10 Things I Wish I Knew When I Started Trading

We all wish we could go back in time and relive the youthful parts of our lives, but with the benefit of our current hard-won knowledge.  God knows I do.

There are so many things I would do differently.  For one I wouldn’t have had those four extra shots at the high school kegger where I ended up puking my guts out in the bathroom for the rest of the night.  I probably would have bought $MSFT when they IPO’d.  And I definitely wouldn’t have blown off an awkward, gangly, pimple faced 16-year old Sofia Vergara when she once told me I was “el hombre mas guapo en todo el mundo.”

But hey, what can you do?

In an effort to help traders avoid some of my mistakes in trading, and since I am a giver, here are ten things I wish I knew when I first stated trading.

Complexity is your enemy

Take a look at almost any trading platform or charting software today and you will see more studies, indicators, and drawing tools that any one trader could ever need.  At the end of the day all indicators are a derivative of price and volume, so why get so fancy?  After many years of trying to find the “perfect indicator” I ended up with price, volume, S/R levels, the occasional trendline, and a couple of key moving averages.

95% of that other stuff is masturbatory narcissism by pseudo-quants who have to justify their own existence.  Unless you are on the Goldman Sachs trading floor or running your own hedge fund, keep it simple.

Work on specialization

I thought when I started trading that I had to be able to trade EVERYTHING.  That to me was the definition of a trader.   Some people can trade cotton futures, iron condors, and the dollar/yen cross.  I can’t, and it took me a long while to figure that out and shake off my self-imposed dogma.

Get good at one asset class, one instrument, or one issue, and once you master it (read: make money consistently), then incorporate something new into your repertoire.  Or don’t.   I know people who only trade $AAPL and make a good living doing it.

It’s okay to ask for help

At first glance trading seems like an activity for loners.  For people who want to sit in a room and stare at charts for hours on end.  And to be fair, there are quite a few of us out there that wouldn’t look too out-of-place on the front of one of those most wanted posters you see at your local post office.  But if you scratch the serial killer surface of most traders you will find someone who not only is willing to talk trading, but actually craves it.

For eight years after I took my first trade I didn’t talk to anyone else about what I was doing.  It was only when I stumbled across the Money Talk BB on the Prodigy network back in the early 90’s that I began to interact with others who were doing was I was doing.  And even then I was timid about asking for help.

Everyone knows that there is no “Holy Grail” trait when it comes to success in the markets, but I believe the thing that comes closest is the ability of a trader to have an open and honest exchange of ideas with other traders.  The more you do it the more you build your trading knowledge and the more you define yourself as a trader in your own right.

Learn to Ignore the narrative

I recently watched a presentation that Barry Ritholtz did at his “Big Picture” conference.  Besides the fact that he was saying how he felt that George W. Bush was the greatest President of the last century, the other thing that I found fascinating was his discussion about how human beings as a species need a narrative.  It’s part of our evolutionary DNA and the way before technology that we carried forth ideas, knowledge, and traditions from generation to generation.

The same phenomenon happens with market participants; they love to attach a story to a stock, using it as the justification for why it moved up or down, or didn’t move up or down.  This tendency will only cause you to lose money as a trader, and the faster you learn to ignore the narrative the better off you will be.

It’s not all or nothing

I have been all through the Trading Bible, and nowhere in it does it say that you have to put all your money to work in a position at one time.  Nor do you have to take your money out all at once.  Scaling in allows you to test the waters on your entry and add to your position only when a move goes in your direction.  Scaling out may even be more important as it allows you to lock in profits on positions which enables you to give them more room and be able to stay in for a greater move.

You will be wrong, a lot

Ted Williams was one of the greatest sluggers in the history of baseball, but he couldn’t get a hit 60% of the time he was at bat.  The hardest thing for most traders to get through their thick skulls is that being wrong most of the time is part of the game.

You will be wrong.  You will be wrong a lot.  A whole lot.  Embrace it. Learn to accept it.  As long as you cut your losses quick and maintain good risk/reward ratios on your setups you will make money over time.

It’s all about the Benjamins

This one may seem obvious but when I first started trading I was more interested in showing how smart I was by doing something most people didn’t understand.  I spent a lot of time telling non-traders about the markets and making myself feel important.

I bought books, software, and attended seminars because I thought it was cool to be a trader.  But all the while I was losing money in the markets.

Ask yourself this question, and be honest.  What’s more important to you, having everyone you know idolize you because you’re “trader”, but lose money, or have everyone think that you are just some schlub who works in an ice cream store,  while in fact you are really making a fortune in the markets?

Trading is ONLY about making money.  If you can’t do it on a regular basis you are not a trader.  Everything else is just conversation.

You won’t find answers in books

Books on trading, with rare exceptions, are for entertainment purposes only.  It does no good for you to read about how someone else trades because you will never be able to trade the way they do.  In addition, any ideas, concepts, or techniques that are taught in books are usually outdated by the time they are published because the markets are dynamic.  They are constantly changing, and like a flowing river, you can never step into the same one twice.

I can say for certain that my trading progress took a massive leap forward the day I stopped going to my local bookseller looking for answers on how to make money in the markets.

In fact there is only one book on trading that I know of that has solved the problem of keeping its content fresh and up to date.  It also happens to be free and you can pick it up here.

The reality is, you just don’t exist

Everyone has an ego.  We all suffer to an extent from illusions of self-importance. Problem is, the markets don’t just consider us unimportant, they don’t even acknowledge our existence. Nothing about our lives or what happens in them means anything to the markets.

Good person or bad.  Flush with cash or scraping by just trying to make your rent. Tall, short, pretty, ugly, it doesn’t matter one bit.

Did you stay out too late drinking with your buddies last night?  Is your mother dying of cancer?  Did your wife yell out “give it to me good Juan the pool-boy” the last time you made love to her?  All of that is as irrelevant to the markets as you are.  And if any of those things affect the way in which you approach your trading, the market will run you over like a freight train.

Everything you know about life is counter intuitive to the markets

From the time you are first able to comprehend “value” you are taught that cheaper is better.  If you want to buy a new refrigerator you wait for it to go on sale.  Then you try for a discount because they have discontinued that model.  And you get them to knock even more off because it is a floor model.  You want to pay the least you can because it is a wasting asset.

In the markets that is exactly the wrong thing to do.  A share of stock, option contract, or basket of currency is only worth what the next person will pay for it.  You buy strength and sell weakness.  You never average down and you pyramid up.  All-time highs are to be bought and all-time lows sold.  You sell good news and buy bad.

You have to understand that when you set foot into the world of the markets that the normative rules of value and worth, as well as your inbred ideas of consumer psychology no longer apply.

Hopefully these concepts will be helpful to you in your quest to be a successful trader.  Let me know which ones resonate with you and feel free to send me the things you wish you knew when you started trading.

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  • Jeff Watson

    specialization is the most important take away from this column. Learn to play one game very well. Play a strong defensive game. And know more than anyone else on the planet about your particular market. Keep the winds to your back.

  • Ted

    Books in the beginning of your trading career can mold the correct psychological approach you take to the market but after that only “experience” by actively trading is what will teach you lessons that you will either learn from or keep repeating. Buy into strengths means to me, that you have identified a trend, so you simply follow the positive uptrend and ride it until you feel its time to exit. I like that idea.

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  • brian, yet again your down-to-earth honesty and simplification helps crystallise thoughts and bring humbling clarity. I have been an apprentice trader full-time for the past 2 years and have collected my share of scars. One of the hardest won lessons was repeatedly trying to sell tops and buy bottoms: the refrigerator analogy…no book that I ever read explained how truly counter intuitive it is to do the very opposite.

    Trading is predicated on a series of unnatural acts, unlearning lifelong habits often takes longer than the supply of capital allows

    You’re a genuinely good bloke and hugely appreciated.

  • carl_sf

    More excellent advice! I agree that so much of the “news” is just blah blah blah … better to focus on price action. Also, like the KISS approach to your weekly trade ideas.

  • Juan

    Why would you buy at all timee highs and sell at the lows? I think it makes sense to do the opposite.

    • Dan

      agreed.. I also wanted some clarification on that. Maybe I am just understanding it wrong.

    • Because the moment you see an all-time low, you don’t know if it will be the all time low forever. An all-time low can be followed by another all-time low, and another, and another.

      There actually was a study that if you buy the market at a 52w high and sell them a year later you are profitable whereas when you buy the market at a 52w low and sell a year later.

  • Dan

    Great article!

    One question though.. you say “..buy strength and sell weakness”. Is this referring to the fact that most traders have their eyes peeled for 52 week high “breakout” plays and the like and less of solid, oversold stocks which give off buy signals (which I’m a huge fan of..)?

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  • robertsweetman

    Wanna buy some trading books? 😉 Completely agree with this point.

    I’d like to add (for consideration) that focusing on the process of learning through feedback by keeping good records of what did/didn’t work within very specific criteria is the only way to crack it. You only learn from the experiences you remember.

  • One of the best articles I’ve read Yet. Another where it feels I’m being spoken to directly. It’s only been 2 years & it has been a wonderful Ulcer inducing ride. Thank you for the excellent posts.

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  • Brick By Brick Investing

    I would definitely agree that the more complex your strategy the less likely you are to make money over time. This took me a while to learn as well, I remember I had 10 different indicators on a chart at once trying to create the “holy grail.” Another thing that took me over 2 years to understand is being wrong is part of the game. In my current profession being wrong is not an option so it took me a considerable amount of time to accept when it comes to trading you will be wrong more than you are right.

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  • berzerk

    I think one needs to be in the right state of mind to actually understand what you wrote here. I’ve been in the markets for the last 10 years and saw posts like that many times. My only answer back then was “oh,ok” and then I’d get side-tracked and keep trying to sell the highs and buy the laws, avoiding losses and getting constantly frustrated in the process.

    After reading your post those who were bruised a lot but the markets but finally got that will smile and nod.

    Those who still haven’t learnt the lessons will keep looking for the best entry method, avoiding losses and making it complicated.

    It’s not that this post doesn’t matter, because it in fact includes all there is to know about successful trading.

    Still it won’t make a difference – those who get it will stick to what they know works, those who don’t will discard it.

    Thank you for writing this blog, it’s one of the few places about trading where I don’t skip posts.

  • Alessandro Plasmati

    Very good article, thanks.

    My feeling about reading books is that you won’t find specific answers but guidance about trading fundamentals and things to absolutely avoid. This I find beneficial, otherwise why read this blog post in the first place? 😉