October 2003

This is something that I sent to a trader who was struggling.  A bit overwhelming maybe, but still applicable I think.  See if it hits any hot buttons.

I usually look at a 3-min, 5-min, and 30-min ES charts.  I like to trade the ES because I do it better.  I fought that a long time but I have given in.  Wanted to trade the NQ but that just doesn't work for me.  Looks good, feels good, and I lose.  Oh well.  I think that the ES is herky and jerky but I understand it or something.  Can't explain it.  I ditched the 1-min chart because it distracted me and hiked me up to where I was jumping into and out of trades about as fast as you can imagine.  I once had 50 trades in one day and lost $2500.  It was like I couldn't help myself.  That 1-min chart was provoking me something terrible.  I changed to a 3-min time frame and it was better, but I had other problems which I eventually solved with discipline.  I think the 1-min has a purpose, but you have to really have your act together and a lot of discipline to use it.

I watch two monitors.  A 21-inch where I put the 3 and 5-min charts and a sliver for the 30-minute chart I watch for the position trade and sometimes for a reminder of the 'big trend' while trading a 3 and 5 minute charts setup.  I also have the trading platform there.  I put eChat on the 19-inch monitor.  It is too large and covers too much of my charts so I put it over there.  I don't think most people can effectively use more than two or three monitors.  Just can't look that many directions at once and assimilate the data being shown there, especially under the pressure of trading and running your trading platform, etc.

Hard stops are needed to enforce the risk management part of your trading plan.  Mental stops do not normally work.  It gets you to 'hope mode' real fast and that's very bad.  If it's a two point maximum risk on any trade then so be it.  Just make sure your system will accommodate that.  You could two point stop yourself into oblivion.

What's real and what's not real in terms of signals and trades you ask?  That is a question you will probably never know the answer to.  You can get to where you have a good idea of the odds on any situation because you are thoroughly familiar with your system and through experience you will know what to expect to a certain degree, but to ultimately know?  No way.  It's like asking if this signal you have just discovered is a good one or a bad one.  No one knows, and it's a waste of time to ask the question.  Asking that question at the critical moment of decision is very counterproductive to your trading health.  It causes hesitation and doubt.  Something you can certainly do without in trading.

Okay you asked for it so here are my thoughts on becoming a successful trader.  Hesitation comes from fear of losing usually.  We want a guarantee or at least the knowledge that it is going the right direction before we enter a trade.  That makes you late on your entries and late = loser trade usually.  It takes a long time to develop a trading style and find a system that 'speaks to you' well enough to overcome the fear and apprehension of entering a trade.  It has to be a total faith, trust, and confidence thing.  It has to become automatic.  You have to not only know that your system works, but that YOU can make it work.  To get that level of competency you have to totally understand your system and have a conscious realization that it works.  Then it is a matter of paper trading a lot so that entering a trade is automatic.  That may take 3 months, 6 months, or even years.  Some never get there.  Pay attention and try to learn the nuances of the system and more importantly the market you are trading.  You have to learn the personality of the system and the market and that's not easy.  It takes a lot of screen time and dedicated 'watching' with a purpose.  You have to be focused on learning the personalities and how things work.  Then once you get that down you are ready to deal with the enemy.  That enemy is you.  You have to understand yourself and what makes you tick.  Ego has to be thrashed to death and put outside your trading.  That is one of the hardest things you will ever attempt to do in your lifetime.  No egos, no opinions, and no hunting for the answer to 'why'.  Why is the market doing this?  Why is it going up?  Why is it going down?  Once you spend valuable time finding the answer to that, it is history, the move is over, and you missed the trade.  Truth is, who cares?  All you care about as a trader is which way is it going and what is my system telling me to do about it?   Read the charts and do what the system dictates.  I've known great minds who were the best at analyzing the market etc and couldn't pull the trigger to save their lives.  They were so hung up on that 'why' or 'is this a good signal or a bad one' issues that they just couldn't bring themselves to do it and were total failures at trading.  Brilliant guys who couldn't put what they knew into action.

Sounds like a soap box?  It is.  I've been there and I am thoroughly familiar with the pain and frustration of losing.  Confidence in one's abilities is hard to come by and hard to maintain.  Once you have it it can go away fast.  One bad day and it is start over time almost.  So don't think that if you get it it is locked in forever.  It is a constant battle.

Okay enough of that stuff.  How do you get better?  The first thing you need to do is get rid of the ego as I said earlier.  It doesn't matter what anyone else thinks.  It is not personal when you lose.  It is not personal when you win.  It is an ordinary event.  Not something special in either case.  You didn't do it. The system and your discipline to run it did it.  Win or lose if you executed the system you are successful because that is your only job in trading.

Very important stuff follows.  Read carefully.  You need to get in close touch with yourself.  That's hard for most of us to do because we either can't or won't admit to ourselves what and who we are.  It is mandatory for a trader to be able to do that however.  Psychology is 90% of trading.  And that's not an exaggeration.  There are lots of systems that are successful but it is the operator who decides when to take the signal and when to pull the trigger and if he isn't in touch with himself he probably won't be able to take advantage of that great system.  Knowing yourself and taking appropriate action versus using your feelings as an excuse to not trade that day or do bad trades is a thin line.  If you do a bad trade take responsibility but don't beat yourself up. NO NEGATIVE SELF TALK!  EVER.  PERIOD!  Never do that to yourself.  It is your worst action against yourself and will keep you from becoming successful at anything in life.  If you think you are a stupid trader how do you think you are going to believe that you are a quality guy or gal who is going to be a consistent successful trader?  If you feel fuzzy, or bad, or 'out of sorts' at the start of the trading day you need to have the self awareness to recognize those times and the discipline go play golf.  That takes brutal honesty but I have lost a lot of money sitting there trying to trade when I had no business being there.  You press, try too hard, and force the action trying to 'create' trades and the harder you try the worse it will get.  You must have the discipline to not trade in those situations and on those occasions.  Discipline is about trading your system properly and also not trading when you shouldn't.  Operator error is the cause of most trader failures.  Objectively keep track of your trading 'errors' and treat them as 'things I need to improve upon'.  Not as personal 'failures'.

The Holy Grail?  There is no system that is the Holy Grail.  As I said earlier there are lots of systems that are successful to one degree or another.  You just have to find the one that 'speaks the straightest and clearest' to you.  So what is the Holy Grail if there is one?  If anything, it is you.  You are the one who decides how to employ the system so it is to your advantage to spend some time and money on yourself.  Not buying every system in sight and failing at all of them because you aren't prepared to operate any of them.  Get my drift?

You need to settle on a system that makes sense to you.  You need to understand it and what it is trying to do.  It doesn't have to be complicated.  It needs to have a sense of purpose to it.  Needs to be tested.  In a 'still' market, playback paper trading, and then real time paper trading.  You will find that they are all different with different levels of stress and apprehension.  Once you are comfortable with that you need to develop a trading plan and write down the trading rules for that plan.  If your plan is sound you should be able to write down trading rules that are easily understandable and can be consistently and ruthlessly enforced because it is when you get outside your system that you get whacked.  The rules make sure that you trade within your system and nothing more.  Discipline comes from having a good system that you believe in and rules to insure that you execute it consistently and properly. 

You have to become aware of and believe that you are the system.  Your total job is to align yourself with the system and the market and take advantage of that relationship.  You don't use the system.  You ARE the system.  May sound corny but you need to 'Be the System'

A couple of last things.  Be sure you create an atmosphere through which you can learn and flourish.  Do not try to learn to trade with loud noises, other people, and distractions around you.  Have a quiet place to trade.  Close the doors and disconnect the phones.  It's going to be that hard.  I've known a lot of guys who could have made it but wives, kids, and any interruption was devastating to their concentration and they were ultimately failures at trading.  Keep it private and keep it quiet until you have it under control is usually the best answer.  The exception is the one on one tutor who can really help you. Read books with a grain of salt.  There are no gurus of trading systems who are always right and win all the time. Indeed, beware the person who tells you he never loses and is ultra successful.  He is either lying or God, and if he is God then he doesn't need to trade.  The books 'Trading in the Zone' and 'The Disciplined Trader' by Mark Douglas however are both excellent books on trading psychology and are mandatory reading for any trader

There are lots and lots of other things I could tell you but time and space is of the essence.  I think I have covered what now in hindsight seems to be the most important things to me as I was trying to learn to trade.  Just be aware that what you are trying to do is join a group of about 5% to 10% of all who try it who actually become successful traders.  It's not easy and it takes special skills.  That's why there are so many brokers.  It can be learned but you have to have a lot of dedication, a strong work ethic, and a true passion for trading.  Last thing is that if it isn't fun for you, forget it immediately.  Life is too short and money is too hard to earn to throw it away on an impossible task that is misery for you.  If that's the case, then do something else.  Those are hard words but it's the truth.  It's wonderfully exhilarating for those who can do it but utterly miserable for those who are not cut out for it.  Just be honest with yourself.   It's to you and your family's benefit and best interest that you do that.