The horse goes in front of the cart
Mistake 2: jumping into the market before having learned the required skills
Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so.
Douglas Adams
‘How much money will I make?’, ‘Will I be a successful and profitable trader by next week?’, ‘How long does all this take?’ As a trader, coach and mentor I have lost count of the amount of times I have been asked these and similar questions. All revolve around the central theme of being able to trade profitably with a minimum level of learning and preparation and the ill-conceived notion that success and profit will flow effortlessly. The questions come from a broad range of intending traders, from successful self-employed business owners, engineers and doctors, to those who have held a government job for 40 years and now somehow believe that they are going to become successful traders overnight.
The industry itself has much to do with creating the illusion that success as a trader is our democratic right, living as we do in a capitalist world. Many trading educators, commentators and supposed ‘gurus’ build their business around encouraging all and sundry to participate in the wonderful world of trading where profits are generated while you sleep or go fishing with your mates. They also paint a picture of trading as an occupation that requires little work or effort, merely a computer and 10 minutes a day to generate wealth beyond the realms of imagination. It’s a hoax! As you will read throughout this book, success in any trading endeavour requires dedication, commitment and lots of hard work. It is not an easy business, but one that requires discipline and a consistent application of a well-researched trading plan, coupled with a complete understanding and acceptance of the range of probabilities associated with any strategy.
The role of reputable market educators is important to the successful development of a profitable trading business. The trick is to seek out the ‘real’ ones. Find the traders with years of experience, not those with the latest whiz-bang indicator with promises of easy returns and early retirement for little or no work. Experienced traders have a realistic rate of profitable return over an extended period of time.
Market educator and seminar organiser David Hunt has been involved with a wide range of reputable market educators for many years. He has been responsible for arranging some of the world’s highprofile traders and educators to teach and train people in Australia. David offers his views on the role of these professionals in educating those who want to become successful traders.
Most traders start out not knowing anything at all. They have no experience in trading. The only thing they have is capital and a dream of making money (easy or otherwise) that has been fuelled by an ad they have read promising them quick money and an easy way to enter the trading world. They may have been good business people or successful professionals but the skills required for successful trading are way different. Good trading requires not adding money to a losing position whereas sometimes in business recapitalisation is needed to ensure survival and success.
The role of market educators is to give traders a look at what is possible in trading for them to see what strategies, methods and rules there are for trading markets. It’s a lower risk opportunity to try before they risk their real money. A trainee pilot is given procedures to follow. A trainee surgeon is given the knowledge and support of previous doctors. Yet trainee traders think they will jump into the market after having read one book or attending one dodgy seminar and make a squillion dollars in about five days.
Good market educators share their knowledge and experience and their rules that they have proven over time that work. In other words, market educators give a structured way of dealing with the great unknown of where the market is going and how to make money from it.
Beginner traders can luck into a 2003 to 2007 bull market with no knowledge and clean up through good luck rather than any particular level of skill. But when the bear market hits they lose all they made and then some. They have to pay the piper sometime. These people will often seek education and help after they have lost large sums of money. More often than not, they have made huge profits during a bull market and then given it all back, plus a chunk of their original capital, when the market conditions change, because they do not know how to limit risk. They have profited off the back of a rising market, but have never bothered to develop the skills necessary to trade through a variety of market conditions.
Good market educators teach you how to limit risk and take positive expectation trades. They give traders a structured way and a realistic process for trading that could take many years and hundreds of thousands of dollars in time, money and trading losses to develop. They are happy to share their methods and processes with others because they know they work and they have nothing to hide.
It is important to learn and understand all aspects of the markets before you start trading. It’s common knowledge that any enterprise is only as good as the foundations on which it is built, and trading is no different. If you take the time to learn and understand the workings of the markets, market conditions, interactions, trading styles and techniques, and market and personal psychology before engaging the markets you will have built a very solid foundation upon which to build your trading business. Too often potential traders jump into the market before they are properly prepared and the results are disastrous.
The market is a magical thing, really. The markets give us the opportunity to make or lose a lot of money and play out all of our psychological issues and games in the blink of an eye or click of a mouse button.
If you have deep-seated personal issues they will come out in trading. Markets are all mass psychology: fear, hope and greed. One minute you can feel like a hero, the next minute a complete loser.
In simple terms, the market transfers money from the hands of the weak to the hands of the strong. If you do not understand the market, you put yourself in a position of weakness. You do not want to be weak in the markets. What you need to learn is a process of analysis and rules to follow that work in the long run across differing market conditions. But not all market conditions—no trading strategy will work in all market conditions. Traders need to learn what market conditions work for their strategies. They need to learn one does not have to be right all the time to be a profitable trader. For example, I was a director of a Turtle Trading Fund by original Turtle Trader, Russell Sands (see chapter 6). The Turtle method is very profitable in the long run. In 2008 the Turtle program made a profit of just under 200 per cent for the full year. Yet it lost about 53 per cent of the time on its trades. This method has only had one losing year out of 25 years.
Teaching the old dogs new tricks
Training and education is a vital part of initially learning about the markets and the actual activity of trading. Ongoing training and skill development is also important. The markets are always changing and new markets and products are continually being added to the range of options open to traders. The rapid expansion of both the contract for difference (CFD) market and the foreign exchange (Forex) market are testimony to this. It is estimated that in excess of $3 trillion is traded daily on the Forex markets, up from under $2 trillion in 2004. This is a 71 per cent surge in daily volume in three years. To participate in these markets and to take advantage of the opportunities they present, education and training is required, even by those who may have been trading other instruments for years.
Each market has it nuances and idiosyncrasies that need to be learned and understood if one is to trade them successfully, so ongoing education is an essential requirement for those who wish to successfully participate in these markets. The temptation to jump into trading before being adequately prepared exists just as much for some experienced traders as it does for those starting out on their trading career. The age-old issues of greed, fear and hope strangle our logical thought processes and convince us that we had better ‘get in quick’ before we miss the next great opportunity that will be a massive winning trade. This thinking usually results in jumping into the markets when ill-prepared and unready for the range of outcomes that the markets can and will throw up. The next emotion is panic as we realise that we have no idea what to do next, and then emotional turmoil and financial loss as the whole thing goes drastically wrong. If we had taken the time to be fully prepared and not risked jumping in too early for fear of missing out, then no doubt the experience would be dramatically different.
The old saying that ‘there will be another bus leaving the station in a few minutes’ can be applied time and again for those wishing to jump into trading before they are adequately prepared. All too often, particularly in a rampaging bull market, underprepared traders are busting to jump into the market to grab a slice of the pie they think they are missing out on. Fuelled by stories in the press — from their mates, work colleagues, or anyone else with an opinion — of the huge profits people are making ‘trading’, they become fearful of missing out or of being left behind in the rush. These people grab onto the latest fad or trading seminar that promises them a slice of the action and away they go.
Fired up on adrenalin and just enough information to be dangerous, they launch headfirst into their trading career. Swept along by the wave of euphoria, they usually experience some success and become complacent at the ‘ease’ of trading. With little (if any) awareness of risk and money management, underprepared traders are struck by the greed mistress and their position sizes and risk profile become misaligned with their abilities. Suddenly, and without warning, the market changes and they are blown out of the water by the speed and severity of this attack on their abilities. Under siege, they panic. With no notes in their instruction manual, they self-destruct and suffer a devastating psychological and financial blow.
In stark contrast with this are those who have learned their skills from an educator who has not only shown them a few entry and exit techniques, but has also stressed money management, position sizing and risk management skill development, and has encouraged them to develop their own individual trading style. These guys are armed with the tools necessary to not only survive, but to perhaps prosper when markets turn. They have learned the importance of stop losses, manageable position sizes and managing the emotions of fear and greed. They understand the concepts of developing a trader’s mindset and thinking in terms of probabilities. They are educated, prepared and know what they will do and how they will do it under a variety of market conditions.
Not all market educators are the same. The industry ranges from the slick salesman with the well-oiled marketing plan of a seminar or system with little substance and a high price tag, to the low-key professional trader who may not have the slickest presentation skills but whose methods and techniques have a solid track record and are well proven in a real-time trading environment.
From my experience, there are four main types of market educators, as described below.
The McDonald’s corporate style school
The McDonald’s corporate style trading education is formulaic education at high prices, usually taught by junior staff who never seem to have the same trades on as their students. Most students start here and have no money left over after paying tuition.
When you talk with their brokers you discover that these students are net losers with the exception of some spectacular, well-publicised winners who are invariably overtrading. You will see lots of flashy ads in papers and on TV for these ‘educators’.
The basic trading methodology will slowly lose money. When the crowd all trades one way then the crowd will be wrong. In fact, professional traders often buy these systems just to do the opposite of the recommended trades. Most of the educators are teaching the same stuff—it’s the market where no-one makes money.
The space cadet secret knowledge school
The space cadet secret knowledge school relies on mystery, secret formulas and magical indicators. In the end, some do not teach you how to trade at all. They just show you how to apply these apparent secrets and charge you an exorbitant fee for the privilege. They are very good marketers and have loud voices.
The ‘I’m rich; you can be too’ school
The ‘I’m rich; you can be too! Just do my course’ school is run by guys giving long and repetitive presentations. They teach you zip about trading but tell you how they are an astronaut or deep-sea diver adventurer. They usually promote options trading because it is leveraged and the returns look more spectacular when compared with margin and outlay. When you talk with the brokers, these students are break-even traders on the whole. They are wonderful at showing you all their past successes and historical trades on hand-picked charts. They show you lots of winning trades and hardly ever display a losing trade.
The individual real trader school
The individual real trader school does not have glossy advertising or a series of promotional media ads. Their stands at trading expos tend to be low-key and lack the glitz and glamour of the types mentioned above. They are traders and authors who actually trade their methods as well as teach. They are prepared to disclose and teach you their methods and also how to think and research the markets and come up with trading ideas for yourself (that is, to become independent). These real traders will openly and honestly discuss winning trades, losing trades, drawdowns, and every other aspect of their trading style and the markets. Their goal is to help you learn and understand the markets and then to apply your own skills to become an independent and successful trader.
The promises of miraculous returns for little or no work are the dreams of the ill-informed and uneducated trader. If a market educator is promising some amazing return from a secret ‘system’ that is only available to a select few at a greatly inflated price, then run for the hills. It will simply not work over the long term. Look for educators who not only teach you their trading style, but from whom you can learn the necessary skills and mindset to develop your own unique trading style that suits you!
Too much pressing the greed button through marketing and overselling the dream is a red flag and should immediately raise your suspicions as to the real beneficiary of you attending the advertised training. Will you benefit from the learning and knowledge gained, or will the ‘guru’ who has never taken a real trade benefit more by taking your cash?
The real guys will often teach and trade at the same time. Actually, trading in front of people is much harder than trading in your own office. This is a sign they believe in what they do—you can also see if they follow their own rules.
In this chapter, David Hunt, founding member and president of the Australian Technical Analysts Association (ATAA), gave his take on getting properly prepared to start trading any market.
David freely admits he had to forget his education as an economist in order to make money trading the markets. His trading career began in foreign exchange in 1986 working for a large Australian listed company. He then worked as a proprietary trader for a large bank before managing a large Australian bond fund. During this time David began teaching other traders both trading skills and money management. He is a founding member and the current president of the Australian Technical Analysts Association. In 1996 David founded the boutique market education firm ADEST (<www.adest.com.au>), bringing many high-profile traders to Australia.
He is a consultant to advanced financial planning firms in asset allocation, market timing and share selection.