When aspiring traders feel like they’ve discovered a methodology which may deliver consistent results and they finally make the decision to ditch the simulator and go live, they often lose focus on the most important aspect of this business. Money.
This is about money. Period. Full stop.
It’s about getting the money from another trader’s account into your trading account and then transferring that money to your bank account and then spending it on something you need or want. Seems obvious. Of course it’s about money. Why am I even writing this?
I’m writing it because it’s very easy to overlook the obvious when you’re in the heat of the moment. When you’re trading, you’re playing a video game. You want to win. You don’t want to lose. Ever. And so you quickly forget about the big picture. The big picture is the bottom line at the end of the year. When you start to lose focus on that and instead focus on finding another trade twenty minutes before the close because you need to make 2 ticks to cover your 1 tick loss plus commissions, you begin the downward spiral into oblivion.
Successful trading requires extreme discipline. It’s not just adhering to your risk stops. It’s waiting for that perfect setup. Waiting for the big players to tip their hands. Waiting for that price action you’ve seen a hundred times before now. You see the clues. You see the pressure. You go for the kill. You are profitable because you waited for the lame gazelle rather than charging into a pack of warthogs.
The problems arise when you become eager. When you get bored. When you want your money back right now. Or you want it back this week or this month.
Most, if not all, pro traders will tell you that their years are frequently made over the course of a few really good months. Some years they may go on a great run and make money every month without fail but often the year-end profitability comes from a short time period. When they find something that works, they push it for all it’s worth. When it’s not working, they stop. They wait. They adapt. They do not continue donating money to other traders just because they feel like they need to be doing something.
I often share a story during the webinars which I thought would make a good addition to this blog post. I once worked in a prop firm which, at its peak, probably had around 50 traders. Most of them didn’t make it. A few did. While I was there, one of the younger guys seemed to have found a very good spread strategy for the treasuries. He would make 1 or 2 ticks a day like clockwork. He did have the occasional loser but it would also only be 1 to 2 ticks so he was coming out ahead almost every week. He had found something that worked for him. Much to his financial detriment, the management completely overlooked him because at the time, the treasury markets were insane and the bigger players in the room were frequently putting up 20 to 40 tick days. They were also doing a ton of volume and the firm was making a lot of money on the backend by up charging us on commissions. So management is watching the guy who’s swinging 300 at a clip and putting up 10,000 turns a day. Naturally. But they completely lost out on what I believe would have been another cash machine for them. This guy who’s making a tick a day in the spreads.
The kid should have been trading 1000 up. His risk was so tight that they would not have been in danger of losing much when he was wrong and if he had maintained his proven results, both he and the firm would have profited in a big way from his trading. Instead, they both lost out because he was eventually fired when the firm had to cut back because all the big traders left.
The point here is that even experienced traders running a firm can make the mistake of getting caught up in the moment and forget about the big picture. When a trader finds something that works, you make sure he stays with that strategy and then you pump up his size. You do not tell him he has to make more trades. You do not tell him he has to sit there all day. You do not mess with his style. You nurture it. You figure out the best way to help him capitalize on it. If it ain’t broke, don’t fix it.
People frequently ask me what their average number of trades should be on a daily basis. This is the wrong question to be asking. It’s irrelevant. The only thing that matters is the bottom line at the end of the year. It doesn’t matter how you achieve the results. It can be with one trade a day or twenty trades a day. Profitability is what matters. It would be better to net 10 ticks a day on one trade rather than net it over the course of twenty trades because the more trades you make, the more money you lose to exchange fees and commissions. But whatever works. Sometimes the name of the game is riding one good winner. Sometimes it’s scalping it out a couple ticks at a time because the 10 tick winner is not there to be had.
I’ll give you an extreme example that I like to use it because it makes this easy to understand. Let’s say you discovered a price action setup that worked 80% of the time without fail and your winners were equal to your losers. The problem is that you only see it once a month and you never know which day it will be so you have to sit there every day for twenty days each month until it occurs. The rest of the time, you have no idea what’s going to happen and can’t read the market at all. What do you do?
The correct answer is you sit there and do not fire until you see the setup. When you see it, you fire off as much size as you can afford to swing. Then you cover the position, take the win or loss, and wait for the next month to roll around. In this example, which is for illustrative purposes, you are guaranteed to make money if you just wait for your spot. We know there are no guarantees in this business but hopefully you get the idea. The methodology I teach does not revolve around taking one trade a month, obviously, but it does revolve around waiting for your spot (as should any solid methodology). It’s a huge factor in maintaining consistent results. This isn’t to say you shouldn’t look for other setups that may work during other days of the month. You should do so but until you find something that’s proven, you should only be risking money on the once a month trade.
One of the main problems for the 95% of traders who lose is that they cannot sit there and do nothing while they wait. So while they are waiting for the next 80% success setup, they donate dollars because they’re bored. I see this all the time at the poker tables. There are lots of very good players who can maintain their game for the first two or three hours. Not very many can play their best game after that. Particularly not if they are losing. And if the game started at 8pm and they’re still sitting there at 6am, they’ve most likely emptied their pockets and hit the ATM with every credit card they have available. It is possible to go broke in one day. Along those same lines, it’s a common practice in the casino industry to require casino dealers to take a fifteen minute break every hour. It’s very difficult to maintain extreme focus for more than forty-five minutes at a time and casino management is not going to risk allowing a dealer to make a mistake due to being tired.
Trading is obviously very different from most other businesses. For one thing, the game is rigged in a way which allows big money to influence price action but that’s just a natural result of capitalism and the illusion of “free” markets. What really sets it apart is that the game is open pretty much 24 hours a day/5 days a week all year long. You can go from trading the European markets to the U.S. markets to the Asian markets and back to the European markets all day and all night. It’s not like you have to sit there and wait for a customer to walk into your retail shop and buy something. You are not working on marketing strategies or reliant upon the amount of passing traffic which sees the sign in your store window. You can take a trade at almost anytime of the day. But you cannot take a good trade at anytime of the day…
Don’t get lost in the action. Divorce yourself emotionally. It’s a business. It’s not a game where you can re-up on credits when you run out. It’s not about cerebral stimulation, occupying your time, getting a rush from winning, figuring out how to make money every day of every month, or satisfying your ego’s desire to show everyone around you how smart you are and prove you’re a trading genius. It’s about getting paid.