Patience is a Virtue

One aspect of trading that is so often overlooked, but probably lies at the heart of most poor decisions ... is.... you guessed it..... patience. Lets be honest, the sole reason we trade and got involved in trading is to make money, a lot of it. And a lot of it can be made, don't get me wrong. The richest individuals in the world are investors and they got to be rich by harnessing the power of time. Whether they are conscious of it or not, the power of time and using money effectively with the power of mathematics helped them to amass a great deal of wealth. In the world of trading, having patience can drastically improve the performance of your account. There are countless examples of traders who lost almost all of their capital simply because they didn't master the art of waiting and risked too much or traded too often in hopes of out thinking the market. The ones who do make money, are the ones who understand a market will run, then walk. I want you to look at the graphic I prepared below. Click on it so it enlarges and absorb what's happening.

Now I initially called it "The Flight Path of the Trend Follower" but quickly corrected myself by adding the word "Good" to the title. I'm illustrating how closely a trader's progress looks just like market movement. Your progress is not going to be a straight line. Actually, your progress will probably seem stagnant more times than not. 60-80% of the time, your account will look lifeless, losing what you win over and over. That's okay. If you have patience and understand that, instead of out thinking the market, you follow it, understanding when she starts running again, you'll be there. Along the way to riches, you will experience good sized "setbacks" but they're not setbacks. It's just trapped energy spooling up to be released down the road.

Being a good trend follower means understanding markets take a while to work themselves out and make substantial moves, one way or the other. Trend followers trade as usual, expecting only what the market is willing to give. Buyers and sellers often "fight" so much that sideways choppy action can last what seems forever until one side wins and the people who stuck around long enough reap the reward. The good trend follower understands this thoroughly and it's what keeps him/her from betting too much or taking odd trades that go outside their system. They make trades listening to what the market and their system ARE telling them, rather than listening to what they feel the market SHOULD do. Big difference. As an ex Elliottician I still struggle with letting go of all the patterns I learned, hopelessly trying to forecast the future. Why? Well after years of study and lack luster results at best, I quickly realized that in real time, markets cannot fit in a box and that market will move and swing the way it wants. Also, if you ever become married to one or two possible outcomes, you tend to hold on to those beliefs even when the market is telling you it's not going that way. Trend following is all about finding out when the trend has changed, and simply taking action, moving your stops, and letting the market move while you get out of the way. She says to lose $800, you give $800... She gives you $500, you take back $500.

When using a good trend following approach, drawdowns will occur whether you are trading a weekly chart, or a minute chart. They cannot be avoided. Sure you can do your best and avoid certain phases, but for the most part, it's easiest to follow along and be there when price makes the big moves. Embrace the draw downs. They aren't so bad. They are simply a precursor for the main event. If you can master the art of patience while trading, after every drawdown period you will continue to add additional profit, and that's a beautiful thing. Just make sure you trade small and account for those drawdowns, otherwise you'll not only be late to the party, you won't make it at all.

"Change Is Automatic, Progress Isn't"

I was listening to my guy Tony Robbins this afternoon (I tend to geek out on personal growth material at times) and he made this statement. He wasn't talking about trading but just the same, it definitely applies. The markets and conditions are changing all of the time, day by day, minute by minute, second by second. The market doesn't care whether you are young, old, man, woman, a nice person, a bad person, skinny, big boned, etc. It just keeps changing, going up and down, taking people's money and redistributing it to others and vice versa. I'm emphasizing this point because it's very simple and small minded to get angry at the market because of lack luster results.The market simply doesn't care that you have taken 5 losses in a row. It doesn't care that you're spreading yourself too thin. It doesn't care about you, period. When we win, we say "I" did that! When we lose, we tend to look for someone or something to blame. Well, start with yourself. Look and see if there's anything you could have done better. Break things down and figure out if you followed your proven system correctly. If you did, stay on the same track. If you're veering off, get back on track and make the necessary adjustments. Take responsibility when you need to so you can change, grow, and move on. That is what success is all about. This is what needs to happen in order to progress. Eventually, it becomes a ritual and you'll stick to your guns time and time again.

I'm reminded of what my late mentor said about his trading... "I'm allowed to have a down day, not a bad day". What he meant by that was if he followed his proven system and lost for the day, that's a down day and perfectly acceptable. If he were to take chances and not follow his proven system, that my friends would be a bad day, and you're not allowed to have them.

Good trading everyone and have a great weekend.

Be Safe, Avoid The Announcements

Short post for today but the question usually comes up on what a trader should do during a major financial announcement, like today's Fed (Federal Reserve) announcement? In what surprised very few, today the Fed kept interest rates at their current level instead of raising them. Regardless of what the decision was I can guarantee one thing.... At 2:00pm EST, on every Federal Reserve announcement day, the markets go crazy, wonky even. I don't care how sophisticated your software is. Generally when announcements are released, the market swings so drastically that it's near impossible to profit, unless you're trading on a 1 minute time frame and/or initiating some serious short term trades. Be safe, stop your trading at 1:59pm EST and call it a day. Your trading account will thank you in the end. Take it from me who has learned the hard way in the past. Leave that risky game for the other guys and prepare for the next trading day. Cheers.

Be Right, Even When Wrong

I know what you're thinking... How is that possible in the world of trading? Well what I mean by that is, follow your proven system, time and time again so that even when you lose a trade, you know that in the long run, you're always going to win. It gets back to the previous points I made in the posts and I'm sorry if I sound like a broken record but always stick to the plan. Stop trying to win every trade. Stop changing your proven system when you take a string of losses. Relax, breathe, and think about carrying out your system on the very next trade because only then, will you be on track to build sustained wealth. Most traders become statistics because they just can't let the losses go. It consumes their mind and they go a bit crazy in the process. Soon after, goodbye capital.

Personally speaking, during the last week of August and the first week of September, I have doubled my trading account in value. As great as that feels/felt I'm aware that drawdowns and losses are around the corner. This is because that's the way the market works. Now if I lose half of my account in the next few days then we obviously have a problem. Generally, what you make when the market trends nicely, will be reduced by a certain percentage following that run. The trick is to stick to your system so that once the trend resumes or picks up again, you can be there, and who knows, you may double your account once again. Always be prepared to give a portion of your earnings back to the other players. It's the cost of doing business. But if you can take $10,000 and turn it into $100,000 in one year, do you really think you're going to concern yourself with thinking about all the losing trades you had along the way? So please, keep looking at the large picture... Trade by trade you will get to where you want to be. It's just not going to be a straight line. Remember, always position yourself to be right, even when you lose a trade. Your financial future depends on it, literally.

Please, backtest BackTest BACKTEST

I cannot stress this point enough. It's imperative you backtest every possible system or method strenuously! This will become your bread and butter, your "go to" for building profit, drawing income, and producing wealth. It needs to stand the test of time, in different market conditions. It needs to remain unchanged for a long period of time because this is how you will survive drawdowns. Which brings me to my next point. Your system has to be able to be properly backtested having past data and indicators remaining the same, whether you're looking at live data, or past data. Meaning the buy and sell signals remain the same once each bar finally closes, past or present. And this is where approaches like the Elliot Wave Principle fall apart. These types of approaches can never be properly back tested because they are always using projections of what is to happen in the future but valid wave counts, when live, can change. This means as you back test with old data, the picture and count may appear extremely clear yet when you were looking at that same data being drawn live, the picture was murky and full of different possibilities.

When backtesting, your approach should be 95-100% accurate when comparing live data to past data. This allows you to see just how profitable or unprofitable your trade method is over a period of time, and make necessary changes if needed. You also need to make sure enough sample data is tested. For example, if reading 1-5 minute charts, 2 months of data is great. Swing trading (30-240 min charts), 6 months - 1 year, and daily charts, 1-2 years of data testing is good. Me myself, I trade the smaller time frames but instead of testing just 2 months, I went ahead and tested 6 months, just to be sure I had a good reliable system. I stayed up at all hours of the night/morning for weeks, testing every time frame, and then multiple time frames on the same chart to find the absolute best sweet spot for each respective market I wanted to trade. Like I said, if you really want to be successful, it's not cheap. You have to put the work in. It takes a very long time to be an overnight success.

Once I found it, I still only paper traded for a few months to get used to initiating trades in real time and to get a feel for what results I could expect. Only when my real time results matched up with the past backtesting reports did I pull the trigger on my first trade. This is what you need to do. It feels nice to pull in profit but never forget how easy it is to lose in this game. If your system does not hold up and you take shortcuts by not ensuring you have looked at every possible outcome over time, it will cost you, I guarantee it. Success in this business is not by chance. Success come to those who plan for it and execute strategies that have a proven track record. Put your ego away and backtest the hell outta your approach and I promise, you will thank the gods you did.

Compounding Is The Key Ingredient To Wealth

In one of my earlier posts, I talked about slow-medium growth being far better and far more sustainable than fast growth. This is true but I neglected to illustrate just how "fast" slow-medium growth actually is. Finance is all mathematics and once you understand the numbers, it makes everything very clear.

As a trader, I typically take small bets on each trade I make to make more money than what's being risked. This typically nets me anywhere between 100-1000% annual returns. This may seem very high (and it is when compared to large hedge fund managers on Wall Street), but as a day trader, trading a much smaller amount of money, it can be done taking small amounts of risk on short term individual trades. Some traders have returned +2000% in past years. The point is, when you look at these numbers, one gets excited but the truth is, even when making a much lower profit on a yearly basis, when compounded, the returns can really add up (and quickly) once an account matures.

I wonder how much money you would have after 10 years if you invested $1 and grew it by 100% every year after?

1st year = $1
2nd year = $2
3rd year = $4
4th year = $8
5th year = $16
6th year = $32
7th year = $64
8th year = $128
9th year = $256
10th year =$512

$511 of profit in 10 years is not so bad from an investment of only $1. Realistically speaking, if you invested $1000 instead of just $1, that profit jumps to $511,000. Let's say instead of trading for just 10 years you wanted to trade for 20. I wonder how that would change the end result?

11th year = $1,024,000
12th year = $2,048,000
13th year = $4,096,000
14th year = $8,192,000
15th year = $16,384,000
16th year = $32,768,000
17th year = $65,536,000
18th year = $131,072,000
19th year = $263,144,000
20th year = $524,288,000

Now the game becomes exciting. I'm not sure of any job out there where you can make over $524 million in just 20 years. This is all because of the power of mathematics, more specifically, compounded growth.

Some of you may say, wait a minute, 100% return a year is a bit "unrealistic"!. Fair enough. If you shoot a bit lower, lets say a 50% return annually, you would still walk away with a cool $2,216,837.82. Point is, compounded growth speeds up the accumulation of wealth over time to a point where unbelievable returns are attained. Stop trying to do it all in one year. Have some patience and the days will come where speed of growth is the last thing on your mind. If you're like me, and never want to fully retire, then you have a very bright future ahead of you once you figure out a system that works out for you. Keep doing that over and over again and change your life forever in the process.

Be Indifferent

In the world of trading, every investor knows there are ups and downs. It's not a question on if they will happen, but when. How you deal with those "ups" and "downs" means everything to your bottom line. My advice... deal with them in the exact same way. Your path to wealth will be a journey of many peaks and valleys so the best thing you can do is take each win and loss the same way, while understanding sustained success in this business will only happen if you're incredibly emotionally stable. Emotions get you killed in this game so the better you are at doing the same thing, over and over, while keeping your emotions in check, the more profit and the less losses you will experience. Keep following the market with a proven system and your losses will continue to be small and your gains will continue to grow.

I've taken a lot of losses in my career and I know they aren't fun. The important thing though is if you looked at my monthly statements, the total of those losses, are generally less than the gains. At the end of the day, that's all that matters.

You're Not Alone

Being a trader can be one of the loneliest professions out there, especially if you work from home. I'm touching on this subject because no one talks about how being a trader can affect your personal life with friends and family. I've felt lonely and misunderstood my whole career so i know how it feels.

When I first started in the business, I got the "be careful" and "that's too risky" responses when I shared what I was getting into. Even my cousin, who he himself was a trader and is now head of the department for one of the big Canadian banks told me... "Scott, it's risky. Are you sure you want to do this?" These concerns are perfectly understandable and valid since so few people actually make good money in the world of investing. Funny thing is, when I went to family, experts, and associations looking for some form of help, mentorship, and advice, no one seemed interested to share any knowledge or at least point me in the right direction. Whether it be close family or strangers, I started to see just how competitive the trading industry is. The truth is, every trader has to take it upon themselves to not rely on others to help when in need. You need to put the puzzle together and that often comes from many different sources. It's very rare today to have a successful trader just offer up their method and every detail about what they do to remain ahead of the game.  

As I continued to trade (unsuccessfully), I struggled to fit in to a society that pretty much only respects someone who has a job. I'd go out to parties, talk to friends and family about what I was into, and the conversations would seem to die almost as soon as I mentioned I was a trader. I didn't look successful really. Average clothes, average car, and I probably had a low energy to me because of my current results. It's important to recognize, when an entertainer or an entrepreneur or an athlete experience obvious success, people tend to get excited and want to be around them. When you're in the trenches, working on your craft, with little to no success, people often write you off or simply ignore you.

Currently it's pretty much the same experience for me. I tend to not say too much when people ask what i do. I still look the same, I still have an average car, but my attitude and outlook is a lot brighter. I've chosen to keep my life fairly censored for now. Life is fairly simple right now but in time, I'm sure people will begin to notice that things are changing. They will recognize what I've known all along inside but that's the way the world is/works.

So my advice to all you hungry traders out there, whoever you are, wherever you are, you're not alone. Like my good friend's dad told me recently (retired Wall Street guy)... "If people don't recognize what you're doing is what you love to do and they smirk at building financial independence, f*** them."

Start Small

Anyone who proclaims that you need a million dollars to make a million dollars is lying to you, especially in today's world. As a trader, it's your job to understand that $500 could potentially be turned into $1 million with the right amount of money management and a good, sound system. It may take awhile, but it can be done. The best part is, this type of thinking leads to better decisions and much less risk than starting with say $50,000 or more. The main concern for any trader is risk management. If you're buying one stock for $500, then maybe you should reconsider that decision but if you're opening a leveraged trading account where you could be taking trades risking as little as 1 or 2 dollars, well that's a great start to build your account and make mistakes along the way.

Me myself, I would say now I take on trades with medium risk. Not too small, but giving myself a lot of room to be wrong. When I first started out, I traded way too large and eventually lost it all. Next time around, I was super conservative because I never forgot about the pain I had previously. I would take little trades, constantly trying to figure out a system that worked. Took me longer than I expected  (8 years) but when I had something that worked, I slowly started increasing the risk and the amount of capital in use, and slowly grew it quite substantially.

Take it from me, a seasoned trader who made all the common mistakes, play small to eventually win big.