If you want to survive in the markets trading, and most don’t, a few concepts must be understood and dealt with internally. A quick internet search shows that over 85% of traders lose money every year.
So, it’s not just doctors that suck at trading, the vast majority of traders do, also. This should be a clear indicator of a torturous profession. Nonetheless, countless newcomers enter the ring annually, looking for the fountain of wealth.
If you are smart and level-headed, a few realizations will slap you in the face early on in trading:
- I’m losing money.
- I don’t know what I’m doing.
- I’m about to lose my pants.
- My professional training as a doctor/lawyer, etc., isn’t helping me.
The last one can be the hardest to take.
The markets are an entirely different animal. No previous training will provide an answer. In fact, your previous training can be a detriment.
While tenacity and pushing through may have helped you get through your professional training, perseverance in a losing trade is futile and will lead to more losses. As Kenny Rogers put it, “… know when to walk away … and know when to run.”
Many professionals fail repeatedly in trading. Like beating your head up against a wall, your repeated trades erode your accounts. Just as true health comes from within, an internal checkup from the neck up is the solution. Self-examination is the answer.
Like managing a patient’s vitals, a review of your own trading wins — and more importantly losses — is the answer.
Nothing is more glaring over time as a traders wins and losses in chart format. Many trading platforms provide your account details but are often difficult to review for what you need to see to alter course. Seeing, for example, the wins and losses for all of your option trading strategies in percentages and absolute numbers will quickly put things in perspective. Below is a chart of my last 347 option trades in one account.
Now you can quickly see what is happening. You can clearly see where you are profiting, and what is cutting into your profits.
Once you know what type of trades are not working, you can look at the root causes of what is making you enter these trades. It is likely a loss of objective perspective of your equity and where it is likely headed … a common problem.
I’ve read dozens of books from respected authorities on trading. Most often, a period of learning is needed to understand how markets work. Some advocate at least a year, others 5-10 years. Most reveal you need to pay the tuition of trading losses before you can graduate to consistently bringing home the bacon.
The time it takes to understand the patterns of the market can be significantly reduced by specific training, as revealed in the book PEAK, Secrets of the new science of expertise.
The authors studied what made a few elite doctors great diagnosticians. The answer was their ability to take several different symptoms and signs and integrate them into a pattern for diagnosis. Rather than seeing each component separately, they meshed all the indicators into one for an accurate diagnosis and subsequent treatment at the cause of the problem. Trading is no different.
PEAK also revealed that because you are great at pattern recognition in doctoring, chess, music, or whatever, that expertise does not transfer automatically to another endeavor. In trading, your signs and symptoms are price, volume, price to earnings ratios, relative strength indicators, stochastics, or any of the other three main types of indicators. All must be meshed into a pattern for your equity of choice to profit and master trading.
Combining pattern recognition with being in the flow of the markets leads to consistent profits. And profits is what trading is all about.
Enuf said.