How I will teach my kids to trade

[Dollar_McGavin]

Hi everyone,

I was inspired to write this up after reading @Clear_Trades excellent post, linked here. Highly recommend everybody read it as there are so many lessons there for traders of all levels.

Experience has taught me that 90% of the problems that inexperienced traders run into is because they never developed real trading skills. After years of losing, the pieces finally fell into place for me after just a few practice sessions and was the biggest “aha” moment of my trading career. So, if my kids wanted to learn trading, this is how I would teach them:

1. Understand profitable trading = profits > losses = cut losers + let profits run = minimize losses + maximize gains = managing losing positions aggressively to minimize losses + managing winning positions slowly to maximize gains = trading skills

2. Practice and develop trading skills (= managing losing / winning positions): Manual back testing with random coin flip entries with 1:1 R:R, use SL and TP. This idea here is to take away entry decisions and focus purely on managing positions in a breakeven strategy. Also if a trader can be profitable with random entries using a breakeven strategy, they can be profitable with any strategy.

   • Start by learning to cut losing positions before price hits the SL. Ignore winners, let them hit the TP. Experiment using price action, S/R levels, indicators or whatever you like. The goal is to be able to read the charts, quickly recognize when the market moves against you and take decisive action.
   • Experiment with different ways of cutting losses, managing losing positions and managing the downside. The better you get at this the more profitable you’ll be. E.g. scaling out / reducing position size, taking positions in opposite direction in correlated pairs, using options, starting with small initial positions and DCA etc.
   • Once you can manage the downside in your sleep, continue to practice without the TP to learn how to let profits run and grow. Experiment with position management, scaling in, scaling out, pyramiding, taking partial profits at a swing high and reloading it on a dip etc.
   • IMO, these are real trading skills that will determine profitability in this business. I still practice these in paper trading accounts to experiment and test new ideas.

3. Systems and strategies: If you’ve practiced everything in step 2 enough to be consistently profitable with random entries then you will have already developed a preference for certain tools and indicators and choosing a suitable system or developing your own system will be quite easy. However I think most will go on to develop their very own systems and processes from the experience they gained in step 2.

Both losing traders and experienced traders make mistakes, especially when experimenting with different ideas that can result in losing trades. However the key difference is that experienced traders aren’t afraid to experiment or make mistakes because they have the skills to get themselves out with minimum or no damage. This is the basis of confidence in trading.

Hopefully you picked up and understood why most traders lose: they spend all their time, energy and focus jumping straight to trying to find the holy grail system / strategy (step 3). And when they get into trouble with losing trades (as every trader eventually does), they aren’t able to get themselves out without big losses.

[Clear_Trades]

Very nice post. I booked marked it and will reread it. So many great points. And I whole heartedly agree managing losses is so important.

[Mondeoman]

@Dollar_McGavin

So, if my kids wanted to learn trading, this is how I would teach them:

Hi.
An interesting post. For most people, we are able to exercise two controls in our lives. One is income and the other is costs. On a daily basis, I seek examples of how my sons should approach opportunities for the latter - cost control. One of them gets it, and exercises it - the other has not yet understood the value of waiting, but nevertheless thinks about choice before taking a cost decision.

Crazy but relevant examples include buying a “meal deal” even if you only want the sandwich. In most high street stores in the UK, the main component (sandwich, prepared salad, wrap) is £3.00 but when you include a drink and a snack, it is £3.50. So I ask them always to buy a meal deal whether or not they want the snack and the drink. Given that you are going to eat the sandwich anyway, it is a great opportunity to buy retail food at a nominal discount of 50% or more.

When looking at less frequent and more costly items I always ask them to work backwards from retail price. On a personal basis, depending on what the item is, I target spending 50% of retail for a new item, and between 10% and 20% of retail price if the item is second hand. I forgot to take my waterproof coat on holiday last week. Borrowed a plastic poncho from my travelling sister for one evening, went to a local charity shop and bought a good quality American wax-coated coat for £11 whose retail value is likely £90. It is so good I am adding it to the “coat” collection and will donate the least useful coat it replaced to a local charity shop.

This is a way of life for me. And I carry that way of life into my short and long term trading pursuit as well. Gold, silver, property do not require my attention more than once every three months so I do not treat them as “trading” pursuits, but they really are trading - only on a much longer timescale than currency trading, crypto trading and other (goods) trading I occasionally enter into.

Since the long term prospect of each market is by far the greatest reward for the effort assigned, as a family, we are now on a five year plan to decide what we do with our property holdings. Are my sons going to continue the long term buy to let property portfolio and try to keep their personal costs in life within the boundaries of the net income it provides, or will we sell assets over the next 20 years and accept the potential reduction in wealth by continuing to be 100% self employed with the attendant business risk? Nice problem to have, but if I had not spent the last 30 years with the same mentality, we would never be in a position of choice today.

[Dollar_McGavin]

Hi @TYGMedia,

With all respect, you either didn’t read what I wrote, misunderstood the main points or I suck at writing.

Based on your reply, you misunderstood what I meant by real trading skills. As I wrote in the OP:

“managing losing positions aggressively to minimize losses + managing winning positions slowly to maximize gains = trading skills”

You’re referring to a different set of skills that have very little to do with profitable trading.

@TYGMedia

Hi @Dollar_McGavin, I’m a little bit against this statement. I had tried it (random / flipping coin) through EA.

This phrase above , an EA does not apply trading skills. Programming an EA requires programming skills not trading skills. This is no different than a manual trader following a mechanical system. Setting a 1R SL defines an acceptable loss, it does not in any way minimize the loss for any specific trade because a trader with real skills would be able to recognize a losing trade (from practice and experience) very quickly and exit the trade even before it hits the SL (minimize loss).

@TYGMedia

There was a mentor in my country claim it. The fact is, you can do it when market is calm. So the chance of long and short can be said 50:50.

Ok, the coin flip entry with a 1:1 R:R is not supposed to be a trading system, it’s an exercise for practicing. The point was to create an exercise for a trader to practice and develop trading skills with a goal of turning a breakeven system into a profitable system.

@TYGMedia

When market is rally, on one direction, your balance will go straight to zero

Yes, creating losing trades is exactly the point!
The exercise is suppose to create a lot of losing trades so my kids can learn to manage their way out of them (=minimize losses in step 2a).

And as I wrote, if a trader develops the trading skills to be profitable with system that has lots and lots of losing trades then he / she can be profitable with any system.

@TYGMedia

I am actually teaching my son to trade. As a software engineer, my approach will always rely on a procedure, condition and exact number.

No offense, but these are not trading skills, this is your brain applying software engineering skills into trading, I did something similar (which doesn’t work otherwise all software engineers would be profitable traders ).

My experience has been that academics, economists, financial professionals, engineers, lawyers, doctors or any other profession that requires years of academic study actually make the worst traders. Their brains are wired for them to succeed in their respective fields but are wired backwards for profitable trading in financial markets.

I recommend to all traders to read the book “When genius failed” about the smartest academics and mathematicians in finance who nearly blew the global financial system with their hedge fund. They also thought the knew trading when in reality they were arbitraging bond yield differentials applying zero trading skills (= they didn’t focus on minimizing losses), instead they leveraged up with their version of EAs to make more profits.

I also know this because I have a Master of Science in Electrical Engineering and did a lot of software development work myself. My engineering brain blocked me for years. I developed 100s of indicators and EAs using all the “trading knowledge” I had gathered from 100s of books, online trading systems. It would for a while and maybe traded breakeven but there wasn’t any real money.

It took me years before it finally clicked that trading is not about precision, procedure, logical conditions, indicators, exact numbers or being right about a trade. It’s starts by adopting a laser-focused mentality on being less wrong and then develops from there as I outlined in the OP.

@TYGMedia

Since everything is so technical, he could follow it nicely.

Ok, but this is thinking like an engineer, not a trader.

@TYGMedia

Then I continued by to explain him money and risk management. He can absorb it fast. He grew his cent account with no problem, more then 150% / year.
The problem he has now, when I change his account to a standard account. He hardly can reach 50% / year. There is fear of losing big money (after 3+ years).

I get what you’re saying but a trader with real trading skills wouldn’t let losses get too big. This was the whole point of the exercise I outlined in the OP.

losing big money = no trading skills even after 3 years

There is no shame in making losses, we all have done it. Hell I did it for more than 5 years.

Thinking like a profitable trader is the hardest thing for the inexperienced to understand. It’s not about winning, being “right”, or making perfect entries, it’s almost the exact opposite, assuming your next trade will be a loser until the market proves the trade to be a winner.

@TYGMedia

The same thing to my nephew, I realize mentality is one big thing a trader needs. It means discipline, confident and wisdom to see thing clearly. So, it’s not all about skill.

Sorry, again there is confusion in what I wrote with trading skills.

Discipline = discipline in managing the downside to minimize losses, this can only come from practice (the exercise in my OP with coin flip entries and 1:1 R:R SLs and TPs)

Confidence = the belief in one’s ability to manage the downside so he / she doesn’t need to fear big losses because they’ve practiced and practiced until they could do it in their sleep (as I wrote in my OP)

wisdom = comes from experience, experience comes from practicing the right things

@TYGMedia

The same thing was happened with me, after a big lost, I needed 3+ years to trade with bigger fund. I started from 100 USD, periodically increased the amount.

Ok, I’m starting to feel like a broken record.

big loss = not applying trading skill

Unfortunately there is no other way to say it, trading skills doesn’t let losses get too big. You actually did exactly what I wrote in the OP:

Hopefully you picked up and understood why most traders lose: they spend all their time, energy and focus jumping straight to trying to find the holy grail system / strategy (step 3). And when they get into trouble with losing trades (as every trader eventually does), they aren’t able to get themselves out without big losses.

I suggest re-reading the OP but this time lose the software engineering brain, easier said than done, I know . Stop thinking about EAs, trading systems and trying to make money. I know this is why we get into trading in the first place but it becomes the biggest obstacle. Profitable trading is much more simpler than most people think, it’s not an intellectual challenge, it’s another mentality that needs to be learned and developed.

But the trader actually has to do the boring work of manually practicing cutting losses and letting the market take care of winners in order to “get it”.

Just my personal opinion based on my experience, up to you to follow or not.

In any case, I wish you all the best in your trading endeavours.

[TYGMedia]

Hi @Dollar_McGavin, I don’t want to make it long. It’s just that you don’t get what I meant.

I don’t want to argue either. I have no position to judge here.
Let’s forget what I wrote. Nothing personal here …

[Dollar_McGavin]

@TYGMedia, I apologize if my reply made you feel like I was personally attacking you. That wasn’t my intention, this is just my blunt writing style that can come across like that. Maybe I should have used more smileys and emojis.

There’s no need to delete your post. What you wrote is valid for a lot of people, I also thought that way for a long time so I can totally relate. In many ways, you can say that I am writing as if it is to my old self.

If I misunderstood what you wrote, then please free to explain further if you wish.

[Dollar_McGavin]

Yes, adopting a mentality of managing the downside was the key turning point for me.

I found Tom Hougaard after I “got it” but these 2 quotes from him really resonate and sum it up better than I ever could:

Going against the conditioning that life, in our modern world, has programmed you with, success in financial market speculation is not about being the best, coming first, and winning.
Instead, it’s about losing.
And that’s why I win.
I win because I’m really good at losing.
In trading, unlike life, it’s the best loser that wins.

He gave them three commands that dictated his trading life — Commands that I use as the backbone of my trading philosophy — commands that you should use too.
1: I assume I am wrong – until proven otherwise.
2: I expect to be uncomfortable.
3: I add when you subtract, and I subtract when you add.

[Dollar_McGavin]

@Mondeoman, this was a great read.

I saw a lot of my own personal traits in what you wrote. Your reply reminded me of one wealth building philosophy that I’m teaching my kids: disconnecting money from time and effort.

The idea here is that time is more valuable than money as money can be scaled up and multiplied while time cannot. It’s a simple phrase but has so many hidden details. For example:

1. The amount of money you make is correlated neither to time nor effort, i.e. making lots of money doesn’t require a lot of time nor effort.
2. Wealth should be measured in time, not money. The goal should be to accumulate as much of it as possible in order to look for ways to continuously increase the amount of money made per hour as possible.
3. The metric for building wealth should be $/hour worked = $/effort, that is you want to maximize the money you make with the least amount of time spent.
4. As time is the more valuable asset, wealth builders should look to accumulate time, i.e. buy time. This is done by first figuring out what your time is worth in $/hour. Once you figure this out, anything that you need to do that can be done by someone else at a lower cost should be outsourced, so you end up buying back that time in order to focus on making more money / hour.
5. Unfortunately most people who have jobs are selling their time. Meaning they are often obligated to spend a large portion of their valuable time for a finite limited amount of money.

I could go on and on, but will leave it here.

Just like your family is doing with the property holdings, I’m looking to turn my current capital management business into a family office, if my kids want to continue the legacy, that is.

[FranziskaSchulz]

I love your approach! You’re absolutely right about the need to build real trading skills first. Focusing on managing losses with random entries is a smart way to gain confidence. Experimenting and learning from mistakes is key to growth. Once you nail those skills, finding or creating a system that fits your style will be much easier. Thanks for sharing such valuable insights!

[Dollar_McGavin]

Just when I was about to give up helping traders on this site, your reply made my morning, thank you!

Yes, exactly as you described. It completely changed my trading mentality, flipped on the light switch and within 2 days 90% of my trading problems were gone. 6 weeks later, I outlined the core principles of my own system, still little tweaks here and there but the foundation is in place.

You’re welcome! Good luck with the trading!

[Ogasteve]

“Fight back trades” in order to recover a loss most time leads to further losses because we are usually under pressure and not in the best frame of mind. Good lesson.