Based on listening (again) to David Jones at IG talking about risk/trade size/stop loss placement etc. as well as stuff read in books by Malcolm Pryor, comments from Simon Townshend’s site, Richard Farleigh’s talk and my own trading experiences to date…
So, I’m going to start this blog by admitting something… I think I’m a pretty smart guy.
While I wasn’t a stand out student I was surprised and relieved to discover on leaving school that I seemed to be relatively smart. This isn’t to say that I wonder around thinking I’m some vastly superior intellect (aka an ego driven arse**le) and that others are beneath me. It’s counterproductive trying to get by if everyone wants to smack you in the mouth…
However, that fact remains that I think I’m pretty clever, I’m good at certain things. I like reading about psychology, project management and so on. Not an arse but not a thicko either. Here the tale begins…
I went to one of the IG Seminars on site at their offices for a few reasons…
1. I’m nosey and wanted to see what their offices looked like – I should have guessed, it looks like an office 😉
2. I actually had a couple of genuine questions about the IG platform
3. Possibly of picking up a different perspective and learning something useful.
I actually wasn’t expecting IG’s David Jones to be giving the talk – which was covered in similar style to the Heathrow seminar on FX I’d been to a few (x?) weeks ago. This is no bad thing btw and I’ll get onto it in another blog post properly. This blog isn’t really about that though.
So, I’ve seen (parts) of this talk before in person, read David’s book (and a LOT of others) and I watch him doing his analysis stuff during the Wednesday Mid-Week market focus. (Which is excellent, you should check it out)
Basically as questions come up in the seminar I’m not struggling for the answers. You should only risk x per trade, don’t trade markets you can’t afford to, use wide stops, don’t bet against the trend etc. etc. etc. I’m sitting there thinking… ‘I know all this stuff, it’s obvious’…
This is when I realised (shock horror) I’M NOT ACTUALLY DOING ANY OF IT …
I’m down about 10% on aggregate for the last month so my results are slapping me in the face that, because I believe I’m a smart guy I can just somehow magically pick it up… How mental and deluded is that?!?!
What also prompted this stunning revelation was Richard Farleigh (ex-Dragon’s Den) talking about blowing 25% of his salary before going back to the drawing board and eventually becoming a multi-millionaire. Other traders I’ve talked to have all done similar things.
Also, for the record, Richard Farleigh is definitely many times smarter than me, which helped put things into perspective. It doesn’t help that he’s also better looking (damn). So if the chess grand master economist with perfect hair can screw up then I better just up my game a little tiny bit!
Another thing that occurred to me as I was busy having this epiphany was that (with the exception of Linda Bradford Raschke) all the people I rate either as traders or influences do NOT day-trade.
Simon Townshend – places maybe, maybe 9 trades per month
David Jones – looking at hourly charts and talking about long stops
Malcolm Pryor – talks about weekly charts for stocks/indices in his book “Winning Spread Betting Strategies”
Richard Farleigh – quote “Do NOT day trade”
I think part of the reason we’re all hung up on ‘day trading’ is that a sort of mythology has built up that really successful traders are the ones looking at screens all day attempting to turn all that data into something they can act on. The legend is that by doing something simple (on the outside) then billions of dollars of profit flow from this naturally. This is the ‘meme’ that companies selling training at £2k a weekend use to hook in new punters.
What we beginners think trading is about is all wrong. Oh No!
I’d also suggest that the obsession that newbie traders have with indicators and strategies stem from the fact that they’re trying to avoid the harder steps of thinking in depth about all the criteria the particular instrument has to meet before they can place a trade – regardless of whether it wins or loses. What everyone wants to actually see on an indicator is all the price data magically translated into a single word which is either ‘buy’ or ‘sell’ 😉
I’m happy to report that I’m at least old enough to know that the world isn’t that simple.
In Richard Farleigh’s talk, Vann K Tharpe’s work, Malcolm Pryor’s books the question keeps being asked “What’s the edge you have in placing the trade?” I’ve not been able to answer this question…
In fact I sort of glossed over it but really it’s a hugely important question. It could possibly can be translated as “How are you going to make money?”
Essentially this post is all about the realisation that, while I know what to do in order to be successful (because all the steps are right there if you pay attention) I’ve so far failed because I mistakenly think I know better… Self delusion, ignorance and arrogance have blinded me but the actual results say it all.
So in summary I shall henceforth adopt a new humility in the face of the markets and do all the things I’m well aware of in order to give myself an edge. Some examples: –
- Risk reward 1:3
- 1% risk per trade
- Only trade with the trend
- Keep really good records
- Plan every trade
- Only trade higher timeframes (end of day/weekly)
- Stay off FX and crude oil till my account size is more than £10K
- Have wider stops (within risk limits) to allow the market to breathe
- Exercise PATIENCE and get there in a leisurely fashion
- Write a business plan for my trading activity
One thing that’s sort of omitted is that trying to turn a £1000 account into a £2000 account (as people do) in totally un-realistic timeframes is almost guaranteed to blow up your account.
Spread-betting allows leverage so you need to use leverage to do the heavy lifting BUT this can only come later when you don’t actually suck at trading. I’d love to make £200 per week extra trading but at the rate I’m going that’s just highly unlikely…
How about doing it in a completely different way? Making a measly 20 points at £10 per point? So £200 at 1% risk is… yep, a £20,000 account. Now the thing here is that making 20 points isn’t that hard. It’s when your £10 per point trade makes 100+ points that you weren’t even expecting that you can shout and run about. This is the dream that’s sold without consideration for the reality. Even with the scenario above that only allows you a 20 point stop 😉
I’ve been guilty of Gunslinging into the FX market with a 20 point stop and that’s just crazy. So I’m not as smart as I thought… but I can be a better trader by recognising this fact and approaching it like a business, with proper decision making, preparation and planning.
There you go – It’s only taken me 9 months to discover humility and realise I’m not as smart as I thought 😉
Upcoming blogs to look out for: –
- Key points from David Jones’s talk (might have to get permission to blog this, tba)
- What I changed after I realised I wasn’t a genius
- Trading business plan