Monday, April 28, 2008

Trading becomes boring

The following article has been written as a letter to someone, who set himself the goal to go real only after 40 consecutive days of profitable demo trading. This trader had losses in the past and switched to demotrading 2 years back to really learn to trade. He now has reached a point, where real trading seems to be no longer elusive, but near again as he has mastered a lot of ground these last 2 years in his personal trading.


allow me to jump in as I have been down that road. I hope you understand this mail as well meant advice and not as bashing, but it is my frank opinion and I really hope to see you succeed in the future.

Reading your mail I have the feeling, that despite your success you are setting yourself up for another failure.

1. Being 40 days green doesn’t mean you will be able to start green in real trading. Actually looking at my own trading journal I know at my current stage as a trader I will have a (few) red day(s) after  a very successful run up in my account. Your account development can be plotted like a chart and even a very strong bullish run will have some retracements, will consolidate from time to time. So after 40 green days I would expect one or multiple red days in a row, before the trend resumes. And actually, that was my downfall 2 years ago, when I was where I am today again. I was unable to manage the red days, I was unable to trade with the knowledge, that red days, that losing trades or a red week are part of the business. Ask any merchant, if he has made only profits, if he never ever had spoiled merchandise, if he never ever experienced some theft. You will find none. No the real test comes when you have had 3 red days in a row, when you have a red week after months of green and need to ask yourself: WHY?

Were these red days, this string of losses just bad luck, just a few trade setups not working or has the market changed and have you lost your edge? If it is the first, as most likely it will be, then you Continue to do what you have done in the past and the profits will come again. But when the markets have changed, then you need to go back to the drawing board, then you need to identify what has changed and adapt or you will wash out. 2 years ago, I nearly washed out. I did not adapt to the higher volatility creeping into the markets, I did not change my trading approach and it cost me nearly my trading career.
So embrace the red days, handle them, see to keep them small without taking extraordinary risks. It’s not about turning the day green after you made a bad trade, it’s about keeping the riskprofile equal over all your trades. If then the day turns green after you started with a red trade, Great!! But if you took higher risks to turn the day after a losing trade, then beware: Know that you have been lucky. And every trader may rely on luck a few times during the month. Without luck there is no success. But be sure that if you need it too often it will no longer come to you. I try to limit myself to two lucky trades a month. Usually you only know in hindsight, that you have been very lucky, that you better stop going down that road and return to the well worn safer roads you have traveled before. Because in trading higher profits always mean higher risk as well. So if you took a higher than normal risk to turn the day and you got away lucky, then turn around…or decide that you are now ready for that higher risk, but then you need to take it always or your edge in the markets will have vanished.

2. You want to change your broker and trading platform from the one you used 2 years ago. I could give you advice on what I use as anyone reading this letter can. But BEWARE you are setting yourself up for certain failure.
I found these steps 3 years ago I think and here is the link again:
Start reading Step 30 to 36
Trading becomes boring…Something becomes boring, when nothing new comes around, when you just go straight ahead. I once made a vacation in Australia, we landed in Darwin, took a Jeep and drove along the Stuart Highway down to Adelaide with a few detours right and left. But I still remember that Street-sign in Darwin saying Adelaide 4400km (~2750 miles) And that Stuart Highway went straight ahead for hours, 300km just straight ahead before a bend in the road came. Your mind starts playing games, but you need to focus and drive on and on and on.
But before something becomes boring it needs to be familiar! Anything new is by definition not familiar and it certainly will not be boring.
So your 40 days green will only be a worthwhile experience when you trained yourself exactly the way you want to trade in real time. Why do Air force pilots use extremely sophisticated simulators. Training without killing the pilot. But all that training would mean nothing if the simulator would not look and feel like the real thing. So setup your trading station exactly the way you want it. It’s a bit like decorating your own room. You need to feel cozy, actually you will be sitting there for hours a day, so it should be comfortable, it should not be stressing and everything stays where it belongs. It is your room, you don’t need to, you don’t have to share it. So make your trading station your home, where you feel comfortable. Start demo trading and after a few weeks when switching to real trading it will be just a small step. Marriage used to be such a big thing. For me the real big step was deciding to live together with my girlfriend in 1989. The marriage 4 years later was just a small step, just telling the world that we belong together, that we want to stay together. We are still together and we love each other. An anachronism in our fast world? Maybe, but I know I have something very special in my life. Is it boring at times, just going straight ahead? Of course, after such a long time there can’t be something new every other day. But I would not have it any other way!

Trading becomes boring only when it’s no longer new, only when it is so familiar that you can do it in your sleep, when there is nothing new every other day, when you are set in your trading, when you trust in your method, know deep deep down, that you really have an edge, when you can trust yourself to do what is necessary in every situation. There still will be surprises, there still will be a detour, a new road to travel, new obstacles never encountered before, but you will be able to master them, because you can trust yourself to do what is best for you. But first let it become familiar and boring. There is no shortcut on that road, we all know that. Start and just take it step by step and you will be surprised how fast these 4400km will be behind you and you have traveled a whole continent.

3. Opentick gives you a datafeed for 15$/mth. IB costs me 10$/mth if I trade demo only. Otherwise I pay nothing for the US futures data. I pay for my chartsoftware, I pay for other futures data, as I trade more than US futures. But limiting yourself to just a few shortens the time you need to become profitable. I now know that, I already took that longer road, so now I profit from the experience. But it added 2 years to my learning at least. Keep the cost of business down. Use what really gives you an edge and just stay away from all that candy right and left. It will  be sweet for a few days…and the dentist will love you, as you made sure he has a job to do in the future. Keep it simple, stupid.

Best regards,