Retail trading, like most other endeavors, requires a learning curve that can be challenging. Like most traders, when I started my trading journey some years ago I jumped right into the deep end by taking a quick technical analysis crash course, back-tested a strategy I quickly ‘glued’ together, and opened a small brokerage account. A lot of the knowledge I acquired was from mainstream educational sources and the strategy I put together was from many hours of identifying patterns on charts.
Over a period of a few months, I made some gains on the brokerage account but lost it all due to faulty risk management and gaps in my understanding of how the markets I was trading operated. The many hours of screen time during backtesting were indispensable to my experience and learning process but I was starting to realize that there was more to learn and apply than just the patterns that my ‘lizard brain’ was spotting.
If pro athletes or brain surgeons require lots of practice and focus on process rather than outcomes, why did I think that the trading field was any different? Why did so many of the mainstream brokerage-funded educational institutions think it was any different? Despite this niggling realization, I kept on saving up and gathering funds to open new accounts to try again and again with different variations of the same technical strategy for a couple of years. I managed to make 100% on one account, spent it all on liabilities, and then I lost trading account after trading account after that.
My journaling was consistent sometimes and patchy at other times, with occasional entries and no structure. However, one day after a frustrating week, I decided to pore over it and I noticed some patterns in my behavior. Inconsistent lot sizing, inconsistent reasons for entries, a lack of understanding of WHY I even entered positions in the first place, many currency pairs and indexes and an underlying lack of belief in myself and my trading methodology. In stepping back to analyze my own behavior I was able to see certain things that I needed to change, although I was not sure how to make the changes at the time.
So it was back to the drawing board. I worked on correcting my psychology, changed my approach, learned more about how the markets actually worked and started pacing myself till I noticed improvements in my results. As I write this article I am still improving and looking for ways to improve and grow. I enjoy trading more and I have a more balanced life all-round.
Although I trust my process and I know that the journey so far was important for my growth, there are certain things that I wish I had known at the beginning. I did a few interviews with other traders I know and I also picked their brains about some things they also wished they had known when they first started out.
“I alone cannot change the world, but I can cast a stone across the waters to create many ripples” – Mother Teresa
There is a phase of the learning curve where a trader holes up and treads a lonely path. However, the power of groups cannot be understated. When I opened myself up to bouncing ideas back and forth with other traders, I really learned a lot. There were blind spots that I was not aware of that they saw and vice versa. The power of group research and development in a community with intellectual humility was very liberating for me. My growth was accelerated as was the growth of all the other members of the groups I found myself in. Traders with different areas of experience and different levels of experience teaching and learning from each other truly was a game changer for me.
“If you cannot see where you are going, ask someone who has been there before.” – J Loren Norris
Many people in the retail trading space are really smart people, so it is not a surprise that there are quite a lot of inflated egos in the space. There were many arguments in Forex Factory, Telegram, Whatsapp and Discord groups that had me scratching my head. I felt the tug and pull of my own ego underneath my humble façade as well; “I know so much technical analysis, what do I need anyone or anything else for?”
I think one needs one’s ego and a few very good traders I met were pretty brash and abrasive but I found that part of that was just down to their experiences in life. Underneath it all, abrasive or non-abrasive, there remained an intellectual humility and willingness to learn. I went through a couple of mentorship programs – some more useful than others – until I came across an institutional trader who used to be a quant trader for a bank. It was a whole new level for me and I kept some of what I had learned over the years but discarded a lot.
I still ‘found’ my own way but I was taught key unshakable principles of the markets and I was introduced to a robust process-based approach to ‘institutional’ trading.
03: Clear Education
“Live as if you were to die tomorrow. Learn as if you were to live forever” –Mahatma Gandhi
Trend lines, Head and Shoulders, Channels, Fibonacci levels, and other price action-based observations are only parts of the puzzle, in my opinion. Even other indicators, which even the mainstream eschews these days, like MACD, Stochastic Indicators, Bollinger Bands, and other oscillators can be useful if actually understood and reverse-engineered. Having studied and used them for a while I found that they were not the most important tools in the toolbox.
Granted some people may use them to very good effect and consistently make money but I found that I wanted to know more about the inner workings and dynamics that determine the value of assets. In my mind price was king but I delved into understanding how the ‘Locals’ used to trade on the floor, volume, sentiment analysis, auction theory, understanding how bonds work, commodities, options and inter-market correlations and rotations among other things involving institutional trading. For many people, this may seem too tedious, and maybe that works for them, but I found the contrary to be the case. Simplicity evolved out of the seeming complexity and slowly and surely I found my own niche.
If you feel that buying and selling off areas of imbalance retests, trend lines, head and shoulders, channels, overbought or oversold stochastic signals or Fibonacci levels are the only pieces of the puzzle that you need, then so be it. You may find or continue to find success in your trading. I thought I could but I chose not to rely on just those data points when I knew very well there was more lying underneath the hood. My curiosity about the markets keeps me learning and applying iteratively. While I found it important to keep learning, one must not let it lead to the problem of disorganized system hopping.
Another important lesson I learned was to treat my trading as a business and not a hobby.
04: System Hopping
“The risk of a wrong decision is preferable to the terror of indecision” –Maimonides
This one is a bit tricky because, like everything in life, it is good to ‘try new things’. This would be fine in trading if approached properly but many new traders usually hop from one system to another before accumulating a large enough sample size of trades to see a coherent result, thereby skewing their outcomes with this inconsistency. It may work but sometimes as traders we abandoned what worked because of a small string of losses we could have just cut quickly.
I am glad I ‘hopped’ till I found what I was comfortable with. Some of the systems I hopped away from could have ‘worked’ well enough over a sample size, via ‘luck’, if I stuck to them but thankfully I did not stick to half-baked misconceptions. With an understanding of what moves markets the available options for observable nuances for developing a trading system are ‘limited’. This does not mean that there aren’t a million and one ways to trade.
For example, buyers coming in at higher prices will result in a rally. This can be seen on price and volume charts. Institutions will usually take profits, partials or otherwise, at measures of balance areas. These balance areas happen to coincide with the Fibonacci 50-level projection of the balance area to the upside or the downside. Does this mean that I should base my entire approach on Fibonacci levels? No, I do not think so. There are many other examples I will not go into in this article.
05: Thinking like the Herd
“If everybody is thinking alike, then somebody isn’t thinking” –George S. Patton
Logically speaking, if over 85% of retail traders are net losers, then I would prefer to know what makes them lose and do the exact opposite of whatever it is. Sounds easy but it can be complicated. For example, the fear of buying at higher prices and selling at lower prices goes against the ‘wiring’ of the brain to seek bargains by buying at lower prices and selling at higher prices. By all means if I find a ‘lean’ to work into at a top or bottom edge that meets my criteria for an opportunity I would take it but more importantly, I would be looking to add to my position at lower or higher prices if it keeps going in my favor.
This is easier said than done in a live market environment with all the psychological ‘boobie traps’ price action can be rigged with. Stanley Druckenmiller, one of the greatest traders in history who made 30% per year for 3 decades with no negative year, ON SIZE, once said; “It is not just about being right or wrong but how much you make when you are right”. This is a principle of ‘scaling in’ that I have added to my trading plan recently.
06: Removing Humanity from Analysis
“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute” –William Feather
Many of us retail traders, newbies and some experienced ones, look at the markets as a bunch of numbers and chart patterns. This is okay if you are able to operate that way but I, personally, have not been able to, so I chose to look closer ‘underneath the hood’. Markets are about people at the end of the day, thus my approach takes the historic behavior of important market participants into cognizance. Some key questions I ask are what is the situation with credit? What are the central banks doing? What is going on in the bond markets? What are bond traders doing? What is going on in the metals markets? What are metals traders doing? Are they all in agreement or are there differences of opinion between them?
I also like to know what is happening with ‘forward looking’ fundamentals like the CPI and the Composite PMI. The CPI because it gives me a feel for what is happening regarding inflation and the PMIs to know what the purchasing managers of the largest companies in different countries are going to be doing next month. All these data points add to a narrative I build about the general order flow of money and the health of the world economy.
With all these pieces of the jigsaw puzzle on the table, I start to juxtapose with my technicals like price action and volume.
Trading is a performance-based business and to perform well, one has to focus on the process and the outcomes will follow. I think there are some psychological traps that one may find oneself stuck in, but none of them are insurmountable. All it takes is some self-reflection, study, and practice. One also might also consider practicing humility so as to not block their own growth subconsciously. One must not be afraid to put in the work and most importantly never give up.