Why it’s hard to be a profitable trader

So following on from yesterday, I want to discuss the longer email that I got about how much effort it takes to be profitable a trader. It’s as unique to you as it will be as your fingerprint is to you. I said yesterday that it can take a long time to develop a feel. You might instantaneously understand chart patterns and all of this and that, and god knows Twitter is full of all that banality, but you have to try to trade them all. If someone shows you here’s 10 or so bullish patterns and here’s 10 or so bearish patterns, I actually feel that that’s a disservice to you because what, how does that benefit you knowing those patterns when you can look it up. Everything that you need to know is stored in the cloud somewhere.

So why would you need to memorize that? Because if you were interested in those patterns and indicating that you could identify them on a chart, which one is going to be the one for you to trade? Because in my experience I don’t believe you can trade all of those patterns at the same time. Most everyone that I know has their setup and they stick with it and just like panning for gold, it took them a while to get the right pattern and to get it down as far as the time that that takes. It comes from lots of trial and error. Just like I think anything else in life. If you learned how to play guitar, you probably had no sense of time. You probably the action on the guitar probably hurt you. same thing if you started drums.

It’s hard to have four-limb independence. Then you have to learn standard time and you have to learn odd meters and all those different things and be now the band’s metronome. So that takes some time, that takes practice. The only problem with trying to do that with trading is that you have to lose money and you say, Well, can I paper trade my way to learning all that to find my knack? You probably can to some degree, but since you’re not really losing real money, you don’t feel the burn and that’s integral to your growth. I know it sounds like, well I don’t understand. How does losing money help me? But if you think about it, you’ll probably light bulb will go off because you need to learn how to understand and and respect the risk. There are things that you can do in paper trading that you can’t do with real money because the risks are too great. You can hold past your stop order, your protective stop and lose more money and then have it come back in your favor. But doing that with real money is fool hardy.

I don’t think trading has to be all consuming. Eric, Eric wrote this email. In fact, I think you need to have a balanced life because really trading is not like any other profession. If you’re an attorney and you’re working 90 hour work weeks, it’s hard to do anything else really, really well. It’s hard to even show up in friendships and relationships at that point and be present because you’re probably gassed one, two, you have work on your mind all the time, but, and in any type of addiction, whether it’s trading addiction or otherwise isn’t really great. I think you can become passionate about something and then want to study everything. But just as long as you walk away from this episode knowing that knowing stuff like you’ve heard this a million times already doesn’t necessarily help you trade better.

You have to be able to put the trades on and feel them. What kind of emotional responses do they give and take from you. How do you interact with the market? And that’s the feel that you need. Whether you’re a systems person or a discretionary trader, you actually need a feel for both because in the end everything is discretionary. Even if you make your own trading system, even if you’re a high frequency trader, whatever that might look like, you still have to code it in a way that’s compatible with your temperament and your personality. So it always comes back to feel, which means execution. So sitting in front of the screen all day can give you the illusion that you’re working hard, but you also have to work smartly. You can fool yourself into like, man, I’m working hard. How come I’m not getting the results that I want?

Well, you very well might not be working all that smartly sitting in front of the screen all day, all day is, is turning trading into a blue collar despair when I think you can do all your research and preparation the night before and know exactly what you’re going to do the next day. And then you approach the market in a very calm and deliberate matter. You put your stops in, wait for the market to come to you. If it doesn’t come back the next day, maybe you’ll have more orders to enter. Maybe the ones that you were going to enter now have moved too far away in the other direction. So it doesn’t make sense. That used to happen a lot. There were times when I’d go maybe three weeks without putting on a trade. Now granted in commodities there’s really only like five dozen of them around the world and even then half of them are really only liquid enough to take any kind of size.

And so if you look at that, maybe three to six of them are actually trending. So that’s a terribly small field of vision so to speak. So there’s lots of times when those markets don’t trend or they’re super choppy and you have to sit on your hands and wait it out. Otherwise you’re giving good money after bad. Now keep in mind folks, for the kind of market that we’re in to develop a good feel, you know these aren’t exactly smooth markets. Not everyone is doing well. Look at Tiger Management. They’re down on two of their funds by big double digits. There’s one fund that’s down over 50%. And a good chunk of what they do is Trend Following. Scalping markets are zigging and zagging in ways that you know are atypical. So people who had an edge, even after having paid their dues, are still losing money.

This is one of the reasons why you need to put real money to work because it doesn’t teach you how you will react when you’re under pressure. There is no pressure in paper trading. You see, and I’m not going to get into stupid analogies that are beaten to death or cliches about how diamonds are formed under pressure. There’s, we’re a long way away from talking about Tiffany diamonds and trading. But you do have to go through it all. You do have to go through a hazing period where you’re rushing the fraternity if you will, in the sorority of trading. So be mindful that just because you’re at your desk by six or seven in the morning watching the markets calling up all your charts, this is like you can hire an assistant to do that. So I’ll come back to saying yes, you have to work with intention, I think is the better way of saying it. Work intentionally. What’s your goal? What is it that you want your money to do for you? And be mindful of what do you think it is that you want to do during the day?

I know a lot of folks, especially in the 55 and older crowd who are just bored stiff they retired, made their money, they have enough to live comfortably and they are excited about the markets, they’re enthusiasts as I’ll say. And so they’ll study the markets and they’ll find a place to go because the spouse or the significant other doesn’t want them in the house, you know? And so they’ll spend all day studying the markets, which is great, it’s a good pastime, but that’s not really trading. That’s entertainment. So I’m trying to come around this from a 360 degree angle of what trading is for me. It’s like, I don’t know, two to four hours of research perhaps the night before, double checking things in the morning, calling your orders in, and then waiting for the markets to come to you.

Me myself, I never really entered the market at the market (with market orders). They were always stops. If I was looking to add length, the buy stops would be above the market and I’d let the market trade into those stops. This way I’m not chasing anything. I’m also being patient. I’m forcing myself to be patient and letting the market come to me. I want to buy when there’s other buyers – not interested in pullbacks. same thing in taking profits. As the markets move up, you adjust your stops. You can do that and practice that on a spreadsheet the night before. This way when the morning comes, you know exactly what you’re going to do. There’s no guessing, there’s no second guessing. And you have a plan. And that’s important because the number one thing if you’re going to speculate is to place superior defense.

That’s the number one goal is preserve your capital as much as you possibly can, but at the same time participate in the markets so that you can conjugate your trader psychology and your emotional constitution with the very rules that you’re trying to perfect as you develop your craft and to develop your feel. That’s all the big tuition. Now most people don’t have that. People are like, man you listen to Goggins or you listen to Jocko and that’s great. And then look at the failure rate of people who, who try to go out for doing BUD/S training. A lot of them don’t make it. It’s not because they’re not good people and it’s not because they’re not intelligent and it’s not because they’re not really good athletes, it’s just that they don’t have what it takes and you don’t know what it’s going to take of you until you get there.

You can practice your sit-ups and your pushups and you can do drown proofing on your own with family members and lifeguards watching you. You can do all that stuff, but it’s not until they’ve pulled you out of bed at 1 in the morning if you’ve even had any sleep and throw you into cold water in a disoriented way that you get to see what you’re made of. And that’s kind of what happens with trading. You have to learn in a sometimes very humiliating way what you’re made of. And that comes from putting real money to work and suffering what we would think of as real losses. If you’re too dainty and too pretty and to have too much of a high opinion of yourself because you think you’re the smartest person at the table, perfect, that’s fine with me. But you might find it very difficult to put money to work in the marketplace if you have an emotional need to be right all the time.

You have to be much more promiscuous and not necessarily so opinionated. Anyway, couple days there on how to develop a feel and again, just to put an exclamation point on it within the feel that you have is your trading edge. And you never want to put on a trade if you don’t have an edge, ultimately in the beginning you have to wing it because you don’t know your ass from a hole in the ground. So you have to wing it to see what feels good. You see, that helps you develop your feel.

I’m trying to cut my workload here because I’m getting really busy with things, trying to add some more video…discussions that we’ll be recording on video and putting up on YouTube. So you should go to Spotify, Stitcher, or Apple Podcast or whichever is your favorite music listening platform because it’s likely our podcast is syndicated there.

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