In my 25 years of involvement in the trading arena, as you might imagine, I’ve learned a thing or two. I, like every trader, have made mistakes and experienced deep emotional angst, as well as great euphoria throughout my years of trading. I have seen multitudes fall by the wayside in their attempt to become profitable traders and others become wildly successful. So what’s the difference in these two groups?
The first group includes those who attempt to begin trading by simply reading a few books on technical analysis or perhaps attend a free weekend seminar, only to find out that it’s not quite that easy. The next step in these would-be traders’ search for profitability is combing through numerous indicators, oscillators and cheaply priced black box systems, only to be disappointed with the results. This leads to the final step (if there is still money in their account) in a trader’s development, that is to formulate a solid proven strategy. Incidentally, few reach this step. A very important aspect to this group is that their main focus is on money, not losing money and making money. I would suggest that is a major issue. In my experience, skill building is much more important and the key to success for that second group of traders, the successful ones.
Because I feel skill building is so important, I have increasingly become involved in addressing the challenges many traders go through. I talk to people about what they’re doing wrong and share many of my experiences as a broker and trader. A common thread I see is that most people truly don’t understand how the markets really work. The fact is that most retail traders/investors under-perform the market over long periods, and some will give up on trading or investing all together. That’s because they don’t know who they’re competing against and don’t understand the mindset of professional traders. Due to this, they have little chance of making money on a consistent basis. Professionals on Wall Street have done plenty of skill building, are highly trained, very competitive individuals, and their sole mandate is to make money for the firm they work for. This is important to understand because trading in its basic level is a zero-sum game. This simply means that the winners take profits at the expense of the losers.
Our students come from all walks of life. So to reinforce this notion that to compete successfully one needs training, I will ask, perhaps a doctor in the audience, if it’s plausible for me to do his job competently if I went to the library and picked up a few books on medicine, or perhaps attended a medical conference. It seems almost ludicrous that I would ask that question, yet isn’t that what most retail traders/investors do when they engage the markets?
It’s no secret that the financial markets are dominated by the large institutions that control vast sums of money. These institutions recruit the best and brightest people to work on their trading desks, and employ computers to trade for them. If you were able to look inside a trading desk at any of the major firms on Wall Street, you would find that 90% of the individuals seated in front of those trading desks graduated from an Ivy League school. In addition, they are privy to information that we as individual traders don’t have access to. And lastly, they have hundreds of millions of dollars at their disposal. In short, unless we understand how they operate, we don’t stand a chance of beating them.
Institutions however, do leave footprints. This is why understanding and learning to identify supply and demand is essential to knowing who you’re trading against. When you look at the many charts that we show in these newsletters you will notice that there is always a violent move away from a basing pattern. If you think about it rationally, who else but a large bank or institution has the fire power to move a major market in that fashion?
The last and probably most important aspect of who we trade against is ourselves. There is a famous line from the cartoon strip Pogo which is, “I have met the enemy, and he is me.” This quote sums up the difficulty traders have in maintaining self-discipline, and hence another obstacle to overcome on the road to being a successful trader and another area in which skill building is important. This topic has been written about extensively in these and other publications, so I won’t bore you with any more of that.
The bottom line is that trading is an endeavor that requires training and acquiring a skill set. It isn’t any different than being a doctor or an engineer. So if you want to step into the trading arena you had better be skilled and ready to compete, because if you’re not, surely somebody that is will take your money.