Dear All,
I wrote this article few years back for some of my friends who were Trading FOREX, you will be able to relate it better if you have traded FOREX / CFDs at some stage in life.
Let me introduce myself first, I am a successful trader for last 28 years. During this time I have worked as a retail trader, investment banker, venture capitalist, market maker in an emerging market and managed a private equity fund. During this entire period I still continued as a trader and have seen the markets from both retail and institutional perspective. Had the opportunity to work with some of the biggest brains on Wall Street and at the same had a chance to visit 107 countries so far and interact with traders at various levels including High Net Worth individuals and institutional money managers. Now i have moved on & running a successful Technology business, focusing on STARTUP Investing & working on multiple Startups.
Based on my experience as a Trader, I can safely conclude about one big factor which differentiate a successful trader from a failed trader and that is Psychology. The Psychology of a successful trader is entirely different than that of a failed trader and here I will try to describe some of the psychological traits of both type of traders. I am writing it more on the Q&A style in order for people to understand it better.
As per the latest statistics, 67% of all retail traders end up wiping out their account within the first 3 months of their trading. Other 20% last for another 3 months. Out of the remaining 13% only 3% survive for longer than 3 years.
Why does this happen and what should be done to become a member of 3% club ?
Answers can vary from person to person but basics remains the same for everybody and I will try to to discuss some of them here.
- A successful trader who has survived more than 3 years in the market is focused on "When not to trade" than "when to trade". Compared to that a losing retail trader is practically trading every possible time in the market. This is a key difference between success and failure for retail traders.
While the nature of the market is 24/5 so most retail traders feels and thinks it's their obligation to constantly follow the market as soon as they wake up and until the time they really have to sleep.
Compared to that a successful trader defines certain pockets of the markets during certain times of the day and limit his/her trading for that period and ignores all other times irrespective of where the market is going.
- A successful trader always works with an x% profit targets for the day/week/month and tries to achieve them and benchmarks the performance against his/her own targets. He/She may under perform or outperform at times but they take it into their stride and move onto the next day. As long as they are within 70%-130% of their band they are happy.
Most successful traders suspend their trading for the month once target is achieved.
Compared to that an average retail trader doesn't have his/her profit targets well defined. For him/her it's always "More the Better" concept and therefore they never stop. So they always behave as if they are in a mission to conquer and they must not stop at any amount of profit they make.
It is this type of traders who forms the majority of retail traders. Since they don't have targets they don't have clarity as to when to stop and when not to trade.
They also almost never withdraw their profits. They believe in compounding returns based on a spreadsheet which tells them 1000 can become 1 million and that it's very easy to do it. And such traders basically with luck also sometime reach there but since they never intend to withdraw their profits and only keep compounding them to make a fortune, it's just a matter of one or two bad days when they end up losing most of it.
Compared to this, successful traders always withdraw their profits. As their definition of profit is not only numbers on the screen but also what's actually withdrawn and spent. Numbers on the screen doesn't matter if they don't reflect in your bank account on a time to time basis.
- so what's the one single biggest factor to differentiate successful traders from failed retail traders ?
Well again there can be plenty of factors but one of the single biggest factor is "Over Trading".
The day a retail trader learns :
"When to not trade" and "When to Stop"
He/She can start a journey towards 3% successful traders club.
- what about Risk Management ?
A successful trader almost always knows his risk per trade and almost always sticks to it. He/She never alters / modify a SL based on a changed conviction.
Most of them won't double down a trade unless if the level is juicy enough for them to reconsider a reentry. If they renter it will be more because of the merit of the level and not because they must take a revenge with the markets.
Compared to that a retail trader will most certainly double down on a losing bet and some of them keep adding to their positions until it comes to a point of no return.
So risk management is key, but the same is interlinked with what you are trying to achieve. If you have a X% profit target than based on that you can decide your risk per trade and reward per trade. But since most retail traders don't really have a Fixed Profit Target for day/week/month, this number becomes irrelevant and that's where they end up overshooting their Risk Limits.
- What about which pairs to trade and which instruments to trade ?
Interesting question. Simple question but has complex answers.
First of all 24/5 nature of this business brings a unique dimension. Unlike equity markets which are mostly open during certain times of the day and some of them close for certain period of the day, FX/Commodities/CFD markets are always open except for the weekends. This provides an opportunity for traders all across the worlds who live in different time zones to trade these markets anytime of the day.
But the same opportunity can also be a big challenge if you don't focus on what's suitable for you to trade in your timezone.
As a an Asian trader you can't trade EURUSD or USDCAD before you go to sleep as you just don't know what's gonna happen after you sleep and similarly as a European Trader you are better off not keeping open positions in Asian pairs when you go to sleep.
So the answer to what pairs to trade and during which time of the day depends entirely on :
- where are you based ?
- what's your working hours in the markets ?
- are you a part time or full timer ?
- what's your profit targets ?
And therefore I said this earlier, one size doesn't fit all in FX/Commodities/CFD markets. Each of us who is reading this lives in different timezone, works in different market conditions and has different profit targets and risk appetite. I will be happy to help anyone who wants to learn how to design a trading plan based on their timezone, working hours, profit targets and risk appetite.
One more interesting point to note is the size of your account. I have noticed on various internet based chat forums as well as social signal sites about fancy profit % being achieved on a weekly or monthly basis. Most of this fancy profit accounts trade anywhere from 50 dollars to 5000 dollars type of accounts. Some of them are micro cent accounts.
Now the psychology of someone who is betting 50-100-500 dollars can't be compared with someone who has 50-100,000 in the game or someone who is dealing multi million dollar accounts. The worst case scenario for a 50-100 dollars trader is 50-100 dollars loss and therefore he can afford to bet recklessly and with some luck make 50-500% profits per month.
But someone with a 100K or multi million dollars account can't trade the same way and therefore, size of your account also matters when it comes to defining :
- what instruments to trade
- what times to trade in your timezone
So to conclude this topic, a successful trader will almost always focus on certain KEY instruments and focus entirely on trading them versus trading randomly anything and everything. Most successful traders are Specialist in minimum 1 and maximum 3-5 instruments and always stick to that.
Most successful traders will also trade only during certain times of the day and won't bother to look at the markets other than those times.
Most successful traders will stop trading when they are done with their targets and most of them will withdraw portion their profits regularly.
- What about the psychology of a full time trader versus part time trader ?
That's a very important question. Again I see plenty of people commenting on social forums on different instruments and their levels without ever mentioning if that's an Intra-day, Intra-week or medium term opportunity. And there is no differentiation between an Intra day full time trader versus short to medium term trader (I won't call them trader instead I will use the word Investor)
Whatever levels an Intra day retail trader applies to his/her strategy may or may not be relevant for a part time trader/investor. The psychology of the part time investor should be more like a Value/Bargain Stock Picker. His/her job should be to identify opportunities with medium term horizon but with larger profit potential. He/she work with wider stop losses and accumulation strategy on dips/bounce.
For a medium term investor this makes sense but the same may or may not work for an Intra day trader. And therefore it's very important to understand your situation and your ability devote time for the markets.
- What's the best way to learn how to trade markets and be successful ?
There is a saying "Practice makes the men perfect!!!" and probably that's most relevant for financial markets. Nothing works better than learning from your own experience. But before you actually gain that experience, you will still need some help. Some people ask me if they can read this book or that book and watch this video or that video my answer is yes you can read them and watch them as that will help you to gain some extra knowledge on the subject.
But the best way to learn the markets is to find a Mentor who is successful in financial markets. With some efforts you can always come across traders who are there for more than 5 years. It is these traders who can mentor you and tell you, how they survived Lehman Crisis or Flash Crash or Black Friday and still managed to be in green.
Nothing works better than first hand knowledge of how to trade, how to win and how to keep your profits. So try to find a mentor for you and learn some of the tricks of successful traders.
- what about training programs ?
Yes nothing wrong in joining them and nothing wrong in learning new things. One can always learn new things. But be selective in spending your hard earned money on them as there are thousands of them trying to offer their "knowledge" for your top dollars.
Next time when you join a training program and pay for it, politely ask them to share their performance track record. If they are for real, they will have a good track record to show in their account. But if they can't apply their own teachings in their own account than I doubt you will be able to do that either.
- what about trading strategies and automated expert advisors and signal providers ? Should we trust them ?
Well YES and NO.
Will tell you why. All the questions which I raised above are equally relevant for someone who is selling an automated system or trading signals.
Based on my prior experience I can safely conclude no 100% fully automated plug and play expert advisor makes money forever. I have found none so far. Some make money for sometime but none works forever. The reason being, market is ever changing and the behaviour of the market keeps changing rapidly so what works in say January to June may not work from July to September. And therefore relying on them for your earnings is never a great idea.
However having said that, automated experts do help and the best way to exploit them is by designing your own strategies and your own system which you will control like how a pilot controls a plane. While they will be on auto pilot, you will still be in command and control.
For all practical purpose this will be a semi automated system. However this is relevant only for certain time zones and not relevant for all. This is more like an add on for some people but not an absolute must.
For signal providers, my opinion is mixed and I don't trust a stranger with big capital, but you can test anyone of your choice with small capital and only after a reasonable forward trading history is build, you should deploy larger capital.
- What if I don't succeed as a retail trader but still want to make money from the markets ?
Well than the best way to participate in the markets is by investing through :
hedge fund (there are some who allows smaller capital too)
ETF
Mutual Funds
Money Managers
Signal Providers
Managed Accounts
But in this case you still need to do your due diligence on their performance and history and start small and add more once you see some forward performance. I can write a detailed chapter on how to find them and choose them but probably will do that sometimes later.
Most successful traders trade their own capital and almost don't deploy their capital with others. And they always have their own trading strategy/plan for certain instruments to trade during certain times of the day and they stop when they are done with their targets.
So to summarise, ask yourself the following questions :
Why I want to trade ?
to supplement my existing income
I will be depending on trading income for my livelihood
I have enough money to survive but I want to trade for hobby and fun as I believe it gives me a kick
I want to make millions based on my spreadsheets which tells me I can turn a thousand into millions in no time
I want to add a reasonable income which I can withdraw consistently
I really don't know why I want to trade. I am trading just for the sake of it
Once you know why you are trading, ask yourself this question ?
how much money I want to make per day/week/month ?
and to make that money how much money I am willing invest ?
So these questions will define your Profit Targets. Now the most important thing over here is to be as realistic as you can. If you set your profit targets to unrealistic levels than they are bound to fail. What's reasonable and what's not again depends on where you are based, what time you are trading and how much time do you have for the markets and therefore it must be customised based on your situation.
So once you do this exercise you will know why you are trading and how much you want out of it. Now ask yourself :
how much time I can devote ?
what instrument should I trade? I want to become a specialist in A, B and C
out of the time that I have available which time I should trade and when I should not trade and why ?
Once you know this, ask yourself :
- What % of my profit I want to reinvest for compounding returns and what % of profits I want to withdraw every month
Based on your profit targets, and the time available for you to trade the markets define yourself as either an "Intra Day Trader" or "short term investor" or "medium-long term investor".
Rules for the game are different for all so this is absolutely important for you to know.
And once you know this, decide on %Risk per trade as an Intra day trader or %Risk for sequence of trade that you will open as a Short-Medium Investor.
This article is relevant for only FX/Commodities/CFD traders and may or may not work for Stock Traders / Crypto Traders.
If you want me to write about Crypto, do send me a message on Twitter
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And yes finally i can tell you, i am a man & you can call me SEAN
Enjoy Trading & Be safe