I said I would do this, so here goes:
I have worked with thousands of traders. I have been paid to train hundreds of traders.
I have made a lot of money for my employers and lost plenty in my own accounts.
I have been a market maker, stock broker, proprietary trader, firm trader, and private money manager.
Why did I do so poorly in my own account.....?
Purpose of this post: To try and help individuals to successfully trade their own accounts...in other words, the typical ET trader.
The one most common thing I see newer traders doing wrong is over-trading. It is understandable to me that new traders are impatient. They are told to learn from their mistakes. Not to be afraid to lose. Encouraged to trade a lot of small positions in order to more quickly gain experience. They want to speed up the learning process to get to their goal of making money as quickly as possible.
Traders are encouraged in some cases to generate commisions, order flow, ticket charges, desk charges. They feel like they have to trade to get their moneys' worth. Maybe they get a volume discount.
Newer traders read trading books, learn a zillion chart patterns and trading systems. They talk about technical theories, fundamentals, momentum, relative strength. They drool over technology that screens out parameters. They go to chat rooms and bulletin boards. They pay to "learn to trade" at seminars.
Some of these things I did. Most I did not. But invariably, I always made money for other people, and just couldn't do it for myself.
So after too many years of this, I came up with a mental approach that seems so obvious, but nonetheless took me forever to grasp. I had to treat myself as a customer/client. I could not use my intuition, my gut, my hopes and prayers in my own account. I never did for the clients, the employers and investors I had. Just for me. And what did it get me? POOR RESULTS.
So here is my Super Secret....if you are trading your own money, think of it as anyone's but your own. Have a reason for every single trade. Every single move. How would you EXPLAIN what you were doing to your mother if it were her money (as an example..use your own....your wife, child, priest, whatever). Could you explain? Or would you say "it's my job...I'm doing my job...I know what I'm doing"...etc.). The fact of the matter is I always knew that I could be questioned by those whose money I controlled. I knew I needed to have an informed and reasonable response. And I never got into a position I couldn't comfortably justify. But my own money? I didn't need to justify anything to myself. I felt I "knew what I was doing". I had my OPINIONS. I had my long term outlook, while I never used that in regard to my professional trading.
I am going to paraphrase something someone once said to me....We were working together managing money for an asian bank whose owners were very hard to deal with. I hope I can get his point across. I wish I could remember his words.. It was something like this:
"My wife went out one morning wearing gym shorts and a tee shirt over a bathing suit. She was going to meet her friends for breakfast and a day of boating. It was very cold, but it was very early. It was July in Arizona. I said to her, "honey it's freezing...take something warm". She said "no, it will warm up, it's summer."
Well it stayed cold and got colder still during the day. Rain,, wind, everything that "shouldn't have been". Her day on the water was ruined of course. Her car broke down on the freeway. The heat didn't work in the car, and the windows were home in the garage (an old jeep). She sat and froze until she finally got a tow after hours of shivering on the side of the road."
(I guess this was pre-cellphone days).
His point to me was to never assume to know what was going to happen no matter the circumstances. I never saw him make a trade he didn't believe would work. But he never "knew" it would work. He stayed consistent, but he stayed disciplined. If he was wrong, he saw it and changed his position. He believed what could be, but he knew what was.
He, and experience, taught me that opinions are plentiful. Their value is another thing entirely.
Now it is important to have opinions...no doubt....if you don't think something should or will happen, you cannot possibly initiate a trade. But be nimble. Don't hold opinions too long if they turn out to be incorrect.
I work with traders that only fade a big up or down open. They believe this will work more often than not because they know from prior results that this works for them. I know guys that only trade Nasdaq stocks, and others that only trade listed. I know guys that never trade after 10:30 and guys that are done by then. And on, and on.
Why do they do what they do? Because it is their discipline that they stay with what works for them. Do they keep the same style forever? No....traders have to adapt. But it is a slow process in general. So when things work well, you must press. When they don't, you must slow down. Or change. Usually one preceeds the next.
I have talked here before about the 3 most critical aspects of trading:
Discipline alway is on top. Be accountable to yourself. Treat your money as if it was entrusted to you by whomever you most love, respect, fear... whatever works.
Have a reason to make every trade. Be able to verbalize that reason. As importantly, have a reason to exit a trade. You hear "cut your loses and let your winners run"....That is so true. I so often have seen traders get our of good positions because they have achieved their "target price" "target of profit"....I say this is bad thinking. If the trade REMAINS a trade you would put ON at the time you "achieve target", why in the world would you take it off? To me, it is as important to have a reason to get out of a trade as to get in. Anyone can say to themselves they have a reason to exit a losing trade..."cut your losses"..Why then is it so hard for so many to have a real reason to get our of a winner?
It should be, and is, easy. It just takes DISCIPLINE. If you give back X% of your profit; if the market changes, if the group starts to get weak, whatever. You have to have your disciplines and stick to them. Make your own rules, and stay consistant to them.
I hope that all this typing can result in just one positive thought to just one person here. I have gone to so many "brainstorming" meetings in my career. I have listened to a million opinions, statements and arguments. I go though because I KNOW that if I pick up one single constructive thought I will have spent my time wisely. and believe me, they are few and far between. But I can remember single sentences said years ago in long boring meetings. Those senteces have added up to serve me well.
Timing should be easier for new traders to learn. Just be patient and buy or short at the price you pre-determine. Don't chase.
Stock selection...this is a bit tougher. I could write a hundred pages on this issue. But not being so inclined, have standards. Volume, percent of average volume, relative strength, news, whatever you are comfortable with. Know what your quote provider can tell you other than quotes alone. Look for trades, but don't be impulsive. Sometimes not making a trade is a great trade.
Again, I truly hope someone, somewhere, finds one thing of value in what I have said.