Here is an edited version of a post by a
fellow named Ziad Masri. It was posted originally on the EminiPlayer blog in
July of 2009. Later a guy who goes by the name Gladiator X added some of his
own thoughts to Masri's post.
I edited these posts to make them more
readable and am posting the result in two parts. While the ideas discussed in
Part I come largely from Masri's original post, he didn't want me to attribute
them directly to him since the post also contains some of Gladiator X's
thoughts and because I had edited a number of details. I really don't know the
original source of Part II. It was posted by Gladiator X on Trade2Win .
I think both parts explain the truth about
trading and about learning to trade more clearly and accurately than anything I
have seen previously.
Part I
Why do
most traders fail? Change your ways. Now.
edited
by Carl Futia
I am someone who trades for a living. I have
less than 10 years experience but I feel that the mental energy, time, and
effort I have put into trading is enormous. I think I have had success because
I did the REAL HARD WORK, work that most people want to avoid.
Hard work isn't reading a trading book,
applying to a broker, opening a chart and spending hours back testing an EMA
crossover. It isn't sitting for 12 hours per day testing the crossover on
different markets and then sitting 4 hours waiting for the signal to emerge
because in the back test your found it to be 'high probability'. If you are
doing this you're wasting your time, spinning your wheels without moving. You
are avoiding the truth of trading.
Here is the truth of trading. A trader
must learn to identify the direction of the market's trend in the various time
frames which are relevant to his trading goals. But the trend direction is
often ambiguous. So a trader must learn to face trend ambiguity and thrive in
it. Trading is not about
clarity. It is not about setups and signals - not about
EMA crossovers, three-higher closes for entries, waiting for pin-bars at
support.
These sorts of setups and signals may work for
a small number of successful traders, but for most aspiring traders they are
useless. Why? Because they are NOT the essential part of the trading process.
Traders who use setups and signals successfully have already built a mental map
of market behavior. Such a map identifies the market's condition and trend in
the various time frames which concern him. The current position of the market
on this map determines the value of a setup and signal in particular contexts.
The way such mental maps are developed is difficult to explain.
Here is what I mean. I could explain a
specific setup of mine to you, one that is extremely easy to follow. But I
couldn't explain how I interpret the time and sales window and compare it to
order flow and market action. And it is this latter interpretation that
determines whether or not the trend direction is favorable to the setup. This
skill at interpreting time and sales in the context of market action is one I
have developed by watching the market carefully and by taking hours and hours
of notes on its behavior.
It is this experienced recognition of the
direction of the current market trend that gives me an EDGE over other
traders. Only after I have made this judgment do I start paying attention
to setups and signals.
Knowing the direction of the market's various
trends tells me whether my setups are likely to be good ones or bad ones. Most
aspiring traders can't make these distinctions. To them all setups and signals
look the same. When they take a loss after following one all they simply say
"oh it didn't work" and moan about it.
These people have not started the really hard
work - the work they need to do to be successful traders. They will have to
spend weeks or months watching markets trade. They will have to take notes on
what they observe and start building a mental map of market behavior. They will
have to learn to exercise judgment is assessing the market's condition and
trend - and to have confidence in their judgments and the courage to act
upon them.
On these forums hundreds of people talk about
how to be a profitable trader. But most of them not profitable themselves, at
least not to any significant degree.
Speaking as someone who makes A LOT of money
from the markets I say that it was never a specific system or price action
setup that finally made me consistently profitable. Rather it was my extensive
study of market behavior, of the "tells" it gives that help me
identify the market's trend. I had to learn to embrace the inherent ambiguity
of all market behavior - to learn that there are no certainties, only
probabilities. I had to create my own interpretation of everything, even though
I used the knowledge I found in books about the market and trading as a
starting point.
I am now able to trade without a system,
without a detailed plan but with money management. All the guru's say YOU NEED
a specific entry and exit plan but I don't use one.
Believe me, the reason MOST traders lose is
because they fail to embrace uncertainty. They try
to convert the inherent uncertainty of market behavior into something that is a
sure thing in the sense that every trade they make will be dictated by a fixed
set of rules. They spend fruitless hours trying to find a system of setups
and signals that will make money in the markets. They don't learn the $tick
relationship to price themselves but instead look online and see what others
have found. They are unwilling to do their own thinking . They don't spend the
time needed to develop their own skills of market observation and
interpretation.
It took me 4 months to become profitable. Many
of you won't believe this. But the reason I was able to do it so fast was
because I cut out all the crap. You may believe you are working hard - you may
have been up for 8 hours last night testing if the strategy you just read about
in a trading book is a good one.
But I say you haven't really started doing the
hard work yet. Until you do you will remain unprofitable. You won't find the
high-probability, profitable setups you seek. To do this you must first study
the market's behavior and understand it - learn how to identify the market's
condition and trend. Only after you have mastered this aspect of
market interpretation that you can you work with setups and signals.
It will be your understanding of the market's
trend that turns your setups and signals into high probability, profitable
ones. Setups and signals by themselves cannot do the trick - they cannot turn
you into a successful trader. They do not incorporate and understanding of the
market's trend and condition. They miss something that only your personal
judgment can provide.
Let me give you an example that might open
your eyes. Have you ever played a shooting game like Call of Duty 4 or Halo 3?
The players who are very good at these games haven't got a system, they don't
spend up at night thinking about the best place to camp with a shotgun. They
practice playing the game. They master it.
The difference between a winner and loser
isn't that the winner knows a secret, or paid someone to teach them the
secrets, or have a system of using power-ups to beat people. The winners win
because they are more skillful, they have learned how to play, they have
mastered the game. How did they do this? By playing the game, by being continuously
involved in real time competition.
The same is true of good athletes in any
competitive sport. They don't plan their moves against their opponents in
advance. Instead they play by following general principles they know work most
of the time, and they rely on their game experience to make the right play in
response to their opponent's action in the context of the specific game
situation. Yet despite their skill and experience every great athlete will tell
you that he/she fails frequently.
Try hard to think about what this means. I
think it demonstrates my point quite clearly. The good players are genuinely
skilled. They do not follow mechanical rules in their play, rules that anyone
could learn by reading a book. Whoever heard of a football player becoming
great by reading a book on football?!! But aspiring traders seem to believe
they can become good traders, make good profits, by reading books on trading
and checking out the statistics of every setup and signal under the sun! What's
wrong with this picture?
A genuinely skillful trader is someone who can
apply his knowledge of market behavior in any context, in any environment. In
some situations he knows that certain setups and signals are genuinely useful,
but in other situation he avoids those same setups and signals like the plague.
CONTEXT! It's
all about context. Stop trying to trade on signals and setups that pretend that
the market context is always the same. You must instead focus your efforts on
identifying the direction of trends. This is inherently an ambiguous and
uncertain process. So you must embrace uncertainty! Embrace ambiguity! Accept
the fact that you won't get things right every time. But at the same time
learn to trust your judgements without the support of a rigid framework of
mechanical rules.
Here's the situation as I see it for most
users on the forum. You've have been spinning your wheels while thinking that
you are getting somewhere. You are trying to learn how
to trade in the wrong way.
I see that most aspiring traders focus all
their attention on "set-ups" and on finding out which combinations of
indicators work. But these people are never going to become profitable. Why?
They are following the advice of trading books that say trading is simple and
psychology is everything. So they search for set-ups that 'work', and they
hope that these setups can take the guess work out of trading. They
want to be "disciplined" and have simple rules that guide all their
actions in all contexts. But I have got news for you: you
CANNOT take the guesswork out of trading!!!
I offer this opinion as someone who started
last year with $30,000 and ended with $150,000 without a single losing month. I
think I was successful because of the way I went about learning and what I
focused on. My learning process was very different from the ones suggested on
this forum. I learned that while psychology is huge it is not everything. And
while trading is all about simple principles, actually having an edge is NOT
simple. It's a myth that you can have a couple simple price or indicator
set-ups and make money consistently if only you are disciplined. That's a load
of crap. It keeps the dream alive for wannabe traders who never realize what
trading is truly about.
Trading is about being okay
with ambiguity. It's about tolerating confusion. It's about sitting with
discomfort and being at peace with it. It's about not having an exact script of
when to trade or not to trade, or what's really a high odds trade, and being
okay with that. It's about exceptions to the rules. It's about contradiction.
It's about uncertainty.
And yet traders left and right want to make it simple and certain. They want to reduce it to a few simple set-ups to trade with discipline. But the market is not simple. The market is all about uncertainty, and complexity, and ambiguity. Simple set-ups could never capture that, and they can never give you a true lasting edge.
And yet traders left and right want to make it simple and certain. They want to reduce it to a few simple set-ups to trade with discipline. But the market is not simple. The market is all about uncertainty, and complexity, and ambiguity. Simple set-ups could never capture that, and they can never give you a true lasting edge.
So what's the solution? Is the problem in the
simple set-ups themselves? No, it's how they're being used.
The bottom line is that every
trader needs to learn to READ the market, identify the direction of the trend
which concerns you. This means that simple rules will not
do. There has to be a synthesis of different elements (whether
they be price action, indicators, inter-market themes or whatever), and
real-time interpretation must take place. It has to be all about CONTEXT.
Once you can read markets in an unbiased way
you can then choose to employ "simple" set-ups to enter and exit. But
the real work will be in learning to READ THE MARKET to see when
you should use which kind of set-up. Seeing a hammer or
whatever near a support means nothing unless you've identified the broader
picture and gotten a sense of the kind of tactics you should be using, and what
the odds are for different scenarios unfolding.
Now I know most traders try do this to some
extent, but their main focus is on the set-ups. It's not on reading the market
from minute to minute, hour to hour, figuring out the odds of it doing this or
doing that, adapting dynamically, and thinking of trade ideas from all your
observation as the day unfolds. Rather, it's waiting for some simple set-up to
pop up and then taking it.
Is it easier emotionally to have clear set-ups
to wait for and trade in this simple manner? Absolutely. But who said 'easy'
would make you money? If I've learned anything, it's that the market
rewards what is hard to do.
It's hard to have ambiguity surrounding your
market reads. It's hard being uncertain. It's hard dealing with competing and
sometimes conflicting signs. But this is an inevitable part of the trading
process. You must stop trying to avoid it by demanding that things to be clear
cut.
Yes, I know, it is hard to be disciplined when
there's so much ambiguity, so much uncertainty about just what trade to make.
But as a trader it is
impossible to eliminate uncertainty. Don't try to avoid it by looking for
simple set-ups or some straight-forward, simple, always- right method. Instead,
train your mind to deal with the uncertainty.
How can you learn to do this? You must be constantly engaged with the market, always trying (and often failing) to figure out what the market is trying to do (go up or down). You must learn from experience.
How can you learn to do this? You must be constantly engaged with the market, always trying (and often failing) to figure out what the market is trying to do (go up or down). You must learn from experience.
In my own case each and every day I would take
notes in a journal. I would try to interpret the market's action and try
to figure out trades that would take advantage of my analysis. I
took note of the ideas that seemed to work and those that did not. I wasn't
focused on paper trading, or on recording my emotions, or anything of that
sort. Instead I paid strict attention to the market's action and to the
information I thought it was giving me about its condition and trend.
Everything in my journal
was about my own perception and interpretation of the market's action and what
it was telling me about its trend direction.
Day after day, week after week, I kept on
making mistakes, wrong calls, being clueless about what was going on, not
knowing how I should trade, and not knowing if my views made sense or not. Yet
I refused to be discouraged and I continued taking notes and learning.
I would view charts and combinations of
historical intraday charts, and I'd note certain behavior. For example, I'd
study trend day after trend day and try to notice what they had in common and how
I could have picked up on it in real time. Then I'd study range days. Then I'd
study a price chart of the ES versus the Advance decline line and see what the
relationship was across many different days. Then I'd do the same with the ES
and TICK chart. And on and on. Over time, this gave me a feel for the markets,
and a certain understanding of how certain days differ and many subtle signs
and tells for each type of environment and context.
As for set-ups, I didn't use any predefined
ones. I just formed trading ideas and then tried to get in at good trade
locations. Even this, which is the art of execution, can be quite
complicated. I started realizing that in some environments it's best to wait
for pullbacks, in others I need to get in at market or I'll be left in the
dust. In some contexts I can buy low and sell high. In others I have to buy
high and sell higher.. And so on.
I became consistently profitable in a
timeframe of a few months by doing this. But of course before that I had read
30 or 40 books and so I had a lot of background in technical analysis. I had
also worked a lot on my psychology and personal issues. But all of this was in
conjunction with a method of learning and trading the markets that was contrary
to what the general wisdom says about simple set-ups and exact rules.
In the end you have come to a personal
realization. Take a look at your trading career thus far. Do you truly believe
that if you just learn to focus and take all of your set-ups then your equity
curve will reverse and you'll be a consistently profitable trader? Do you think
a few simple set-ups could make you rich?
I don't mean to imply that you need complex
mathematical models. Far from it. What I do mean is that you must develop a
mental map of market contexts and the experience and skill to tell where the
market currently is on that map. This will take time, effort, and lot's of
frustration to develop. And you won't be able to do this if you spend the whole
trading day simply waiting for set-ups to materialize. That just won't cut it.
Right now your learning curve is
stagnant because you're not truly involved with the markets and their
behavior. You are acting like a statistician who is separate from the
market. Your day is wasted in waiting mode. You are not in the observing and
absorbing mode. Because you fear loss you aren't willing to experiment. This
means that you aren't making mistakes and failing regularly, which is what you
need to do to learn quickly.
So I think you need to make a mental shift. If
the path you have followed hasn't brought you to your goal, try my path
instead! Prepare to face uncertainty and ambiguity, the essence of financial
markets. But don't be afraid. The market isn't out to hurt you. Success in
trading requires the ability to be at home with ambiguity and uncertainty, to
be able to take a market stance while accepting the fact that you cannot
predict the future with any degree of certainty. This is what trading is about.
This is why it is an ART. Once you change your focus and your learning process
everything, including success, becomes possible. Until then it'll be a distant
dream that keeps appearing to be so close and yet stays so far away.
So you need to re-align your thinking and get
involved with the markets. Get a trading simulator and trade. Take losses. Make
mistakes. Be clueless. Don't be afraid of it. It's okay, that's the only way
you'll progress. And trust me, you will progress.
Face these challenges. The stuff you have
heard about learning setups and applying discipline comes from gurus who cannot
trade, who give advice based on their failed ventures.
These challenges most people find difficult to
face. This is why most are not successful. If you can't do this profitable
trading will remain a forlorn hope of yours.
I wish you all good luck and I hope some of
you find this helpful. This is what I am giving back to the trading community,
I hope someone of you have an epiphany over what I have said.
When I was in the 'holy-grail' search
mentality, a friend explained all this to me. I took what he said to heart, and
I believe this is why I am consistently profitable today. This the
only real secret I can pass along to you as traders.
Good luck!
Good luck!
The Truth
About Trading - Part II
How
Amateurs Approach the Market.
edited
by Carl Futia
(original
source unknown)
This post is for people who are struggling
with their trading, not being profitable and finding themselves working
extremely hard to no effect.
I found very interesting a recent post 'Who
uses stop losses?' and the various replies about how stops are necessary,
professional, business-like, etc. That post and the ensuing comments confirmed
what I already knew: the retail trading crowd thinks and acts like a flock of
sheep.
Books and information about trading all say
the same things. They emphasize money management, tell you that it is stupid to
average down, tell you to use stop losses, risk 1% of your account, and other
common propaganda.
The interesting thing is that people who talk
about the value of stops, money management, etc. appear to have gotten their
ideas from a book. This include the authors of those same books! It is a never
ending process, a constant recycling of bad ideas. I think that those who write
trading books that explain how to trade aren't particularly good traders
themselves. Why?
I think you must embrace uncertainty to
succeed as a trader. Those who write books, teach seminars and so forth are
just trying to find a way to make money with certainty because they can't trust
their own trading to do it or because they cannot live with the ambiguity and
uncertainty of constant involvement with the market.
These ideologies that trading books offer are
accepted as trading wisdom in the community of amateur traders. I was fed all
this when I was learning to trade.
But I got lucky. A very successful trader told
me early on in my career that 95% of traders fail. Therefore, to
succeed he said that you have to do the opposite of what they do, you
have to think outside of the box. I've always tried to think in a unique and
different way from other traders and I believe this is in large part
responsible for my success.
All across the internet and in all books about
trading you will find the following assertions:
§ High
probability setups + Discipline = Success
§ Always use stop loss orders. Have a specific risk-reward ratio in mind. Know exactly what you will risk in every trade
§ It is stupid to have a risk-reward ratio of less than 1:1
§ It is stupid to aim for very high win percentages
§ The entry price is the most important detail.
Almost all amateur traders buy into this ideology. Why? These rules produce the illusion of certainty in the market place. You know your risk and that's it. There is no chance of becoming emotional because you failed to use a stop and therefore busted out you brokerage account. You don't have to worry about having to explain to your husband, wife, or friends that you are not as big an idiot as you seem to be, that trading is still something worth doing.
But in the market certainty
doesn't exist. Any rule that produces the illusion of certainty just makes it
easier to fail as a trader.
Admittedly I went through a phase of having a
set risk-reward ratio (1:2) and risking 1% of my account, thus calculating my
position size must be (x). My stop loss was frequently hit. I was going nowhere
fast.
I printed off all the trades I ever did and
analyzed them in detail, trying to find what went wrong. I came to some
conclusions.
1. I'm buying high, I'm buying on a higher
close, buying in a late signaled uptrend rather than buying on falling price.
2. Price is volatile. My stop is getting hit.
I can't forecast price fluctuations with enough precision to be able to place a
5 pip stop loss.
I concluded that using a
stop loss represented my effort to predict the market's short run fluctuations,
to treat the market as if its movements were certain. But I couldn't do it.
I tried to move away from
this idea and explore how I could trade without a stop loss.
During this learning process the fact 95% lose
was a uppermost in my mind. Whatever traders who were
losers wrote I would turn on its head and try to do the opposite. This
was my way of thinking outside the box. And I believe that you shouldn't follow
the flock.
I began to see trading as
an art instead of as pure calculation. It is less about
certain maths and more about movement.
It's about watching the
market dance, letting it move up and down without placing too much significance
on any particular jiggle.
I decided that I just
wanted to take a piece of these constant fluctuations and not try to predict
them.
I concluded that trading is not about having a
certain risk-reward, not about applying the same risk to every opportunity, not
about exiting at a pre-determined level. It is about making
adjustments as the market produces new information, as it
moves move around on your mental map of its behavior.
It's extremely hard to make money from the
common wisdom you find in trading books. But if you look past such
"wisdom" you can see trading doesn't have to be so complicated and
time-consuming.
Volatility can produce
profits for you without you having to be a prophet! All the
prop firm traders I know who are successful understand and base their methods
on this insight. All the successes I have had in trading arise from this
observation.
Professional traders win by applying their own
judgment and experience to judge the market's position on their personal market
maps and then letting the market's natural volatility work for them. They
don't waste their time back testing strategies.
So how can you change your current quest to
trade for a living?
1. Read my previous post about how to learn to
trade, I seriously think if traders learn to read the markets, they will be
successful. Read the market, take in the new information is gives you each hour
and each day.
2. Try to escape from common wisdom and
general public beliefs. Start thinking outside the box, Start looking into
volatility, high win percents and try get past your human fears and uneasiness
with ambiguity. Don't use hard stops.
3. Average down and pyramid as a planned
tactic with risk management.
4. Enter when price is falling.... In an
uptrend.
I strongly believe averaging down if done
as a planned strategy and not as an effort to deal with a loss is
an easy way to profit... That is from personal experience and it is expressed
in my account balance.
Thanks for reading. Hope this helps.
