At some point I nearly quit trading, or whatever that I was doing and thought it was trading. I had a strategy, by then I had already read Trade Like a Stock Market Wizard and Trading in the Zone. In theory I was already in the path of consistent profitability but I was still not profitable.
Not trusting the System
This could be not understanding the System, but I will stick to not trusting the System despite proven results that it works. Systems, set of rules, work in certain markets, they are designed for certain markets and will not work in all markets. A Systematic Trend Following system will only work in a trending market, in a range bound market you will die by multiple cuts as you will be taking a series of stops. If you trade support and resistance levels you need a range bound market. So, the lack of trust often comes from not understanding the system and when it works. It is important to understand any system before you use it. I had a system, the JSE was in a downtrend, I could not get a lot of bullish setup, despite the fact that the resources were in a bull market (a story of another day). I was tempted to ditch it.
Mindset
Trading in the Zone does a great job in improving Traders' mindset. Granted, it is the only book on mindset I have read so far, I believe there are many other great books out there. If you do not trust the system and fail to follow it, you will make tons of mistakes some of which will be large losses. Large losses are not just detrimental to your capital but they wreck your self-confidence as well. Without self-confidence you are as good as dead. That self-confidence will not fall from the sky, it is derived from your trading data; your win rate, average wins/losses, and large wins/losses. If your system has a positive expectancy, based on your data, you then have nothing to worry about, you know that with each trade you are closer to your next big win. This will ease your mind and, hopefully, build trust on your system.
Getting Back on my Feet
Now that you have an idea on what are some of the key ingredients to consistent profitability, let us dive into the crux of the matter.
As I said, I was on the verge of giving up. I had multiple trading accounts, trading multiple products including leveraged contracts for derivatives!
One of the main challenges was not understanding leveraged CFDs. I could trade them based on technical analysis, however, I had not wrapped my mind around the technicalities of CFDs. The broker I was using kept on giving me weird prices, prices that were outside the day's trading range, and when I inquired it there were some confusing explanations. I learnt late that I was trading over-the-counter (OTC) products that had not much relationship with the actual market, the broker can actually give you whatever price they want. A solution to this is to trade direct access market (DMA) CFDs. The brokers who offer DMA CFDs usually have high commissions, compared to the OTC brokers who do not charge commissions but whack you with other fees. There is no free lunch. In addition to the unfair prices, I was also getting whacked by interest! I looked at the CFD account versus the non-leveraged account I have with EasyEquities. It dawned on me that I probably need to move away from CFD trading. I did, for a while.
A good friend was doing well in the forex market. He uses Elliot Wave Theory; I was impressed with his results and I wanted to ask him to share his signals, he had already indicated that he does not mind doing so. Just before I asked him, I asked myself if I would ever be good at trading once I rely on his signals? I wanted to give it one last shot before I ask him.
I already had a plan, I just had to stick to it, and find the right market for it. I continued to trade stocks using EasyEquities as there was not much challenge there, just inconsistency. I went back to CFDs, but this time I trade only one instrument, the S&P500 futures. I had to stick to sound risk management; buy when the conditions are right, and sell when the market is bearish. A month later I was happy with the results, it was a bull market so making money was easy and I only traded one direction. This exercise helped me appreciate the system, it improved my risk management, and helped me with trading mindset. I now knew that it is possible to make money from the market.
Also, I was working hard to just break even after a minus 20% drawdown. The JSE was changing, there were some great setups from the retail, banks, and property sectors. I had also gotten over the thinking that made me miss the resources bull run. Basically, I was now at the right place, at a right time, and with the right state of mind. The profits from SPY and brent crude (I broke the rules and started trading other futures markets, they all met the systems rules), and ending 2020 with a marginal gain on the EasyEquities portfolio built my confidence as a Trader. Since then I never doubted myself again, I now know that I am capable. I will forever be grateful for the role that good friend played indirectly in my life; his willingness to help and me challenging myself to give it just one last shot really helped change my life as Trader.
I now try to trade one or two instruments when I am testing a new system, this is also useful if you have limited capital. I also now want few large positions that make an impact in my portfolio. I do not worry much about diversification, remember according to Warren Buffet diversification is for the know nothing investor. If you are obsessed with diversification, just trade one or two ETFs, they are already diversified.
Take home message
1. Understand the system; know when it works and when it does not.
2. Understand the market and the instruments you are trading.
3. Never stop learning. Get support, be part of a trading circle, befriend other Traders and have good relationship with them. You will have different approaches, stick to your plan but be open to other ideas.
4. Do not quit. The end is sweet, it is worth the effort.
If you have not done so, please subscribe to my YouTube Channel.
5. Emphasize risk management.
ReplyDeleteTrue. Very important to understand the instruments one wishes to invest in or trade. Similarly, very important to choose these brokers wisely and read their fees structures carefully and understand what your investments/trades will cost, else you'll get ripped off with ghost brokerage fees.
I had "quit" trading for a good 3 years after I grew impatient of the back-and-forth wins and losses that seemed to take me nowhere.
I watched from the sidelines for that period refining my strategy.
I'm back at it this year and it's okay-ish, that is, wins outweigh losses because I manage my risk better this time around (predicting the market is not easy, unless you're like certain banks in South Africa that can manipulate the currency).