Most new attempts at trading for a Living fail because the trader lacks trading rules. Of course, these are trading rules you're expected to write before you have any trading experience. Asking a trader who is new to the trading business to write trading rules is like asking a High School Senior to pick a College major before he's ever stepped foot into the business world. I've always felt like the US work force would compete way better if High School Graduates spent 3-5 years in the work force prior to picking a major but that's a whole different conversation.
If you start your trading career using technical analysis like Support, Resistance and volume, you're off to a good start and certainly on a path that all traders must take at some point. But eventually, you may start to feel there is a higher power in the market. You may get a nice support trade, get pushed below support and stopped out, only to see price eventually go in the direction you originally anticipated. What's that about? When that happened to me the first few times, I said to myself: how on earth am I going to support my family, trading for a Living, with this kind of funny business going on? It almost feels like someone or something is intentionally pushing your stop loss order prior to running the price up. It's a very common and disturbing feeling amongst new traders.
After this happened, I spent a great deal of time just studying charts trying to understand why some support and resistance levels are reliable and others were not. The truth is, I learned some things that made me the trader I am today. These are the things that make it possible to be trading for a living now. In hindsight though, I could see that part of my quest was just my inner need for safety trying to do something I have affectionately named: "Study the Risk Away."
"Studying the risk away" is an act that most traders (especially new traders) will not admit that they are trying to do. trading for a Living is more psychological than anything else in that you will have to pay attention to parts of your personality that may be barriers to progress. All people have basic human needs. Tony Robins has made a living explaining these to people. I won't get into all of them, but one of them is Certainty. All people have a need for Certainty. Some need it more than others. Certainty is that part of your personality that wants a recurring paycheck.
Here's a great example. Imagine you are offered a job with a decent six figure base salary. Little by little, split that salary into two parts. First 90-10, then 80-20, then 70-30 and so on making the base salary smaller and adding a commission to the job offer for the remainder of the paycheck. As the base salary gets smaller, your need for certainty kicks in and at some point, you cry uncle and start looking for another job. Some people couldn't go past 80-20. Others are comfortable going all the way to 100% commission. Where you fall in this scale says a lot about your risk tolerance.
The bottom line is that as you write your trading rules, don't expect to study the risk away. In the financial markets, there is always risk. The best you can do is write trading rules that fit your tolerance for risk. If you are more of a 80-20 guy (using the examples from above), and don't like to take a lot of risk, you might need to write a set of scalp trading rules with tight stop loss orders. If you are a 100% commission guy, you may write a set of swing trading rules.
As you embark on a trading career, you will find that there are hundreds of ways to turn a buck in this business and you will hear about all kinds of people selling all types of trading Strategies and trading rules. A new traders first reaction is to ask what the earnings potential is for a particular trading Strategy. Instead, try focusing on what is required to put the Strategy into action. If the trading rules have risks that don't fit your personality, you might save yourself some time, and move on to investigate something else. When trading for a Living, it's very difficult to trade against your personality. I have found a middle of the road approach to trading that incorporates tight stops with a decent profit potential.
No comments:
Post a Comment