Steps that bring trading success

Discussion in 'Trading' started by Joe Ross, May 31, 2010.

  1. I guess from time to time I would say this somewhat differently, but what comes to mind is as follows:

    Here are five steps to becoming a successful trader:

    1. Focus on trading vehicles, strategies, and time horizons which suit your personality. You need to be comfortable.

    2. Identify non-random price behaviour, wherever you can find it.

    3. Absolutely convince yourself that what you have found is statistically valid.

    4. Set up trading rules.

    5. Follow the rules, but don’t be afraid to break them if they don’t work.

    In a nutshell, it all comes down to:

    a. Do your own thing (independence);

    b. And do the right thing (discipline).
  2. Finding non-random price behavior is trivial. Here, I'll give it to you: there is correlation between the 15sec price bars in CL (next bar is the same direction as the last bar) when volume is above a certain threashold.

    Now you've found it. But not one single person who read that is any closer to being a profitable trader. Because the issue isn't finding a price inefficiency. It's making use of it once you found it.

    The thread where someone posted the S&P list/delist strategy was a perfect example of this phenomenon.
  3. What it takes to be a successful trader,

    First and Foremost you have to be willing to work.
    I know this is not what you want to hear but you have to do something besides click a mouse and have your fortune come to you. You have to take the time and make the effort.

    Trading should be treated as a business. If you treat it like a Casino then why are you expecting to win?

    If I were a friend and came to you asking you to invest in my business what would you want to know before you let me have any money?

    Are you going to just ask how much can I make? Or will you also ask the following?

    When can I get my money back? What are my chances of losing all my money? How does the business work? How will you make money? Are there any guarantees? What do you know about this business? Have you proven that you can make money? What can possibly go wrong?

    How many people open a trading account without asking themselves these questions? Would it help if I had a business plan answering all these questions?

    You have to have a Plan.

    A Plan won’t guarantee success.
    It will tell you how you plan to make money, what procedures you will follow.
    It spells out when to get in and when to get out.
    It explains how you will control risk
    It is a list of things you will do in response to events you cannot control.
    It allow you to control the only thing you have control over which is yourself

    You have to learn about the market.

    What do you know about the market you are going to trade? Who makes money and at whose expense? Who controls it? Who is the so-called smart money? How do they make their money? How do you plan to take money out of this market? Whose money are you going to take? This should be in your Plan.

    You have to learn how to trade.

    How are you going to learn to trade? I would suggest by trading. How did you learn all the skills you possess today such as riding a bike, driving a car, or playing golf? You learn best by doing, and the more you do the better you get.
    In today’s trading environment you have demo accounts. A good place to learn. I hear the screaming that trading demo and real money are eons apart. Use the demo to see if you can follow your rules. It’s also a good way to test strategies before you commit real money to them. Trade the same capital that you plan to start with. Don’t trade a million dollar demo account if you’re planning on starting with $10,000. Keep track of what works and what doesn’t. It’s a good way to build confidence. Demo trade until you are convinced your strategies have an edge. This should be in your Plan.

    You have to learn to keep records:

    How will you keep track of your trades? How will you measure you success rate? How do you determine if you had a good or bad trade? A good trade can lose money. Which strategy works best? How often will you review your trades and what are you looking for? This should be in your Plan.

    You have to learn about money management.

    How much money will you start with? How much are you willing to put at risk on one trade? How much do you hope to make on one trade? How much do you have to lose before you quit for the day, the week, the month, or permanently? How and when will you add money to or take money out of the account. Is there a maximum amount I will allocate to any one position? This should be in your

    You have to account for the unexpected.

    How will you handle a market meltdown, a terrorist attack, or any other unforeseen event that might affect the market? What if your power goes off, your computer freezes up, or your broker goes off line? Do you have back-ups? Are important phone #s on you speed dial? Will your speed dial work if the power is off? This should be in your Plan.

    You have to learn about yourself.

    Are you driven by Fear or Greed? What emotions will influence your trading? Can you accept a small loss or is the fear of missing a move so great that you’ll let it go and see what happens. Will you sell at the target or will you see if it will go a little higher. Is it easy to justify taking a quick small profit rather than letting the trade move to the planned target or get stopped out. Do you take it personally when you are wrong? You have to know these things before you ever enter a trade. You also have to know how you are going to deal with them. This should be in your Plan.

    The plan should have specific goals with detailed actions required to accomplish these goals by a specific date. If you are not there by that time you have to determine why and adjust the plan.

    The Plan doesn’t guarantee success. The odds of succeeding are way better with one than without one. A specific and detailed trading plan:
    Reduces your chances of making bad trades.
    Guides the decision making process when money is on the line
    Takes emotion out of the equation.
    Allows you to evaluate your trades
    Encourages discipline
    Reduces stress.

    When your trading is not going well you’ll be able to blame two things.
    The plan is not working or you are not following the plan. You can fix both.

    I don’t understand the resistance to having a trading plan. I can only think of two reasons:

    1) It’s a lot of work. I mentioned work at the beginning. I don’t think you’ll find success without doing a little.
    2) By having a plan the responsibility switches to you. You are now accountable for your actions. You can’t blame the market or any of its participants for your decisions.

    It does take a lot of time and it does make you accountable and it just might move you into that elusive and exclusive 5 to 10 percent of traders that call themselves successful.
  4. No.Heat


    Many steps are required.

    In no particular order,

    You need an edge, rock solid discipline, smart money management, adequate trading environment, dominion of your trading platform, redundancy tools, fairly good health and last but not least capital.

    The business is not easy but thankfully due to the newcomers that think it is, us veterans get to place food on our family tables.
  5. Interesting, have you seen this correlation in other instruments or just CL?
  6. I would expect to see a similar phenomenon in nearly every heavily traded instrument except possibly ES, the bond futures, and FX. I wouldn't even be surprised if you found it there.

    The exact time frame and conditions needed to create the correlation will probably vary from market to market. But in any market that moves, if I zoom in, I expect to see it.
  7. This reminds me of a poster I used to enjoy reading FB123 who said he would trade CL using a 20sec chart and watch volume. I have watched the charts at those time frames for awhile with volume and was never able to see anything I had a chance at trading :)
  8. Excellent write up. You asked some insightful trading questions.

  9. DrEvil


    Your execution costs need to be as close as possible to insignificant.
  10. Piffle


    The problem is that many non-random behaviors that you can build a positive expectancy system out of will not be "comfortable" to trade. My main strategy is like this. It requires a few things that many traders would be uncomfortable with. But it has a 2.1 PF, 1.9 Sharpe, a max 13% drawdown over the last few years, has only had 1 unprofitable month over the last few years (barely), and trades 4-5 times a week. So there is no way in hell I am not trading it, even if the stop is bigger than the profit target and I have to potentially hold a pile of ES contracts overnight (neither of which I am crazy about).

    I'm also going to have to completely disagree with number 5. The rules are there for a reason. If your rules don't work, then you need to STOP TRADING and find new rules, not break the existing rules and keep on using them. Also, we need to be clear on what it means when rules "work". Work means they have a positive expectation, not that they make every trade profitable. There is no set of rules that makes every trade profitable. One of the biggest problems losing (heck and even some winning) traders have is that they don't embrace expectation and how it works and focus too much on the current trade, IMO.

    I do agree with your nutshell summary, but the devil is, of course, in the details.
    #10     Jun 1, 2010