In this respect, hard work is associated with such qualities as vision, creativity, persistence, drive, desire, and commitment. Hard work certainly does not mean that the process of trading itself should be filled with exertion. It certainly does not imply struggling with or fighting against the markets. On the contrary, the more effortless and natural the trading process, the better the chances for success. As the anonymous trader in Zen and the Art of Trading put it, “In trading, just as in archery, whenever there is effort, force, strain-ing, struggling, or trying, it’s wrong. You’re out of sync; you’re out of harmony with the market. The perfect trade is one that requires no effort.”
Visualize a world-class distance runner, clicking off mile after mile at a five-minute pace. Now picture an out-of-shape, 250-pound couch potato trying to run a mile at a ten-minute pace. The professional run-ner glides along gracefully-almost effortlessly-despite the long dis-tance and fast pace. The out-of-shape runner, however, is likely to struggle, huffing and puffing like a Yugo going up a 1 percent grade. Who is putting in more work and effort? Who is more successful? Of course, the world-class runner puts in his hard work during training, and this prior effort and commitment are essential to his success. (more…)