We often talk about treating our trading as a business. But it is a different kind of business to the more traditional kind of business.
One thing that attracts so many people to trading is the opportunities it offers. The only real concrete limitation on its possibilities is the amount of capital one has.
But with opportunity comes a great responsibility. The fact that trading markets is free of almost all restrictions means that the entire responsibility for what we actually do lies solely on the shoulders of the traders themselves. There is no one else to blame when things do not go right.
We need to take care of our learning, ensure we learn from our experience, protect our equity, and manage and evaluate our trading strategies.
As Mark Douglas puts it:
" I learned that the markets offer the trader an opportunity to profit from price movement, and these opportunities are basically in perpetual motion. It is an environment where the individual has the freedom to create his own results, unimpeded by many of the constraints that exist in everyday social life. These never ending opportunities make the market a perfect mirror of the trader’s attitude. What the trader sees in that movement and what he can do about it the markets have no control over. All the choices and all the power to turn these choices into experience reside in the mind of each trader. "
And whilst on the subject of treating our trading as a business, one other issue that often comes up is learning to accept losses as an integral part of trading. The only bad loss is the one that results from not following our own rules. Losses can, and should, be treated in the same way as the overheads in any other business. I.e. the costs of doing business. You cannot make profits without being in the market, and being in the market means there will be losses. It is just something that needs to be managed.
Managing losses and handling them with the right attitude is important, as Mark Douglas says:
" I inadvertently learned one of the most important lessons to becoming a successful trader: how to “accept” a loss without any negative consequences. No guilt, anger, shame, or self-punishment."
A lot of truth there in a few words! Loss handling is critical to consistency in the long run.
It’s funny how psychology works. For example, we can feel a lot of pain, frustration and anger at taking a loss on a trade. But, at the same time, a retailer will consider it totally normal and sensible to sell off old stock in a sale, even at a loss, in order to release capital to purchase new, more profitable stock.
It seems to me that there is a constant flow of newcomers here that are filled with drive, dreams, and infinite enthusiasm to make it in forex trading. Well this is what Dr Alexander Elder has to say to them about that in the very first pages of his book:
“You can succeed in trading. It has been done before, and it’s being done right now, today, by people who started from scratch, learned to trade and are making a good living at it… Trading is a journey of self-discovery. If you enjoy learning, if you are not scared of risk, if the rewards appeal to you, if you are prepared to put in the work, you have a great project ahead of you. You will work hard and enjoy the discoveries you’ll make along the way. I wish you success. Now let us begin.”
A good description from Dr Elder of the different paths we can take. It is worth pausing to ponder on which path we ourselves are on, and is it the right one to lead us to where we want to be:
“A newcomer to the market faces three paths that lead into a forest full of treasures and dangers. The first path, for investors, goes through the sunniest areas. Most of those who take it come out alive, if not much richer. Another path, for traders, leads into the heart of the forest. Many travelers disappear, but those who come out look rich. The third is a shortcut that takes gamblers into the swamp.”
“A good signal jumps at you from the chart and grabs you by the face—you can’t miss it! It pays to wait for such signals instead of forcing trades when the market offers you none.” Dr Elder
“Trading a small account is like flying an airplane at treetop level. You have no room to maneuver, no time to think. The slightest slip of attention, a piece of bad luck, a freaky branch sticking out into the air—you crash and burn. The higher you fly, the more time you have to find your way out of trouble.” Dr Elder
I was watching a TV series tonight and someone there said of their life that:
“My life is just a graveyard of crushed dreams”
And it hit me that one could so easily say that about trading, too! A constant stream of new posters full of screaming enthusiasm and dreams. Not dreams of just a new hobby or a pastime, but of nothing less than a life-changing experience, financial freedom, guardian of one’s own destiny, and maybe even a lamborghini or two.
And yet, where do they all go? So many slide down the gutters, watching all their spare cash and even more just wash down the drains. Yet some do pull through. There is a way.
I came across this quote in an e-book and I thought it was a rather provocative way of describing precisely what our plan/strategy/method should achieve. It should be clear, evident and concrete in all aspects - so much so that, under the same circumstances, we would even take those same losing trades.
“Our goal is to create a systematic approach that leads to consistent trades. You want to get to a point where even if a trade was a losing trade, you would still be happy with your selection and given the same circumstances you would make the same decision again and again.”
This doesn’t mean that we shouldn’t ever study losing trades and consider changes that may minimise them.
It does mean we should strive for a strategic approach that is applied consistently according to its rules and parameters. A strategy which incorporates and applies our perceived trading edge whilst including the acceptance of losses under controlled, damage-limitation, conditions.
"Cutting losses short is all about aborting losses - exits. Letting profits run is also all about exits. The entire axiom is all about exits."
Dr Van Tharp
“Trading success starts with the individual and his honest assessment of his location in the financial markets, and his personal strength and weaknesses in terms of personality. The new trader thinks this is psycho-babble. The experienced trader and the veteran know this is where the real market battle begins and ends. The bit in the middle — the trade — is just part of the process.”
Maybe this comment echoes true with some small traders…
“Time and small size are gifts given to part-time traders. Many foolishly squander these gifts with impatience and by taking good, but not excellent, trades. Use the gifts of time and size to make careful selections suitable for your preferred trading style. This is the super-sharp trading edge we use.”
“The financial markets are like an ocean full of sharks where large financial institutions, mutual funds, savvy institutional traders and brokerages prowl for profits. The survival rate for the small fish, the private trader — the minnow, or the guppy — is very low. We are all part of a financial food chain, but the guppy does not have to provide a protein feast for the shark. The ocean is big enough for both of us. Let them eat someone else. As a small fish, I need to survive in order to grow into a bigger fish. You, as a private trader, need to learn and master those strategies most suitable for your size.”
