RESULT: Traders who persevere “travel through the tunnel” and becomes “risk orientated.” This is when they start to make money because they:
1. Develop a methodology which give them an edge
2. Use an effective Money Management system
3. Develop the discipline to follow their methodology
4. Erase “harmful” personality traits.
This sets out the bare bones and you will note that there are three basic stages. As I often say it is curious that many things come in threes in the markets. Major trends can be sub-divided into three, there are three key trading rules, etc. The three key trading rules in fact equate to the three stages through which traders must pass.
The three stages
The three stages have been labeled “greed orientated,” “fear orientated,” and “risk orientated.” However, these labels are not meant to be too literal, they are merely an attempt to approximate to the three key stages.
Greed orientated
The first stage is characterized by ignorance and the thought that the markets will provide “easy money.” The actual emotion driving the new trader may not be greed, indeed it is often something else. A successful businessman or professional may be seeking a new challenge. Similar individuals may just be a little bored with their lifestyle and want something to spice it up. Others may be compulsive gamblers. One of the first problems facing a new trader is the very motivation to trade. Most people do most things emotionally. The decision as to which car to buy, which holiday to go on, etc. is usually based on emotional criteria. Just think why you own the car you do, why you married (or did not) the person you did (or did not). It is no surprise we come to the market and continue to make emotional decisions. But these will not work in the market because the market is an emotional animal itself and when the emotion is screaming sell, the successful trader is more likely to be buying. If we think about traders who are in the market to relieve boredom it becomes clear that the strongest impulse to trade will come when they are most bored. There is no reason why this emotional point should correspond with a good time to trade the markets. Other traders suffer from self-esteem problems, indeed I think we all do from time to time. If so, an argument with another person can again set the trader up for taking a position, to counterbalance the low self-esteem.
All these problems have to be dealt with before a trader can find success and, in my opinion, the only way in which the trader can “see” himself/herself is by using a fairly mechanical “system” so that he/she knows what he/she should be doing. In this way the trader can begin to see when his/her actions do not correspond to the system and start to question why this should be. It is through this process that we can begin to understand ourselves. I believe that this is a key requirement for trading success.
Because of these and other problems, as outlined above, novice traders lose a sufficient amount of cash to cause pain, many (most?) lose all their cash. The key point is that they become fearful as a result. At the same time they begin to realize the first secret of trading: cut your losses. It is this concept which marks the move to fear orientation. Indeed cutting losses can be seen as a reaction to fear.
Fear orientation
At this point stops are used, but they are generally placed too tight. The trader has realized that trading is not easy and that a lot of hard work is required. Many fall by the wayside around this point. But those who persevere do show the necessary commitment for success. But greater tests may still come and that commitment is not always enough.
Fear orientation is inevitable given the nature of the beast, i.e. the human being. The market is not terrifying, or bad, or difficult. It just is what it is, and it gets on with its own business. It is how we perceive the market and how we act that causes the problems. We must realize that we are responsible for our results, nobody else, least of all the market itself. It is only when we accept responsibility that we can start to win. If our losses are someone else’s fault then we are in effect saying that we have no control. If we have no control how can we win?
This stage can last a long time as we work out our various problems. Fear is not helpful in the markets because scared money never wins. We cut losers too quickly and we take profits too quickly. Our trading is characterized by nervous, over quick, action.
Risk orientation
To become risk orientated we must make progress on all fronts. Knowing ourselves, changing as need be, understanding the trading process better, adjusting our trading methodology to suit ourselves, learning to relax when trading; these are a few of the necessary requirements. Most people should immediately at least halve their trading size and that can bring immediate relief/relaxation.
Risk orientation gets its name because you need to understand risk in order to win. Trading is a risk business, when you become risk orientated your orientation is right for the market.
The key trading secret at this point is letting profits run. It is at this point that you may start to make consistent profits in the market. Before you reach that stage you should never trade more than the minimum size, i.e. one contract. Why pay more in tuition fees than you need?
Once risk orientated you may learn the final trading secret, trade selectivity. Once you have that down pat it can all become less exciting. I make money consistently but I still find myself occasionally taking too many trades. To master trade selectivity you have to become an expert in your chosen approach. The key aspect of your approach is that you filter out a vast amount of market information and just focus on those factors which you need to know. It is a lot easier becoming expert in a narrow field than a wide one. The various sources of market information are so vast that it is not possible to take it all in. Let alone become an expert in it. You must decide what information you want, design your approach and then use it. Become an expert and you will find that you become intuitive, that is when you can select only the best trading positions, the low risk ones. Then it will all go the right way.
The 55 steps (a personal journey to success)
(A simplified summary of the key steps taken by John Piper to get where he is today.)
1. We are intrigued by the market and start to do some preliminary reading and research.
2. We buy a book or two and perhaps some newsletters.
3. We find something we quite like and start doing some research using this particular technique.
4. We dabble a bit in the market, trading every now and then, mainly losing money, but not much, and having the occasional winner.
5. We generally forget about the losers and congratulate ourselves on our winners. Convincing ourselves that once we learn the techniques better there will be fewer of the former and more, lots more, of the latter.
6. We keep manual charts, which may become quite large physically, and maybe plot a few indicators manually (this was before computers became quite so available).
7. We spot an approach to the market we think cannot fail to win!
8. We start to trade actively.
9. The results make it clear that it is not as easy as appeared to be the case. There were a few key points we failed to fully appreciate.
10. We continue to trade. Results are fairly indifferent (to bad) but there are enough profits to keep the interest up.
11. We continue to expect great results.
12. Trading volume increases and the amount of money in the market grows.
13.