I’ve been trading for almost 10 years now. Over the years, I’ve spoken to many traders who are on the verge of making it. Almost there.
Technicals or fundamentals knowledge, check.
Willingness to be consistently profitable, double check.
These traders are about 80% in their journey to become a consistently profitable trader. Even here, the Pareto principle is doing its magic.
They’re like a semi-pro football player almost making it to the Champion’s League. Or the aspiring actor trying to get that big breakthrough role. The trader is missing some essential, but not always obvious elements, and here’s the thing: without proper guidance, some of these traders will be stuck in this state forever. If nothing changes, the next step is gradually losing money and/or giving up.
Which is a shame. These are the traders that have put in considerable effort already, but are somehow missing that something to pull them over the edge of consistency. Do you recognise yourself in this profile? Keep reading. See, once you are at this level, it’s not about knowing how to draw a trend line. It’s not about chart patterns and price action. Most traders in this state of limbo usually even have some trading system.
But something’s holding them back.
The trader’s pyramid
It’s not yet working for them because they usually focus on the wrong things. That new, fancy trading system? It’s probably not going to make them the profitable trader they hoped for. What is going to help them become profitable are the fundamental building blocks; the foundations of the trader’s pyramid. Have a look at what I consider to be the most important topics in trader development. Notice the percentages allocated to both sections:
It’s an exact mirror image of how most traders operate. Most traders spend about 80% of their time working on a trading system. While trading systems play a part in the success of a trader, it’s not nearly as important as you might think. You’re nothing with a trading system if you don’t have the patience to wait for the good setups. You’re nothing with a trading system if you sometimes decide to not follow your rules. You’re nothing with a trading system if don’t have the confidence to see your trades through. You’re nothing with a trading system if you move stops and close out your winners too early.
What you should spend time on instead, is building the foundations of every trader’s toolbox: clear objectives, trading psychology, emotions, discipline, patience, sound money and risk management. These are the building blocks of every successful trader. The foundations they build upon. Too many traders search endlessly for the Holy Grail of Trading. Well, you’ve found it. Once you’ve tackled the lower section of the pyramid, the results of your trading system will follow automatically.
What’s holding you back
If you’re still struggling with these foundation concepts; well, you’re not alone.
When traders eventually get to this point, only a few figure out what’s wrong. Most traders never reach the results they hoped for, even though they keep looking for new trading systems in the hope this will actually fix the underlying issues. They couldn’t be more wrong.
Instead, the best way to start fixing these fundamental issues is by tackling the biggest problems that are holding you back. None of them are related to your trading system, all of them are related to you as a trader. Let’s have a look.
1. No confidence
Confidence is the result of sticking to multiple of the foundation concepts in the pyramid. Confident traders exhibit discipline, emotional control and clear objectives. On the other hand, having no confidence in your trading plan is a cause of multiple symptoms on their own, all detrimental to trading successfully.
If you’re not convinced about your trading plan, you’re not sure about your edge. And if you don’t have confidence in your edge, how will you enter trades with conviction? Secret: you’re not.
From there, it’s a slippery slope: if you don’t have confidence in your trades, you’ll doubt yourself from the moment price goes against you for even a second. You’ll start to change your stop loss or take profit levels since you will change your mind multiple times during the time you’re in the trade. Eventually, having no confidence means you’re going to lose money.
Consider the opposite scenario: a trader with confidence has a well thought out trading plan, which he follows to the letter. The confident trader doesn’t have to second-guess the trade he just entered since he just follows his trading plan. Process over outcome. No need to tweak a stop loss or modify your take profit levels. He’s convinced by his edge, so any temporary price retracement or even a loss will not bother him. After all, the trader is convinced that over a meaningful sample of trades, his edge will play out and the probability of coming out on top is high.
The lack-of-confidence vicious circle
However, getting to a state of being confident can be tough. The trader who lacks confidence will not produce the results he/she hoped for. This usually results in an even less confident trader, producing even worse results. It’s easy to get into a vicious circle this way.
Most traders will deal with this by trying out a new system, in the hopes this will fix their lack of confidence. It usually does initially, but that confidence stems from using a new system, not fundamental beliefs about the trader. Sure enough, the stint of confidence is therefor short-lived and the trader falls back to the old feedback loop of losses.
How to fix this? You should focus on two main points of belief:
- Realise it’s not about the trading plan, it’s about you. Take responsibility.
- The process of following your trading plan is more important than the trading plan itself
Of course, every trader goes through a period of time where he’s just looking to make a system his own, trying out multiple systems. The so-called system-hopping phase. It’s important however, that once you found a system that aligns with your personality and where you feel you have an edge on the market, to stick to it, make it your own, and trade from a position of confidence. Confidence leads to consistency. And consistency is the only way to objectively evaluate a trading system and get the desired results.
2. No patience
Ah, this is a big one. Having patience is a consequence of your emotions before and during trading. Can you control yourself to just sit on the sidelines until that perfect trade setup comes along? I still have to come across a trader that hasn’t suffered from fear of missing out. The instant gratification of entering a trade just feels good! Additionally, you don’t want to risk missing that one big move, right? Sadly, it’s the wrong approach, and it will cost you money.
Having no patience results in taking sub-optimal trades. This in turn, drains both your account balance and your emotional capital. The results can even be more devastating. Have you ever taken a trade too soon, only to be so discouraged by the loss to miss the actual move a bit later? Or maybe you took a trade out of revenge, hoping to get your money back after you made a loss? I bet that you felt emotionally drained at one point because the losses kept on coming. This could’ve been different, just by having patience.
As an exercise, go over your past 20 trades and for every trade you took, evaluate:
- If this trade really followed your trading plan
- If you took the entry too early
Can you recognise yourself in these patterns? If you did one of the above, what is the impact on your account balance if you just hadn’t taken those trades or waited with your entry? Did you feel drained after taking yet another sub-optimal trade? Doing an exercise like this should absolutely be part of your trade review process (I can recommend Edgewonk and its tilt-meter for this exact issue).
3. No ownership
Have you ever thought any of the following:
- I had my stops hunted by my broker
- The whole market is against me
- I would’ve won this trade, but:
- The spreads were too wide
- The market was too volatile
- I didn’t have access to my broker platform
- Economic news came out
- I couldn’t close the trade at the right time
- The market ran off without me
- My broker is trading against me
- The market gapped over my stops
Guess what: all of it is your fault.
Sounds harsh? It’s supposed to.
You need to wake up and take ownership of everything you do. Blaming things on others and the market is just a coping mechanism, a way to avoid dealing with the problems yourself. It will not help you move forward. It’s much easier to fault someone else than to take ownership because you won’t feel bad about the decisions you made yourself. However, doing this has three very important consequences:
- Since you don’t feel at fault, so you will not start looking for solutions.
- You keep blaming external factors for issues you should deal with yourself.
- Consequently, you keep losing.
Do you have an unreliable broker? Get a decent and regulated broker. Stopped out because of economic news? Get an economic calendar and close out your positions in advance. Spreads too wide? You should account for and expect these scenarios. If you feel you have your stops hunted, it’s because you probably place your stops at such a predictable place that you’re just an easy target. And let’s get one thing straight: the market couldn’t care less about what you do.
Conversely, by starting to take ownership, you’re setting the first steps in becoming a better trader. If you feel that your trading problems are caused by yourself, you have the incentive to actually go and fix them. And once you tackle the issues you’re facing, you’ll feel much better about yourself for doing so. You’ll feel in control. And taking ownership works both ways: once you start making profits, you will feel like you’re the one responsible for making it happen.
You win, not because of the market or some external factor, but because you did it. Well done!
4. Being right vs making money
Every trader who is entering the market, does so with a trade idea. There is a hypothesis, one that might play out. It would be foolish to not analyse the markets beforehand and form an opinion based on historical market information! But make no mistake: you can not predict what the market will do. Every single trade can end up being either a loser or a winner, and traders trying to predict market direction usually end up losing money.
Why is that? With the prediction of future market direction comes a strong notion of being right. And if you have a strong belief that your trade is the right one, you’ll do everything to see that idea play out. If the trade is turning against you, you’ll be happy to keep the losing trade around, in the hopes it might turn around. Conversely, if the trade is going in your direction, guess what? You’ll not hesitate to take profits, since that action validates that you were indeed right. Once you want to be right, it’s not about making a profit anymore, it’s about showing the market that you could predict what happened, even if that means taking a loss.
Consider the following trader pattern instead: rather than predicting market direction, the experienced trader completely assumes that every trade has an equal chance of being a loser as being a winner. In fact, many of the best traders I know even assume that every trade they put on will be a loser. These traders will not feel the burden of having to prove themselves to the market. Free of any preconceptions, they will find it easier to look at each trade objectively and make decisions based on what the market actually does, not based on what would otherwise be a strong bias firmly rooted in their minds. These are the traders who will make consistent profits.
Remember that you’re trading for a profit, not because you want to be right or experience the excitement of being in the markets. If you’re interested in how people make decisions and how people evaluate their chances of being right, I can recommend you look into prospect theory and read the unbelievably interesting book Thinking, Fast and Slow by Daniel Kahneman.
5. Have an opinion
Traders often go through multiple phases. There’s the indicator madness phase, the system hopping phase and the trade copy phase, to name a few. The last one is the subject of this chapter. Usually, this happens after the trader has experienced some losses and is a bit discouraged, maybe doubting their ability to trade profitability. Copying other trader’s advice is therefor an easy (but less-than-ideal) solution.
Copying trades can take multiple forms: subscribing to a signal service is the most obvious one, but it doesn’t stop there. These days, social media is everywhere and there’s no shortage of people expressing their ideas about the market. Many traders will listen to so-called market gurus on Twitter and blindly copy their trading advice. Maybe some traders are subscribed to a newsletter providing market analysis. Maybe you pay a monthly fee for a private chat service with other traders.
If you don’t form your own opinion, you might as well throw your money away. That’s a strong statement, but I absolutely believe that having an analytical mind and forming your own opinion is critical to trader success. I might create a weekly forex outlook, but I sincerely hope this only serves as educational material and no-one is blindly copying what I say. If you think about it, copying others is a recipe for disaster and far from a long term plan. Market gurus might suddenly go quiet. Their advice might also be plain wrong. And most of all: if you’re copying trade advice, you’re not developing your own analysis techniques and you’re not learning what it takes to form an opinion. You can’t keep relying on other people to make it as a consistently profitable trader. Start building your own trading plan, keep records in a trading journal and make your own analysis for the trade setups you plan on taking.
Soon, you’ll start noticing that your ability to correctly analyse what’s happening will improve. You’ll find out about the smaller nuances of trading that you previously looked over. Only if you stop taking advice from others, you’ll become the trader you initially hoped to be.
Trading often seems easy at first, but there are still many reasons why beginning traders keep on struggling. The line between almost making it and actually making it is thin, but many traders don’t exactly know how to reach their full potential. The reasons are usually not related to a specific trading system, but to foundational elements such as trader psychology, emotions, discipline or capital management.
To tackle these issues, this is what you should focus on:
- Have confidence
- Be a patient trader
- Take ownership
- Lose the need to be right
- Form your own opinion
By focussing on these aspects of trading, you will improve and grow as a trader and be another step closer to being consistently profitable.