Trading: Myths and Facts – Part 2

As far as trading success is concerned, a proper trading mindset is better than intelligence. What is the most important ingredient in trading success? Many traders are constantly searching for fool-proof “secrets” to consistently survive in the markets. However, their wrong psychological bias keeps them searching in wrong areas and looking at the wrong ideas. As a result of this, they look for magic trading strategies with 75%-95% accuracy.

They think these strategies are the open sesame to great riches inherent in the financial markets. They think they can conquer the markets by entering orders at seemingly right times. Entering the markets at the right time or higher accuracy has nothing whatever to do with trading success. A section of the Part 2 in this series delves deeper into the secret of trading masters.

Trading Success Is Only by Choice

Trading success is not made by dreams that you dream but by the choices that you make. Some people take years to discover just a portion of what is constantly revealed in my articles. Longevity and safety of trading accounts are far more important than overnight profits. The market does not owe anybody immense wealth. It would intermittently entice hordes of people with seemingly easy money during bubbles and other mad rushes – only to take it back from them again.

If you are really desperate to be a great trader, then you would need to approach the markets with the same amount of seriousness and persistence with which you would approach any high level of human endeavour. You cannot afford to fail to bring yourself in harmony with trading ideas that work. As long as you do your best in doing what is right while trading, you can be confident that your long-term survival is sure.

We would examine further trading myths in this article, including the ones that have to do with people’s attitude towards trading systems.

Myth #2: Trading is Gambling, and Therefore I Am Going to Quit Trading

Another similar myth: The best thing is to warn people to desist from trading because it does not work. It is too risky.

Fact: This fear that trading is ‘too’ risky might be justified to some extent since it arises out of harsh experiences. Perhaps some of them were formerly traders, apart from the fact that there are some who have not done trading and they will be telling you the reasons why you should not trade.

It is people that make silly mistakes on the markets. The markets are not to blame. People tend to look for short-cuts to lasting success, and the markets offer no such. They do not want to make any sacrifices and they want consistent success on the markets. The truth about trading goes against the way they prefer to think, yet they blame the markets. They give way to their inordinate greed and fall prey to con artists and scam artists who appeal to their sense of greed and hoodwink them in the name of trading.

When people abandon those who tell them the truth and patronise sly crooks who would tell them what they want to hear, do we blame the markets for that? The markets are no more at fault than a car manufacturer would be for an accident caused by a driver using a cell phone. The defamation of trading can be likened to a supposed defamation of travel by air because of some incidents of plane crashes.

If you decide never to become a pilot because of what it takes to be a qualified pilot or never to be an airline passenger because of a possibility of losing your life in a crash, does that mean that flying is not popular? Let us take marriage as an analogy. Is marriage as an institution evil? The fact that millions of marriages crash does not mean that marriage as an institution does not work. If some marriages crash, other marriages are successful.

Most people set wrong and selfish priorities in relationships, ignoring the factors that can make a marriage last. These factors are commitment, true love, honesty, humility, reasonableness, selflessness, personal sacrifices, high moral standards, faithfulness and the spirit of forgiveness. They focus on beauty, money, education, flashy wedding ceremony, fame, intelligence and other factors that are not really of significant importance as far as connubial success is concerned. People cause marriage failures, but they blame the marital institution. They look for the right person, and they themselves have a wrong mindset. You see, we need to respect trading for what it stands for. Laying a very good trading foundation for yourself will go a long way in making you successful.

Experienced traders go for small and consistent profits, whereas gamblers use dangerous position sizing, dreaming of making it big or striking it rich in one easy stroke. This gamblers’ fallacy usually leads to margin calls or huge drawdowns whenever the markets go against them. Imagine that someone who was not adequately trained (especially in effective risk management) loses his hard-earned money. And since then, whenever he hears anyone mentioning anything about trading, he warns the person never to try it. He likes to tell others that he had done trading before and he lost his investment.

He always gives the impression that he knows very much about trading, and the best thing is that people should stay away from it. There are many people like this around, whose mission is to warn people against trading. They like to discourage people because they have done it and failed or because they know someone who did it and failed. They feel they know about trading. They are never going to do it and they are telling others the reason why they should not do it.

There are some who do not even know how to set up a trading platform, yet they have strong opinions against trading. On the other hand, successful trading experts will not tell you this. Successful trading experts will never berate trading. I know those who have made millions (even billions) of dollars from trading. They have been surviving on the markets for many years. These experts once faced challenges in trading, but they went ahead and overcame the challenges.

Therefore, the easiest way to identify a trading ignoramus or a novice is that the person would try to discourage you from trading and ask you to find better things to do. A novice discourages others because she/he does not know the secret to successful trading and she/he has given up.

Normally certain people would not come to trading if they had another means of attaining financial freedom. In fact, in most cases, you have more to lose by not doing anything. To be a professional in anything – in any walk of life whatsoever, you have to be in the top 10%. No matter what your field is, all the money is being made in the top 10% of that field. That is why the top 5 to 10% of the world makes more money than the rest of the 90 to 95% combined.

All the money is in the top. If you tried to avoid realities by avoiding trading, the realities would eventually face you somewhere else. So some are misguided when they think there are better things to do. Given the challenges and competition they would face in those ‘better things’ to do, it is more likely that they would end up with average or mediocre results in whatever fields they choose. Please think of any professions or areas of business, some would try them and fail; some would try them and succeed. Such is life. Many desire extraordinary success, but are unwilling or too lazy to make the necessary commitment, sacrifices and exercise enough perseverance to attain their goals. Without spending enough time, energy and resources, dreams will only be dreams, not achievements. It takes some rare secrets to be a master of any walk of life.

If any person threatens to quit trading, it has no effect on anybody. As far as the trading world is concerned, no-one is indispensable. The trading world will continue to grow bigger and bigger, in geometrical progression. For one person that quits trading, ten persons are ready to start trading. For one person that leaves the United States, a hundred people want to enter. The financial markets are like China; it does not know that someone is leaving.

Furthermore, the fact that somebody or any group failed in trading does not mean that trading does not work. It works for those who know and apply effective trading principles. Somebody’s failure does not mean that every other person is failing. If some had been led to their downfall, it does not mean that there are not those who are being led to victory. If you do not know those who succeed in trading, I will tell you confidently that they exist. Some people failed and they decided to quit trading forever. Others failed and decided to move on; learning from their mistakes. Misinformed opinion has no effect on the financial markets.

How Do You React to Your Trading Results?

Do you have a realistic trading goal? What do you want out of trading? Do you have reasonable expectations or do you fantasise about things that may be beyond your ability and trading realities? Wise traders do not pursue unrealistic goals. They, therefore, try to be content with whatever profit they have. As long as their trading portfolios are safe, they are satisfied with any increment they have on it.

In a letter to his son Eduard, Albert Einstein gave his advice: “Life is like riding a bicycle. To keep your balance you must keep moving.” If you test a good trading system and see that you are still ahead after several months of practice, no matter how small the profit is, why cannot you then go live? Your strategy is most likely to work as it did in the past. This does not mean you would not have losses; but it simply means you would be able to preserve your trading capital. Therefore you need to work seriously on your trading mindset rather than blaming your trustworthy system. The problem lies with the trader, not the trading system. In spite of alternating losing and winning streaks, a skilled trader remains effective because he patiently handles every situation, faithfully keeping at his trading rules in the face of occasional and transitory disappointments.

Myth #3: The Markets Are Predictable

Another similar myth: Trading systems and advanced analyses predict the market accurately.

Fact: Effective trading beliefs are based on long-term observations of the markets. Serious endeavour has also been made to study the trading strategies of successful traders, and what a majority of them have in common. Most of their timeless principles have been mentioned tirelessly. One of them is “cut your losses short and let your profits run” (a golden rule). Traders keep on looking for magical trading systems that can make them right most of the time.

Your success has nothing to do with your knowledge of what is happening in India or Ghana; neither does it have anything to do with any forms of technical analyses whatsoever. The only purpose for possessing a trading system or doing market analyses is simply to have reasons for entering a trade; it has nothing to do with your survival. Unguarded strength is double weakness. No trading methodology or system on earth can survive without effective risk management, plus our long-term success has nothing to do with the accuracy of our entries, it lies in our exits.

Dr. Van K. Tharp forecasts that a sequence of six trades with a hit rate of 17% remain profitable, provided the five losses are limited to 5 x (-1R) = -5R, and the winning trade amounts to 10R. Conversely, a sequence of six trades with a hit rate of 83% remains a losing strategy if the five profits are limited to 5 x (+1R) = +5R, and the losing trade amounts to -10R. This golden rule makes perfect sense but wrong mental biases always make us go against it, doing its exact opposite.

Most people would not learn their lessons until they have learned through harsh personal experiences. Given the significant percentage of those who lose money by trying to predict the markets, the notion that the markets can be predicted is intellectually unsatisfactory.

In addition, thinking that the markets are predictable is even more dangerous to your trading mindset because you would not want to get out of a trade if you are wrong, since you may feel that the market may soon reverse; which may not happen. You do not need to predict the markets before you can make consistent profits.

We trading analysts are only humans, only that we use complicated trading jargon to impress. One thing that is abject (and which would no doubt, continue) is the fact that most professional analysts like to create the impression that they know what the markets would do in the future. It does not matter whether the person is talking on the most respected trading news program on earth. How many of us can mention with certainty when we are going to die, where we would die and what would be the cause of our death?

We predict the market and continue predicting, but we may not show our personal trading results. Novices are angrily forlorn because they think gurus do not lose. If I say I made 300 pips last month, some trading rookies may say: ‘Hey, that is the geek who does not lose!’ If they ask me for trading signals and the first two signals lose, they become mad. But what if I display my losing trades and winning trades, plus how I still survive? Then if people ask me for signals, they would not get furious after two or three losses because they have seen how I display losses with profits and they know our profits would soon outgrow those losses.

The purpose for trading is not to avoid losses, but to make more money than is lost. You do not need a complicated strategy to achieve this; a simple and straightforward trading idea may be fine. However, vendors would always be pushing complicated strategies to traders as the solution.

Conclusion

There will be challenges in your trading life that will separate you from your trading goals only if you allow them to. Trading success is not the birthright of a privileged few. Trading success is for me, trading success is for you. Trading success is for those who need it, and for those who are currently losing. It is for those who have given up trading, and for those who are yet to start trading.

The message is clear: Trading success is for everyone. The next article in this series would expatiate on the right attitude towards trading strategies.

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Author: Mustapha Azeez
Originally published: September, 2011.

Reproduced with kind permission of: TRADERS’ media GmbH