5 Little Known Realities Of Trading The Markets

Trading offers some huge potential for people looking to be their own boss and work from wherever they want.  However, trading isn’t like a typical job where you either make money or go home empty-handed.  You can actually walk away with less money than when you started.  And over the years I’ve learned some really valuable lessons about trading that not many people like to talk about:

A trader’s most valuable asset in trading is your confidence.  If you lose your confidence, then nothing else will matter.  That’s why it’s a good idea for traders to start trading on a simulator until they’ve proven they are consistent with their trading decisions and execution.  Notice the words “consistent trading decisions and execution”.  This is more than just making a few dollars on paper over the period of a few days.  It’s all about making sure you are making consistent analysis and decisions, then executing on them at the right time.

Don’t trade with “scared” money.  In order for someone to effectively follow their plan, they can’t be worrying about losing money.  A lot of people will pump up the idea of making easy money through trading, but to even have a chance of getting to that point requires that you have no attachment to the money.  After all, that’s why they call it “risk capital”.  If someone funds their trading account with money they need to pay the bills, then they’re asking for trouble.

All strategies have draw-downs.  Although we strive to be as consistent as possible, there will be periods of time that the market just doesn’t move in a way that fits a particular strategy.  It may be for an hour, day, or longer.  The idea is to learn to identify the market environments that don’t fit your strategy.  That’s the difference between blindly trading a system or setup, and understanding market dynamics.For example, we’ve found most intra-day strategies work best in highly volatile markets, when longer-term traders get chopped out of the market.  And when the market is slower and choppy, swing trades can perform better.  In the chart below you can see the last half of 2011 was extremely volatile with an ATR above 15, average daily volume above 2.5M contracts, and big swings in price action.  Contrast that with the first quarter of 2012 where we’ve been in a slow uptrend, with ATR below 15, average volume below 2M contracts, and contracted price action.

Trading goes against how we’re taught to behave as children.  In school we’re taught, “You must strive to be ‘right’ as much as possible.”  But in trading, someone could only win 45% of the time and still make money.  So, traders must reprogram themselves to get comfortable taking losses.  It’s just part of the game.

We’re also taught to move away from pain/fear and move toward comfort/security.  But traders have to get comfortable with going against popular belief.  For example, if you buy a stock after it just moved in a straight 50% gain, the odds of the stock continuing to move higher without a retracement are low.  But if you buy after price has dropped to a Fibonacci retracement level, your odds of ending up with a gain are much better.  Of course there’s much more to that equation, but the idea is to think about all the possible outcomes, and then determine what’s most likely/probable.

Day trading futures is highly competitive.  This means it’s difficult to just read a book on technical analysis, then compete with the market.  After all, price charts are just visual representations of other market participants actions, which means you need some kind of “edge” over other people.  A common mistake most new traders make is thinking they can “guess” where the market’s headed.  The problem with that is over half of the market’s trading volume is traded by algorithms that know how to consistently wipe out undisciplined traders.

So, if you decide to take the plunge into trading any markets, take these points to heart.  It all starts with a solid education, iron will, and the ability to be able to adapt to changing market conditions.