Tag Archives: strategy

The real reason ‘retail’ traders fail

I’ve been spending a lot of mental ‘time’ looking at the approaches of Jimmy Young, Chris Lori and especially @Trader_Dante off the twitter in the last couple of weeks. This also comes back to a throw away comment that Anton Kreil made at his ‘Traders of the Future II’ seminar. Added to that a spell watching Mark Douglas on youtube and then a couple of other excerpts by Brett N. Steenbarger so my brain is well and truly cooked with respect to trading.

Sometimes all this marinating can produce questions and maybe a little insight.

We all know the statistic about ‘retail’ traders have this appalling 80% – 90% rate of failure and it takes so much time to get good etc. Now of course psychology plays a huge part but prompted by this question I think I’ve gotten some way to understanding why this is true.

Retail traders are told that charts are at cause in the market or to put it another way…

Retail traders think what happens on the chart causes further stuff to happen.

This is partly correct but if something is partly correct it’s also not right either 😉

A chart is an effect – it’s the visual representation of a bunch of transactions and is only slightly causal in the grand scheme of things. A chart is an outcome. Believing that what you see represents the market and attempting to use this as a means of gaining an edge is likely to be a challenge because you’re not thinking about the totality.

Here’s a suggestion of the whole system

Now you can see that charts represent about 10% of the actual information available. Lets break the other elements down.

News = Information coming in that will have either a short term or long term (macro) effect

Market = The sentiment of the majority of the market at the time(frame) you’re in

Traders = Making bids/offers as the conditions change across multiple time-frames

So while there is a feedback loop between traders (who can move the market) and what happens on a chart (price) this image does not have the same weight for traders as the poor retail guy believe it does. For a retail trader the chart is the market. This is a key difference and a mental trap for every retail trader. It definitely pays to think outside of the chart.

For a trader with multi-millions at stake the chart is a result of their actions based on market opinion, macro economics, news and very importantly what other traders are doing. Here’s another attempt at a diagram as it relates to the actual situation…

Retail traders think the chart lives at the top on it’s own and has way more influence than it does…

What’s at cause here moving the squiggly line on the chart?

Yes, it’s how the Trader with a capital T is reacting to events, the market and to a certain extent where the price is in relation to other points. Now, what are the consequences of this for all us retail guys out here in the wilderness? What can we do to level the playing field? Well it helps to be asking the right questions for a start.

Retail newbie question – What’s the price/indicator/chart doing?

Retail improved question – What’s the market doing and how can I join in with low risk?

However here’s the question I believe you really need to ask…

How are Traders viewing the market and where can I enter for minimum risk to ride on the back of their actions

The market doesn’t move at all until a bunch of traders decide ‘we’re going to go this way’ because you and I as retail traders are simply riding on the chart which is the result of the actions of others.

A clear ‘short-cut’ for retail players is to learn to look at charts like Traders and then trade just like them or more accurately off their actions. Seems obvious when you say it like that but this may actually be the only way to achieve an edge over the long haul.

If you don’t want to spend your time thinking this through then I’m sure there’s another guy waiting to sell you the latest ‘can’t loose robot’ or ‘holy grail’ system. Putting myself in someone else’s shoes actually sounds a whole lot more straight-forward. I can’t beat them so figuring out where a Trader would enter and then doing the same means they’re doing the heavy lifting and I’m simply along for the ride 😉

Now a simple question remains…

How can you understand what Traders with a capital ‘T’ are doing? You need to look and think about what’s actually happening from the perspective of a bunch of real people that are already in the market, already in a position, trying to get in or out depending on whether the price is going up or down, rising or falling sharply. Thanks to @Trader_Dante for mainly providing the mental kicks to get this out of my brain and onto this ‘ere blog.

Traders are competing with others buying and selling actual stuff and because the retail guys is not doing this then it’s actually very challenging to look at a chart while keeping this in mind. Who is getting a kicking and who is dancing round the office? It’s that simple but until you realise you need to look at what is occurring on a chart with a completely different mind-set I’d say you may still be in the 80-90% bracket.

Ask yourself a different question when you look at a chart (price) pattern, see some news or try to get a ‘feel’ for market sentiment over the long term. Ask yourself this: –

What are the buyers/sellers and other actual Traders going to do when the price gets to ‘x’ point?

In summary and for the last time today… You are making a ‘bet’ on the price move of something that is being bought and sold so it’d probably really help to put yourselves in the shoes of those actually doing ‘buying’ and ‘selling’. How you see the price is not how the people moving the price see what’s going on so you need to look at everything from their perspective for a chance to win.

Right. I am now officially sick of thinking about trading. Possibly until tomorrow anyway 😉

I’d really be interested for people to comment on this post so please don’t be shy in coming back with your thoughts. Thanks for reading.

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Trading plan = phew! Now, lets get on with it ¬_¬

Right off the bat – and before anyone gets excited – this plan does not contain the setups or notes related to how I’m going to be actually trading in 2012. Well it does but I’ve got the only un-redacted copy. Sorry. The main reason is that since this is based on material I’ve paid for then sharing it for free will get my arse sued right off. Please don’t be disappointed and remember I’m still at the sideways stage 😉 so you need to go sort out your own plan.

Secondly – this is not a study in how to write a trading plan. I’ve nothing to teach here and nothing to sell you. However I thought it worth sharing as a way of encouraging anyone who hasn’t got one to go write one. You’ll see this is my sixth attempt at doing this since Jan 2011 which means either I’m lazy, incompetent, foolish or all of the above.

I finally got to a place where I recognized that I need this framework to operate in and I’ve pulled together enough actionable ideas to make this a reality for me. Re-reading stuff I’d written before (as well as previous posts on this blog) is frankly embarrassing. I’m sure there will be stuff on here from now that I’ll cringe at in six months time.

I do reference people that have really shed a significant light-bulb on trading for me so it’s worth looking at from that perspective though. A lot of personal information has also been removed obviously!

It’s partially thanks to the following (free!) software that I got this document to the state it’s in. Focal Filter allows you to create a blocklist of sites that you can’t get to for a certain time. Massively useful with all the distractions of email, twitter, facebook and twitter. Did I mention twitter? 🙂

If you’re easily distracted by crap online then I can really recommend it. I know what of I speak etc. There’s a dedicated Mac application for this kind of thing so go googling for it.

However back to the point at hand. It’s taken me far, far too long to get to where I can actually write this. Why? Well lets look at some of the main reasons.

1.) The majority of information I went through from Jan ’11 till Oct ’11 was simply wrong

2.) Trying to trade on a 5 minute chart while working full time. This is simply impossible.

3.) Not understanding the inter-relationships of multiple time-frames. *see below

4.) Not enough time in front of charts, taking trades and seeing how prices move

5.) Not having a clue – at all. Not understanding how important a plan is.

So the major light-bulb has come on about how price moves and how different time-frames can shed light on this. From this point you can get a hint of where a good entry point might be and then plan accordingly. There are no magic indicators as far as I’m concerned.

The other main thing to point out at this stage is relying solely on a chart without knowing what’s going on in the market (i.e. news) is like going into battle with your eyes shut. You can bet that major market participants are paying close attention to what’s affecting their market/their positions.

A final point to make is that record keeping is important. I suspect that this will become a significant understatement in 3-6 months… Record keeping may actually be the only way to improve over time. Read that again and really think about it. If you’re not recording your trades and why you took them then, erm… you’ve probably been getting the same results I have – crap results 😉

I’ll explain how I’m making this work for me and provide a proper trading update in a couple of weeks. Also looking at different brokers/platforms but that’s an entirely unrelated topic.

TradingBusinessPlan-Redacted

So there you go.

Plan? Check!

Practice?

Process?

Well, that’s what 2012 is for right? 😉

No preparation = bad

So my day today perfectly illustrates why psychology is important to trading.

I’ve had a couple of ok weeks (remember, not losing money is a great result as far as I’m concerned) and decided to see whether I could place a minimum of 5 trades per week as a target. Unfortunately this week has mostly involved me driving around the country and not really being able to keep up with what the market has been doing.

In addition today began with me missing the European market open and trying to catch up throughout the day without reference to a plan. I foolishly went ahead regardless which turned out to be a dumb idea especially on the last trading day of the quarter.

So with one (very small) winning trade and two (larger) losing trades I managed to give myself a wakeup call – preparation is everything. Attempting to make money from the market without doing the homework is basically a recipe for disaster.

The best analogy I can come up with is opening your eyes into bright sunshine having spent the afternoon in the cinema. It’s unlikely you’re going to look your best as you squint like a moron… 😉

Still, not losing my shirt is an achievement compared to previous weeks and 4.75% up on the month is my first positive month. I’ll take that and learn the lesson.