Category: 4. Blogs

Most traders simply want to trade. They fear missing out on the next big move and they forget that the market is still going to be there tomorrow and the next day and 10, 20, 50 years into the future. Everything in the market repeats and that means there will be another opportunity right around the corner, so stop worrying.

Today is not the last day you will have to trade and yet many people trade and think like it is! Over-trading is the number one reason that most traders don’t succeed; it’s a ‘cancer’ to your trading account and to your dreams.

What would be considering “over-trading”?

If you find you are almost always in a trade, you’re over-trading. If you find that you are preoccupied with the markets and your trades, you’re over-trading or you’re about to over-trade. If you are in more than one trade at a time you’re probably over-trading unless you have carefully divided up your overall 1R risk amongst all the trades.

There are many other examples of over-trading, but the basic fact of the matter is that you know if you’re trading too much because you won’t be able to sleep at night and you will be hemorrhaging money.

I personally only trade 1 to 6 times per month approximately, and I very carefully select my trades and filter out the signals I don’t like.

Here’s what over-trading does to your trading results and account…

Too many Trades dilutes your edge

The more trades you take, the more diluted your trading edge becomes. A trading edge increases your chances of success, but the simple fact is, there are only going to be so many high-probability trade signals each week, month, year etc. no matter what your edge is.

So, once you start breaking away from your trading edge and start taking lower-quality trades that don’t meet your criteria, you start lowering your chances of success. You are basically diluting your trading edge down to where eventually it will be no better than random or worse.

• Market Noise vs Quality Trades – There is market noise, and then there are actual high-probability price events, you must know the difference. I wrote an article that touches on this titled how to trade sideways markets and I suggest you check it out to learn more and see some chart examples. The point here is that when you don’t know the difference between market noise and actual price action signals worth risking money on, you will naturally end up taking trades that are just noise and not actual signals, further diluting any edge you may have. The verdict is clear: Before you start risking your hard-earned money in the markets, make damn sure you know EXACTLY what your trading edge looks like and how to trade it so that you don’t ACCIDENTALLY end up over-trading!

The spread and commissions eat into your profits

How do you think casinos make sooooo much money? Frequency. The high-frequency of games played means that their edge is going to play out to their advantage over and over again. The house always wins. In trading, the broker is the house, and they always win because not only are there a lot of people trading but probably 90% of them are trading WAY TOO MUCH. Hence, your only REAL “edge” as a retail trader or investor is to simply TRADE LESS!

Consider this: Every 100 trades you give back at least 100 to 150 pips equivalent in spread or commissions, so the more you trade the more you cost yourself simply due to the “churn” of your account.

You want to avoid trading like you’re the casino player and premeditate, filter, and carefully select your trades. In a nutshell, to maintain your edge you want to avoid giving the market or broker the spread constantly.

Doing too much of anything is usually a bad idea

If you take a look at most endeavors, trading included, often times doing them too much or thinking too much / worrying too much about XYZ endeavor has a direct and negative relationship to how well you do at that thing.

For example: Drinking too much coke, eating too much Mcdonald’s, even working out too much or drinking too much water – all of these things can be bad for you. Being too worried about your significant other will end up pushing them away as it becomes unattractive and “needy”. One thing is true – too much of anything can hurt or even kill you and too many trades WILL kill your trading account for sure!

• Your brain is wired to get addicted…

Drugs, sugar, video games, gambling, blue light from your smartphone, trading, what do all of these things have in common? They can all become insanely, dangerously addictive.

Our brains are wired and designed to become addicted to things, this is an evolutionary trait that served us well thousands of years ago as hunter-gatherers, but in modern-day society with all of its unhealthy vices and temptations, it tends to work against us and in certain cases, even kills us.

Our brains work on a reward system; when something feels good we get a little “shot” of “feel-good chemicals” such as dopamine and others. Hence, we become addicted to whatever gave us that dopamine rush, whether it was bad or good for us. For example, drugs are obviously bad for you but they can make you feel really good and we can become addicted to that good feeling even though we know the dire consequences it brings. Certain drugs like heroin are extremely addictive and can kill you very quickly, so they are especially dangerous. On the contrary, exercise also releases “feel-good” chemicals and you can become addicted to that feeling and you will be more likely to continue working out, obviously that is not a bad thing.

Knowing this basic information about how your brain works, it should be obvious that you need to be very careful and train yourself to get addicted to positive thoughts and processes so that you don’t become addicted to the negative ones.

When it comes to trading, we have a laptop in front of us with flashing colors and prices moving up or down that we can use to enter trades at the push of a button. Once we do that and hit a few winners, the brain says “hey that feels pretty damn good, do it again”, and so the trading addiction begins, if we aren’t careful.

If you do not create a trading plan where you plan out your trading edge and how you will behave in the market, you will naturally end up over-trading as you will get addicted to the feeling of “chasing” that winner. If you do not objectively plan our your trades in the beginning of your career, you will end up losing a lot of money due to trading addiction before you finally learn the lesson enough times that you either quit or have no money or desire left to trade with.

A Cure For Over-trading

I’ve been trading the markets for about 18 years, teaching traders for over half that time, and without a doubt I have learned every lesson there is to learn in the markets many times over. So, the plan I am going to lay out for you below is born out of my experience and it is my opinion that if you follow it, you will be “cured” of the over-trading “cancer” that is probably destroying your trading account right now.

• Set a max 10 to 12 trades a month, ideally less.

You must have some rigid rules built into your trading plan. Think of it like this: some of your trading strategy is rigid and then within that rigid structure there is some flexibility such as how much you risk, how you enter, where you place your stop loss, etc. But, when it comes to trade frequency, it really is necessary to say, “I am not going to take more than 10 trades a month” or 5 trades or whatever. Ideally, I would not trade more than 5 – 7 times a month. If you’re trading more than 10 times a month you’re probably over-trading.

• Wait for setups matching your plan and apply a filter…

When we talk about “applying a filter”, I am talking about a set of criteria that you use to check if a trade is worth taking or not. I like to use a T.L.S. filter wherein I am checking for a trade that has multiple pieces of confluence in its favor, at least 2 of 3: Trend, Level, Signal, etc.

Your goal is to trade like a sniper and wait patiently like a crocodile hunting its prey. You are not going to go after “every” target or the prey that looks strong and difficult to “kill”. Instead, you want to improve your odds of success by saving your “ammo” (trading capital) for the weaker / easier to get prey / trades. You only have so much money to risk just like a sniper only has so many bullets and a crocodile only has so much energy. Use it wisely or you’ll run out / blow out your account.

• Set and forget approach…

One of the big reasons traders trade too much is because they don’t give their trades enough time to play out and then they jump into another trade right away. Remember, good trades take time to play out and if you want to catch big market moves you have to be patient, this means you also have to not trade a lot. This is one reason why you need to set and forget your trades. Doing so not only improves your chances of making big gains but prevents you from trading too much and “chasing” trades.

• Limit yourself to markets clearly moving in one direction with technical evidence

Traders often make the mistake of trading in choppy market conditions, this causes them to get in a trade and it immediately starts going against them, then they want to enter another one. The dopamine chase is underway at that point. Jumping from trade to trade is very dangerous. If you stick to markets that are clearly trending and moving in one direction aggressively, you are much less likely to over-trade.

In Closing…

One of the hard truths of trading is that there simply are not a large amount of high-probability price events in the market each week, month or year. So, it goes to reason that the more you trade the less impactful your trading edge becomes. Despite these facts, most traders continuously trade far too frequently each week, and they end up losing money.

My strategy is built on a low frequency trading approach so that I am basically trading as infrequently as possible whilst not passing up the most obvious trade setups. Obviously, there is some learning and skill required to know what constitutes the “best” and “obvious trade setups”, you aren’t going to just wake up one morning and magically know what to look for. With the help of my professional trading courses and the set and forget approach that I teach, you will begin to learn what a “high-quality” price action event looks like and you’ll learn to filter out the lower-quality ones from them. My end of day trading approach is inherently low-frequency FOR A REASON; it results in a self-fulfilling type of function that works to systematically prevent over-trading which naturally increases your chances of long-term trading success. Which is what we all want, right?

In my experience, the best and fastest way to make money trading is to take a low-frequency, ‘hands-off’ approach. If you’ve been following me for any length of time you probably already knew this, but in today’s lesson I want to expand on the concept of “trading from anywhere” and why it truly pays to make trading something you are “doing on the side” or “in addition to” other revenue streams, rather than put ALL of your hopes and dreams into it.

In my opinion, the goal of any new trader should be a minimalist trading approach where trades are taken in small quantities but with high conviction. In other words, a sniper trading approach is what I recommend and teach and what I personally practice as well. One of the HUGE advantages of this approach is, as stated above, you can literally do anything else you want while still staying in-touch with the markets and placing trades. You could travel, hold down another job, multiple other side-hustles, anything you want. The goal is to make trading a “complement” to your lifestyle, NOT its primary focus. Doing this, is not only great for your stress levels and overall state of well-being, but it’s also literally the BEST thing you can do for your trading account!

Everything in life needs to be balanced. As they say, anything in moderation is not bad for you, and that includes trading. Most people lose at trading because they simply do not practice moderation. Instead, they stay up all night watching the charts and get hooked to short time frame charts that end up sucking them into the day-trading trap that snares so many well-intentioned beginners.

My hope is, after reading today’s lesson, you will adopt a coffee shop trading attitude and look at yourself as more of a “global nomad trader” / part-time trader who may also have another side business. One thing I know for a fact is that MOST WEALTHY PEOPLE have multiple streams of revenue, they do not put all their eggs into one basket. If you think about it, it seems silly that I would be telling you this; to diversify and not depend solely on trading, but that should tell you something in and of itself. I want YOU to succeed and I know that the only way to succeed at trading, for MOST people anyways, is to follow a similar path to the one I am going to lay out below…

“Nomad Trading”…Too good to be true or the answer you’re looking for?

Trading from anywhere; while you’re traveling, while you’re home, while you’re away on business for work, while you’re at a coffee shop, whatever the case is, it’s NOT too good to be true. In fact, taking this “trade from anywhere” approach is literally about the best thing you can do. Let me explain how it’s done…

• Focus on the right chart time frames

In order to take a “nomad” approach to your trading, you must focus on higher time frame charts. I am talking about the weekly and daily and 4-hour time frames. In my opinion, most other time frames are simply a waste of your time, no pun intended. If you don’t know why yet, please read my article on the power of higher time frame trading.

When you are analyzing and trading on these higher time frames, you can simply check the charts each day or even every other day at the end of the day, I call this end of day trading, and it’s basically where you make your trading decisions based on the daily chart close at the end of the trading day in New York. In other words, you don’t make a decision before the current daily bar is closed out. This allows you to skip all the intraday noise and meaningless price movement, during that time you can focus on other activities, whatever they may be.

• Low-Frequency

Naturally, if you’re focusing on higher time frame charts, you’re going to be trading a lot less than if you were constantly watching intraday charts. This is a good thing and it allows you to take a much more laid-back approach to trading that allows you to actually ENJOY your life and not be tied to your computer around the clock. But, that is not the most important part…

The most important part of this low frequency trading approach is that it’s actually BETTER for your overall trading performance and chances of long-term consistent success than day trading or any other form of shorter-term, higher-frequency trading. Afterall, isn’t the whole point of trading to MAKE MONEY OVERALL AND NOT END UP LOSING IT?

• Let the market do the ‘heavy lifting’

Day traders set in front of their computers for hours. They analyze, think and analyze some more, they are essentially on a never-ending mouse-wheel of information overload and trying to make trading decisions. This is absolutely unnecessary and counter-productive! The real reason so many people end up doing this is not because “day trading is cool”, it’s because they simply became trading addicts. They get addicted to the moving prices, flashing colors and the thrill of entering a new trading. It can truly be an addiction just like a drug or video games. Hence, your mission is to control yourself so that the market doesn’t end up controlling you!

You have to let the market do the ‘work’ so that you don’t waste your time analyzing and thinking. This ‘work’ only causes your cortisol (stress) levels to rise which puts you in an even more dangerous trading mindset; one that is not conducive to skilled, patient trading, but to frantic, random and illogical trading. The primary ways we let the market do the “heavy lifting” is to set and forget your trades. Don’t check on them constantly, actually forget about them until the next day or two! You aren’t going to help anything by constantly watching the market!

Trade to Live, Don’t Live to Trade.

In an article I wrote about how minimalism is good for trading, I discussed how the “less is more” approach to both trading and life is truly my approach and how I live my day-to-day life. So many people blow all their money on material things, thinking it will make them happy only to find the allure quickly wears off shortly after the get the item they desired. In this way, having less material things is much better, not only for you bank account and overall financial situation, but for your mind and stress levels.

This minimal approach also works in trading. The less you trade, the less you worry and think about the markets and the less likely you are to over-trade and over-leverage your account. It’s no fluke that MOST successful investors and traders are NOT day-traders.

• Less is more!

When you stop trading so much, you will find that your trading performance gradually improves. Why does this happen though? It’s quite simple; human brains are not naturally wired to be good at trading because we are not wired to be good at self-control and self-regulation of impulses. When you’re sitting in front of a computer with prices moving up and down and the potential to make endless amounts of money, it’s like a recipe for self-control to go right out the window. THIS IS WHY LESS, IS MORE!

The less your brain is involved with the markets, with your trades (especially with live trades), the better you will do, because the most effective way for us to practice consistent self-control is to simply lessen the need to have to perform it.

‘Nomad’ Price Action Trading Strategy Core Points…

So, you should now understand why trading like a nomad is so beneficial to both your trading performance and lifestyle. Now, let’s discuss the main pieces of a “nomad” trading strategy, so that you have an understanding of how it’s actually done:

• End-Of-Day Trading – This is probably the “cornerstone” of the nomad trading approach. End-of-Day trading is something I’ve written about extensively in other articles, which you can read about here, but the basic idea is that you are only making trading decisions after the New York close each day so that you are using daily charts the most and making sure you only consider bars that have closed out. This eliminates the noise and confusion of the lower chart time frames as well.
• Set and Forget – Again, another concept I’ve written about extensively before, and for good reason. Set and forget trading means that once you find a trade and have set up the parameters (entry, stop, position size, exit), you literally walk away from the computer until the next day after the New York close. You are not sitting there all day checking the charts and frantically trying to “figure out” what will happen (hint: you cannot figure out will happen so you have to trust your strategy and just do nothing most of the time).
• Simple trading signals – The price action signals that I trade and teach my students are simple in nature; they aren’t hard to learn, and that’s the way I like it. You simply do not need trade with indicators like you see plastered all over the internet on other trading sites. It’s just a confusing, overly-complicated and unnecessary waste of time. All technical indicators are just derivatives of price action anyways, so why on Earth you would not learn to just trade price action is beyond me. A nomad trader who is using their time to enjoy life instead of staring at charts all day, NEEDS a simple trading approach like this. Remember, the difficult part of trading is money management and psychology, so don’t make the actual chart-analysis and trading part difficult as well.
• Money management – Perhaps most critical to taking this “nomadic” and relaxed approach to trading, is money management. You see, if you are jacking your risk up to a level that makes you preoccupied with your trades, you aren’t going to be able to set and forget your trades because you’re going to be too worried about losing money. You absolutely MUST learn to control your risk per trade so that is not at an amount you cannot mentally handle.

No matter what you think about the following statement I’m about to make, it’s true, and you will see why if you finish reading today’s lesson…

The rich and successful in this world, including business people, professional athletes, movie stars and the like, all DESERVE the money and success they have earned and achieved in their lives.

In nearly every case, they work harder and smarter than the other 99% of the population, they do what 99% of the population won’t do, they take the risks, they invest the time, effort and money, they study and practice and perfect their crafts constantly. Whether directly or indirectly, they are working on becoming “the best”, the majority of their waking hours.

The biggest difference between a successful person and an unsuccessful person is almost always the level of conscientiousness to the task and awareness of what needs to be done and when. That means they are dedicated to always learning and absorbing new knowledge and information, it means they work their asses off to get to where they want to be and dream to be, it means they seek out solutions and answers to the problems and challenges they face. The rich and successful live and breath what they do, they are passionate and will usually be the one in the group who is prepared to do whatever it takes, including take the risks required to get the result they desire.

That, my friends, is the price of freedom and lifestyle, be it from trading, business, sports, a top level executive or CEO, or whatever it is you choose to be. The majority of those that eventually get the good life, deserve the good life, not because it was they inherited it, but because they out-worked everyone else to get it.

So, where does that leave you? Where do you think you stand right now in your life when it comes to increasing your level of conscientiousness, what’s your level of awareness? Be honest with yourself, if you’re overweight, do you deserve to be overweight or do you eat well and exercise regularly? Do you study health and nutrition ? If not, then you probably deserve to be overweight. Do you study the markets, do you read constantly about the markets, do you take courses and seek mentors, do you study the market and charts every day?

No pressure here or anything, but right now, after hearing a brief intro. into what the rich and successful in this world do and how they think and act, do you think at this stage you really deserve trading success and the lifestyle it can bring? Are you really doing what it takes?

IF NOT, READ ON…

Even if you’re not rich yet, even if you’re not successful yet, even if you only have $1,000 in your trading account, you NEED to start acting as if you are a millionaire, you need to start acting as if you have already made it and to do that I have laid out some ideas below to help you get into the right groove. Hopefully this will bring you close to the self-belief that you deserve to master the game of trading, investing, business, whatever endeavor you choose to pursue.

Do you even know why you’re trading and what you want from it?

It’s funny that many, if not most traders, have no idea why they are even trading beyond “I want to make money.” That, my friends, is a problem.

If you don’t know where you’re going, what your goals are, how in the heck can you make a plan to achieve them? You need a “mission statement” for what your reason(s) for trading is, don’t just “wing it” and “see what happens” because if you do this, you’re gambling.

You need to get real about this shit, seriously, this is REAL MONEY AND REAL LIFE, it’s YOUR MONEY. It’s not a “fun little game” we are playing on the internet. Trading IS BUSINESS on the world’s biggest stage; the financial markets. If you aren’t prepared to do this business properly, you are going to get steam-rolled, I promise you that.

Being “prepared” and “playing properly” means you know why you are trading and exactly what your end-goal is, and it can’t just be “to make fast money”, because honestly, you are not going to make fast money unless you get super lucky, and if you are relying on luck to make money in the markets, you’re gambling and you’ll eventually blow up your account as a result.

As an example, what someone wants out of trading could be something like “I want to diversify my income streams and obtain another avenue for making some money besides just my 9-5 job, so my first goal is to just supplement my monthly income with trading income” – that is a specific defined goal that is not too lofty. Too often, traders start with unrealistic goals like “I want to quit my job immediately and make a thousand dollars a day trading” – these types of “goals” are not helpful because they are not realistic.

Your thirst for knowledge has to be unquenchable and insatiable

Warren Buffet still reads everyday, most likely a large portion of his day. He goes to work and studies his craft and industry, despite being almost 90 and one of the richest people alive. Most people would have slacked off decades ago if they had Warren’s money, but not him, and that is why he is the best at what he does.

Tiger Woods still practices golf on a regular basis, despite having achieved everything any professional golfer dreams of. Most people would have thrown in the towel and resorted to a life of laziness and luxury at this point. There is an inner drive, competitiveness, passion, that keeps Tiger, Warren and many others dedicated to their craft. They are just as dedicated now as they were in the beginning, before they were successful, and that is what is required to achieve success in anything.

Ask yourself this: Are you constantly looking to increase your trading knowledge, skills and conscientiousness? Honestly, you shouldn’t even feel like it’s something you “have to do”, you should WANT TO DO IT. If you don’t have that innate desire to WANT to do it, then maybe you don’t deserve to be a successful trader and maybe you should put your time and effort into a different endeavour.

Are you just here to gamble or are you here to make money long-term?

Do you want to make money over the long-run or are you just here to gamble? You may say that you’re here to make money long-term but how you trade and how you feel when you’re planning and about to place a trade will tell you a lot.

If you don’t have a plan, then you’re planning to fail. If you’re second-guessing yourself constantly and have little to no confidence in your decisions, then you probably haven’t learned an effective strategy and don’t have a trading plan in place.

Day-traders almost always end up gambling, because of the constant screens in their face, the constant price changes, the temptation to take stupid trades that don’t meet whatever system they’re trading is too strong for most people to overcome. If you want to make money long-term you need to learn position trading where you hold trades for 1-3 days to 1-3 weeks on average.

Day-trading influences a trading addiction mindset which is NOT the mindset of a pro trader. Professional traders do not trade “for thrills”, they trade for goals, and they have a plan in place to achieve those goals. SOME people can day-trade successfully, but very, very few can do it because it tests the human ability to have self-control perhaps more than any other endeavor on earth. Pro traders do enjoy trading, but it has to be calculated and calm, not impulsive and erratic.

Do you treat your trading like a business and trade with a plan?

This may sound repetitive, but it’s because it’s important. YOU NEED to trade with a plan. If you don’t have a trading plan then you need to make one asap. I have a complete trading plan template at the end of my professional trading course that can fast-track this process for you.

Every business has a goal and a plan to get there, trading should be no different. Too many (most) traders simply learn about trading, read a few blog posts and then start chucking their money into an account and then let the trades fly. This is why they lose money too and why they DON’T DESERVE TRADING SUCCESS.

Do you think and act like a ‘baller’?

If you don’t think and BELIEVE that you deserve trading success BEFORE you actually have the success, how do you think you’ll ever get it? The only way to start doing everything right, that you need to do to become successful, is to first believe that you deserve and that you will attain it. As I’ve written about before, you have to think and act like a ‘baller’ to eventually become one.

As yourself, do you trade like a seasoned hedge-fund manager by position trading and not wasting time on short-term charts? Are you calm and collected and calculating? Do you remove the emotion and the mental highs and lows from trading? If not, you need to start working on these things to become deserving of trading success.

Are you sickeningly disciplined and ninja-focused?

To deserve trading success you also need to put in the time and effort required for such a “reward”. You may not want to hear this, but you have to be sickeningly disciplined and have laser-focus if you want to put yourself into position to deserve trading success.

In an article I wrote on how to become a trading master, I discuss how famed martial artist Bruce Lee become the best ever at his craft. He is a good example of the type of dedication and discipline it takes to deserve trading success. It is not going to “just happen” to you because you think you want it more than the next guy. Let me tell you something, there is not a person on this Earth who wouldn’t love to be able to make consistent money trading the markets, so just “wanting it bad” means ZERO.

Fear the opponent who has practiced 1 kick 10,000 times, not the one who has practiced 10,000 kicks 1 time, put that in your ‘pipe’ and puff on it a while.

Is your trading account hurting? Do you feel overwhelmed, frustrated and ready to throw in the towel on the whole “trading thing”? Well, today’s lesson, if properly understood and implemented, can quite possibly provide you with the knowledge that you need to literally save your trading account and start building it back up.

You’ve probably heard that something like 90 to 95% of people who trade money in the markets or “speculate” in the markets, end up failing over the long-run. Whilst there can be a multitude of reasons for this mass failure, the primary one that underlies all the other ones is typically poor or no risk management skills. Often, traders don’t even understand risk management and just how important and powerful it is.

Hence, in today’s lesson, we are going to dive into the seemingly “boring” topic of risk management (but actually it’s super interesting if you like MAKING MONEY). Forget about everything else, all the hype, all the trading ‘systems’, because I am going to explain and show you the most important piece of the trading “puzzle” as you read on below…

Don’t Start a ‘War’ You Aren’t Prepared to Win.

There are essentially three main aspects to trading success: technical ability, which is chart-reading, price action trading, or whatever trading strategy you choose (I obviously use and teach price action strategies for a variety of reasons), money management which is “capital preservation” and encompasses things like how much $ will you risk per trade, position sizing, stop loss placement and profit targets. Then, there is the mental side, or trading psychology, and all three of these things, technical, money management and mental, are interconnected and intertwined in such a way that if one is missing, the other two essentially mean nothing.

Today, we are focusing on money management obviously, and honestly if you ask me, I would say that money management is the MOST important of the 3 pieces discussed above. Why? Simple: if you aren’t focusing on money management enough and taking care of it properly, your mindset is going to be totally wrong and whatever technical chart reading ability you have is essentially useless without the Money and Mind pieces in place.

So, before you start trading with your real, hard-earned money, you have to ask yourself one question: are you starting a trading ‘war’ that you really aren’t prepared to win? This is what most traders do, and most traders lose. If you don’t understand the concepts in this lesson and that I expand upon in my advanced trading course, you aren’t prepared to win.

Never Leave the Castle Unprotected!

What good what it be for an entire army to ride out into a war and leave the castle with all its riches (gold, silver, civilians) unprotected and unguarded? That’s why there is always a defense in place. Even in today’s military, there is always a “national guard” on reserve, waiting and watching in case any country tries to attack. The truth is that humans have ALWAYS defended that which is most important to them, so why not defend your money!?!?!

You protect and pro-long and GROW YOUR TRADING ACCOUNT by defending it FIRST and foremost. THEN, you go and execute potential winning trades. Remember, “rules of engagement 101 for trading”: NEVER leave your bank account unprotected when you go out to fight the “battle” of trading. Now, what exactly does that mean to you as a trader and more importantly, how do you do it??

It means, you do not start trading live, with real money, until you have a comprehensive trading plan in place. Your trading plan should detail things like what is your risk per trade? What amount of money are you comfortable with potentially losing on any given trade? What is your trading edge and what should you need to see on the charts before you pull the trigger on a trade? Of course, there is a lot more to a trading plan, but these are some of the most important pieces. For more, check out the trading plan template I provide in my courses.

I never go into the “battle of trading” unless I believe I have a strong chance of winning (high probability price action signal with confluence), but I also always assume I COULD LOSE (because any trade can lose) so I always make sure my defense is set in place as well!

Why “Being a Good Trader” is Not Enough…

Excessive use of leverage also known as taking “stupid risks” or stupidly big risks, are the main cause of trading account blowouts and failure. This is also why even the best traders can blow-up and lose all their money or all their clients’ money and you may have even heard of some hedge-funds blowing up in recent years, this is due to excess leverage as well as fraud in some cases.

In his popular blog “The Naked Dollar”, author Scott C. Johnston discusses how many high-profile hedge-fund managers have ruined hundred million dollar investment accounts simply because they did not protect the capital properly. You see, it really only takes one overly-confident or “cocky” trader to convince himself and others that he is “sure” of something and then put on an overly-leveraged position that leads to disaster.

The point is this…There are many “good traders” in the world and many of them even get employed by major banks and investment firms like Goldman Sachs and others. However, not all of them last long enough to generate significant returns because they simply lack the mental ability to manage risk, plan for losses and execute capital preservation correctly and consistently over long periods of time. A “good trader” is not just someone who can read a chart and predict its next move, but its someone who knows how to manage risk and control their risk capital and market exposure and who does so CONSISTENTLY ON EVERY TRADE.

If your capital preservation skills suck, you’re going to be a loser at trading, it’s just math, plain and simple. This is why some of the best traders (chart technicians) and market analysts end up as “nobodies”. If you want to be a “somebody” in the market, you MUST learn capital preservation and DO IT FOREVER over and over.

Why I Get Super Psyched About Risk Management!

Contrary to popular opinion amongst the trading masses, risk management is very, very interesting and exciting. Why? Simple. It’s because IT’S WHAT MAKES YOU MONEY IN THE MARKETS.

However, most traders just sort of gloss over risk management as “something I’ll do later” or some other ridiculous justification. But, really it should be the first and main thing they are focused on. A lot of times traders do this because they simply are ignorant to the POWER of proper money management, so let’s discuss that:

Why Risk Management is So Powerful and How To Use it:

What is the key to making consistent money in the markets over time so that you can actually make a living trading? It’s simple; stay in the market long enough to let your edge play out in your favor. However, most traders blow out their accounts long before this can happen, due to poor capital management skills. Hopefully, you will learn to remedy this situation for yourself.

Here is how you make money as a trader:

1. Contain all your losses below a certain dollar level that you have pre-determined as your personal 1R risk amount that you are OK with losing on any given trade.
2. Trade your edge properly and let it play out over time so that you have some bigger winners in between your smaller losers.

Honestly, that about sums it up. But most traders over-complicate the whole thing and shoot themselves in the foot over and over until they have no money left.

Now, in the image below, I want you to see what is going on and understand it and then IMPLEMENT IT IMMEDIATELY in your trading.

What the graphs below are showing is that:

• Winning percentage is not that important. In the example below, the win rate is about 20% and the trader still made money! How? Properly managing risk capital. Notice how all the losses are the same amount but some of the winners are 4R or 6R? This is what a winning trading performance looks like. It’s also fine to have some 2R winners mixed in as well.
• You need to have a mental obsession with capital preservation. You have your maximum 1R dollar risk amount and then you have to decide how much money you want to risk on any trade at that 1R max OR LESS, but you NEVER go over it. You will see in the image below the 1R max was $100 per trade.
• Yes, there were more losses than wins, by quite a bit, but because the capital management / preservation was SO consistent and disciplined, the winners more than took care of the losers!

Let this example serve as wake up call to those of you who don’t practice disciplined capital preservation. Study these examples below and go out and start practicing it in the real world.

How do you actually employ money management?

I have written about my ideas and theory on money management more extensively in several articles over the years. The topics I have covered include:

• Risk / Reward

Risk Reward is the metric by which we define the risk and potential reward of a trade. If the risk reward doesn’t make sense on a trade, then we need to pass it up and wait for a better one. Read more about it in the following articles:

• The 2% Rule vs. Fixed Risk

There are different philosophies on risk management out there and sadly, many of them are little more than rubbish and they end up hurting beginning traders rather than helping them. Read the following article to learn why one popular risk management system, “the 2% rule” is maybe not the ideal way to control your risk per trade:

• Stop Loss Placement

Stop loss placement has a direct impact on risk management because where you place your stop determines how big of a position size you can trade and position size is how you control your risk. Read this article to learn more:

• Position Sizing

Position sizing is the actual process of entering the number of lots or contracts (the position size) you are trading on a particular trade. It’s the stop loss distance combined with the position size that determines the amount of money you are risking on a trade. Learn more here:

• Profit Target Placement

Placing profit targets as well as the entire process of profit-taking can easily be made overly-complex. Not to say it’s “easy”, but there are definitely certain things you need to know about it that will help make it easier. Learn more here:

• The Psychology of Trade Exits

If you don’t already know, you will soon find out that exiting a trade can really mess with your head. You need to know everything about trade exits you possible can, and specifically the psychology of it all, before you can hope to exit trades successfully. You can learn more about trade exits here:

Conclusion

Most traders end up giving too much of their focus and time to the wrong aspects of trading. Yes, trading strategies, trade entries, technical analysis are all important and you have to know what you’re doing and have a trading plan and understand what your edge is to make money. But, those things alone are simply not enough. You need the right “fuel” on the fire to make money in the markets. That “fuel” is risk management. You must understand risk management and how important it is and how to implement it in your trading. Hopefully this lesson has given you some insight into that.

If you want to better understand how price action trading, trading psychology and money management work together to form a complete trading approach, then you will need more training, study and experience. To get started, check out my advanced price action trading course and get off the “hamster wheel” that poor risk management skills bring about (repeating the same mistakes over and over) and learn how a professional thinks about and trades the market.

I recently watched a documentary about Bill Gates on Netflix and the thing that stuck with me the most from it was that he didn’t become one of the wealthiest people in the world through luck or inheriting huge sums of money. He literally reads like 8 books while traveling, he can read 150 pages an hour, and he ENJOYS learning. One of his close friends said “Bill always knows more about any subject than the person he’s talking to about it”. What does this have to do with trading? Everything…

The key to trading success is developing yourself into a profitable trader by learning to trade properly and being consistently disciplined to follow an effective trading routine until it becomes a habit.

Here’s what you need to know about trading routines: Trading routines are the real key to success in the market. There’s no magic indicator or algorithmic trading robot that is going to easily make you a profitable trader. Just like Bill Gate’s routine each and everyday over the course of years, led him to insane financial success, so can your trading routine. However, if you have no routine or the wrong routine, you will never become a successful trader. Could Bill Gates have laid around watching T.V. eating Cheetos all day instead of reading everything he could get his hands on about business and programming? Sure. And you would never know who Bill Gates was if he had done that.

There’s a “fire” inside of Bill Gates; a desire to learn, to grow, to be more, that seemed to be part innate and part developed through his childhood. I cannot provide this for you, you must develop it if you don’t have it. But, I CAN give you the framework, the “keys” to the “kingdom” so to speak, but you have to be in the proper trading mindset to be able to ‘turn’ the key. So, if you’re ready, read on and learn about the daily trading routine that has worked for me for the last 10+ years in the market….

The Main Ingredients of My Daily Trading Routine

• My trading routine involves interacting with the market FAR less than many other traders. This works for me and I firmly believe that it will work for you for the following reasons: Less stress, Less time to mess up your trades by over-involvement, low trade frequency, instills discipline, you control only yourself and don’t try to control the market.
• My overall approach is to focus on end-of-day data, which means I focus on the daily chart time frames and I will typically wait until the market closes each day to really sit down and take a close look at the markets in my watch list. This is what I call a part time trading routine and not only does it have the advantage of less screen-time (so you can do other things) but the very fact that you’re spending less time in front of the charts actually will improve your trading performance over the long-term.
• I take a weekly view first: I check out the weekly chart time frames, draw in the key levels, get a feel for the near-term and long-term trends and make a note of any obvious / large price action reversal signals.
• Next, we are looking at the daily chart time frame. We are mainly looking for key levels of support and resistance, the current and recent market conditions: Trending or sideways? And last but not least, we are looking at the PRICE ACTION; any signals that may have formed near the key levels? Any signals formed after a pull back to a level? Note: Levels can be horizontal levels of support or resistance or EMA – exponential moving averages or even 50% retrace levels.
• Now, since this is just a blog post, I have to “gloss” over some of the more detailed topics like money management, trading psychology, stop loss placement, etc, but you can follow the links I just provided to learn a bit more and of course these topics are discussed much more thoroughly in my professional trading course.
• What is the GLUE of all of this? Of my entire trading process? Simple. It’s routine – discipline – habit or RDH. Let me explain this to you (it’s critical) – Remember my mention of Bill Gates earlier? Bill Gates probably has better habits than you (or me to be honest), Warren Buffet too. The elite of the world, those men and women who have amassed large fortunes or otherwise succeed at their craft, got to that point through Routines that took Discipline which turned into Habits. The dedication is unreal, but honestly, that is what it takes. Bill Gates doesn’t read so many books because he hates it, he does it because he genuinely loves it! So, you really must love trading and you must love the routine and discipline if you hope to turn them into proper trading habits. Proper trading habits are what bring you wealth in the markets, there is no easy way or short-cut other than TRULY loving the process. And remember, I can show you my process, the one that has worked for me, but it’s up to you to LOVE it, to be passionate enough about the process to make it work!

My Daily Trading Process: Chart Analysis and Trade Execution

The first major chart aspect of my trading routine is taking a “bird’s eye” view of the markets on my watch list. That usually means starting with the weekly chart time frame and giving it a good once-over. I am mainly looking for key levels in the market, major turning points, trends and areas of consolidation to make note of. I always mark the key levels on the weekly chart first, here’s an example:

Next, I will drop down to a daily chart time frame and begin analyzing it in a very similar way. The key levels from the weekly may need to be adjusted a bit on the daily, depending on the price action or you may need to draw in additional levels:

Now, I am analyzing the near-term market conditions to decide which direction is the best to trade in and what nearby levels / areas are the most important to watch. I will often use a moving average here, like the 21 EMA or similar, to help see the near-term trend and momentum. You will also want to learn to identify periods of Higher Highs / Higher Lows and Lower Highs / Lower Lows, which you can learn more about it in my article on how to identify trending markets.

Last, but certainly not least, I am looking for price action signals / potential trades. I am especially looking for “clean and obvious” signals that line-up with levels on the chart, in other words, that have confluence.

• What you saw above in the charts is a brief overview of my weekly / daily chart analysis routine that I do for all the markets in my watchlist. If you don’t have a watch list, you should read my article on creating market watch lists for more.
• Markets go through phases. Study the markets you like the most in your watch lists and you will get to know them, get intimate with them. If you see some or most of them are in bad trading phases, or sideways consolidation that’s choppy, just glance at them and walk away or don’t even check them for a few days. The best trading phases or conditions are trending or when markets are trading in very defined and larger trading ranges.
• I cannot pound this into your head enough: MOST TRADERS LOSE BECAUSE THEY LOOK AT THE CHARTS TOO DAMN MUCH! The market is not meant to be a casino so don’t treat it as one. Don’t get addicted to it! View and treat the market as a way for you to show how planned, skilled and disciplined you can be and you will get rewarded  handsomely for doing so.

How I Find a Trade, Set it Up and Execute It

Now, once you have done the above steps, let’s say you spot a potential trade. Here is how I will set it up with the entry, stop loss and profit target placement…

• Notice the “price action signal” in the chart below, this was technically a bearish tailed bar, followed by a pin bar signal that was also an inside bar within that bearish tailed bar. Price consolidated for a few days before ultimately breaking lower with the existing downtrend.
• Price had pulled back to resistance at the 21 EMA (blue line) and the 1.1250 horizontal level, so we had multiple points of confluence: level and trend.
• Traders could have netted 2R profit from this trade had they held on to it for 3-4 weeks after entry. This is why I always preach set and forget trading!

• This example shows a clear pin bar sell signal that formed at resistance (both horizontal and ema) and within a downtrend. This was a very clear and obvious trade for a savvy price action trader. Stop loss was just above the pin bar high and a 2-3R profit was easily achieved if you held the trade for a couple of weeks.

• An interesting “twist” on the last trade above is seen below. Notice the entry was made as a 50% retrace entry of the pin bar’s tail.
• This entry allows for either a tighter stop loss and hence increased potential risk / reward OR with a normal width stop you could give the trade more breathing room. In this case, we are showing a tighter stop with increased risk reward, 6R was possible here!

Conclusion

In today’s lesson, I have shown you how I personally analyze the charts each week and day and gave you a ‘peek’ into my own personal trading habits. Hopefully, after reading today’s lesson (and re-reading it) you now have a better understanding of WHY you need a daily trading routine and HOW to develop one.

The above daily trading routine is the core foundation that all of my trades are built on, and it’s my opinion that all aspiring traders need such a foundation to build their trading career on if they want to have a serious chance at making consistent money in the markets.

Many of you know I publish a daily market commentary each day shortly after the daily Forex market close. However, what you may not know is that doing these daily commentaries (similar to above charts) is also part of my daily chart analysis and trading routine. I actually started writing down my thoughts about the markets each day well before I started this website, and it’s something I’ve done continuously every trading day for about the last decade. It’s literally a habitual part of my daily life…if I miss a day of commentary for some odd reason, like travel or a holiday, I literally feel ‘strange’, and like something is ‘missing’. You need to get to that point too.

For on-going help and assistance with learning to trade, analyzing the markets, spotting trades and building your own personal trading plan, my daily commentary and members’ analysis is a great example of how I perform my rolling (ongoing) analysis of the market in real-time conditions. This is something that you can learn from me and mimic on your charts. I encourage you to “watch over my shoulder” each day as I analyze the charts and plan my trades in the members daily chart analysis area and my trade ideas newsletter.

Given the amount of inquiry I am receiving from our readers and students regarding the Coronavirus and the recent market volatility, I feel compelled to share my views on the situation, from a trading and investing perspective as well as a personal perspective.

I have produced this article in a question and answer format to best address the comments and concerns many of you have sent us over the past few weeks.

Q: Will the LTTTM business or service be interrupted by the Coronavirus situation?

A:

I am self-isolating at home with my family, avoiding any outside contact. The rest of the LTTTM team are also working from home. In the unlikely event I or a team member becomes ill, we have a contingency plan in place to continue the LTTTM service. The show will go on, as it has done since we started back in 2008.

Q: What do I think about the Coronavirus situation overall and what am I doing?

A:

As I write the US equity markets just crashed circa 13% overnight, the worst drop since the crash of 1987. The market is now down circa 30% so far this year. This has been the most volatile price action I have ever witnessed in all my years of trading.

Whether you believe the virus pandemic is going to eventuate into what the experts are predicting, it has now become an almost self-fulfilling market collapse. Traders and investor’s confusion start to dictate these volatile moves rather than facts and evidence. Unfortunately, now that the markets have caused this level of technical damage, we may remain in this state of chaos for some time until we see the world starting to show clear signs of exiting this viral and economic crisis.

I have members in Italy, South Korea, China, and other seriously impacted regions who have shared concerning stories of just how serious this virus situation is. From all my discussions with well-connected individuals as well as my own in-depth research online (non-main stream media), it is clear that this virus is very serious and poses a risk to certain people in the community, especially the older generation and those people with existing health conditions. Despite the massive dangers to a large segment of the population, the very fact the world is now so aware of the danger of this virus and with everybody preparing and bracing for the worst, the worldwide pandemic may come to an end faster than we all expected, touch wood.

It’s definitely not a time to panic and run for the bomb shelters, but it’s a time to be vigilant, to have a plan, and to protect ourselves and our loved ones from possible infection (especially our older folks who are most at risk).

At this stage, I have taken personal precautions including self-isolating myself and family from the outside world. I have stockpiled food to last months if needed (as I speak, the local stores are restricting purchases and shelves continue to remain almost empty). I have also asked my parents and older friends to self-isolate from all people including their own family. I have also suggested they have food delivered instead of going out to stores and risking infection. Most of my attempts to help my family and friends prepare for a potential worst-case scenario has fallen on deaf ears, so this has me a little concerned. People tend to believe it’s never going to happen to them, and ultimately we can’t control others, we can only really control what we do ourselves.

Q: Why are the markets acting so crazy and is everything going to be ok?

A:

This is a true black swan.

The moves in the markets have been both extreme and unexpected. This is a true black swan (an unexpected and unpredictable event that was extremely difficult or impossible to predict), that is causing genuine chaos to the world’s financial markets and economies. The move has been exaggerated by people’s predictable panic and confusion, and like always, the computer algorithms (quants) are fueling the momentum behind many of these crazy daily movements in the markets.

The only thing to fear is ‘Fear’ itself

Most retail market participants actually believe the world is ending right now, the level of chaos in stocks and commodities especially is unprecedented. Due to the extreme price volatility, we know that typical trader and investor psychology will see many market participants panic and make decisions without even understanding what is truly happening. Some will inevitably be forced to sell due to margin calls or simply to raise capital to run their business during this slow economy.

The problem we have here is that panic and overreaction may indeed turn out to be the cause of another GFC as apposed to the Coronavirus crisis itself. Once you have the entire world fearful of owning financial assets and fearful of any form of travel or even leaving their house, you have a self-fulfilling crash in the global economy, regardless of the true cause. Fear and panic are the real danger to all of us here and not just virus pandemic itself.

Fed to the rescue ‘Again’

Just like we saw back in the 2008/2009 GFC, the US Federal Reserve has just announced ‘whatever it takes’ rescue measures to try and stem the bleeding in financial markets and credit markets. Countries around the world and central banks are all working together to try and stimulate their respective local economies and to help local businesses weather the current economic storm. Sadly these rescue tactics will not save every local business and certainly won’t save every listed company. There is going to be insolvency and bankruptcies as a result of the current crisis, and the global stock, credit, and currency markets are pricing this in already.

Capitalism will continue 

History has shown that the Reserve banks and Governments won’t allow the markets or economy to collapse. They have rescued the world before and they will try to rescue it again, so we should remain optimistic. When the market finally wakes up to the idea that there is a rescue mission from the banks and government on the way, things will hopefully start to stabilize, just as they did back in 2008/2009 GFC and other crisis points in recent history.

It’s important we all understand that no matter what happens right now, this is not the ‘end of days’, this is not the ‘end of capitalism’ and things will continue normally right where they left off eventually. It’s important to stay optimistic because if you immerse yourself in negativity, you will 1. add to the problem and 2. miss the huge trading and investing opportunities upon us.

Q: Do I still think Trump will be re-elected in 2020?

A:

Every since I predicted Trump would win the 2016 election and made 500% + returns on that bet/trade, people have been asking me about my thoughts on Trump winning in 2020. My view is that the pandemic will hopefully be over by the November US presidential election. As a master of spinning any and all events in his favor, Trump will take credit for saving lives through his response teams effort and bringing the crisis to a close. He will take credit for the V-shaped stock market recovery that will ultimately occur after the pandemic subsides, his buddies at the US Federal Reserve will make sure it happens. His existing supporters and new silent supporters will emerge in massive numbers and Trump will claim victory in November 2020 convincingly. There may be opportunities to back Trump above even money odds in the coming weeks/months ahead, and that’s worth keeping an eye on. I might write a post on this later in the year.

Q: How am I trading the current market conditions?

A:

Look for opportunities in all places.

For myself and other experienced traders, there are amazing opportunities to trade the short term swings and trends across a range of markets. In recent weeks there have been a plethora of trade entry opportunities offering high risk-reward payoffs. We have seen amazing volatility in Gold, S&P 500, Crude Oil, and all Major FX Pairs, just to name a few.

The patient trader waits to trade the swings by watching for price action signals to identify the short term turning points OR they wait to trade the trends by watching for retracements to key levels and using price action signals to identify when the prevailing trend momentum will resume.

For investors, there are amazing opportunities to pick up long term investments in solid companies they have had on their investment shopping list. Professionals don’t panic in these situations, they are salivating at the opportunities to profit and they embrace these kinds of market conditions.

Give trades room to move, these are unusual times.

It’s important during this extreme volatility that traders give their trades room which means using a wider stop loss and an adjusted position size. As an example, whilst keeping the same $ at risk per trade, you may trade 1 lot instead of 2 lots. You may use a wider stop loss of 400 points instead of 200. Remember, wider stops don’t mean more risk if you reduce position size. Do the maths and watch your risk.

Use the crazy market conditions and newly found free time to learn and practice your craft.

If your like myself and intend to spend the next few weeks/months at home working or just laying low on weekends instead of going out to see friends and family, you should use this newly found free time to focus on your self-education, to study up on your trading approach and practicing your trading strategies in real-world conditions. There has never been a better time to immerse yourself in the markets, it’s an exciting time to learn and an exciting time to trade.

Closing thoughts:

Like it or not, the privileged elite few control this world, and they have controlled it for a very long time. The financial markets are one mechanism they use to transfer wealth and to control the wealth. They won’t let the game won’t stop, the world will continue and companies and people will return to normal in the not too distant future. It has always been this way for the past few centuries since capitalism began and it’s not going to change any time soon. So stay optimistic and things will eventually return to normal and life will go on. In the meantime, try to make yourself some money and capitalize on the plentiful trading and investing opportunities upon us.

What do you think is really going on out there in the world and in the markets right now? What have you been trading or looking at trading? How are you planning for the next few weeks and months ahead? Talk to me by leaving your comments below and I will reply to every comment.  

Stay safe and good trading,

Today’s lesson is going to be somewhat controversial and may ruffle some feathers. I intend to blow wide open and debunk a lot of the information you have most likely been exposed to this far in your trading journey.

The average trader is out there walking through a confusing and conflicting maze of information from a variety of sources including; blogs, forums, broker websites, books, e-books, courses and YouTube videos.

With all these learning resources available there is naturally going to be some very good and some very bad information, but in reality, there just isn’t a way for most aspiring traders to know what to listen to, who to listen to, or what information is beneficial and what information is non-beneficial.

I’m not going to pretend that there is a way for an aspiring trader to filter this giant sea of information composed by all these resources and mentors out there, because there simply isn’t. A professional trader with 10,000 hours of experience might stand a chance of figuring out the good from the bad and the valid from the invalid. However, you, the beginner or intermediate trader simply won’t possess that filtering ability yet.

Becoming ‘Non-Average’

As traders, we give in to our instinctive feelings of social trustworthiness based on what we see and hear, often to our extreme detriment. We often tend to take a leap of faith with our mentors and have a habit of taking things said to us at face value. We want to cling to information that resonates with us and makes sense to us, especially if it’s delivered by a familiar source that we have come to know and trust.

The ‘average trader’s brain’ is always looking for a shortcut because of the overwhelming desire to make money and be free. The brain wants to get a winning result right now with the least amount of effort possible. If you want to ever make it as a pro trader or investor, I suggest you do everything you can to avoid thinking with the ‘average trader’s brain‘ and start being ‘non-average’. That means becoming much more aware, thinking outside the box more and questioning and filtering the information you read and watch. Most importantly, slowing everything all down!

This now begs the obvious question…how do you even know what I’m about to write in this lesson is truly valid and factual? How can you really be sure? The truth is unless you have followed me and my posts on this blog for a long time and know me and know my work, then you can’t really be sure, and I don’t expect you to simply believe it at face value. If you need to come back and re-read this lesson in a few weeks, or a few months, or a few years, after you figure out that I am somebody worth listening to about trading OR that I am somebody not worth listening to about trading, then so be it.

So with a degree of healthy skepticism, I ask you to consider the below list of eye-opening secrets that pro traders and the trading industry, don’t want you to know about or understand. I hope it helps…

FOREX isn’t the only market the Professionals trade

The FX market is huge, with billions of dollars per day changing hands. It can make you great money if you know what you’re doing OR it can send you broke if you don’t. It’s a very popular market to trade globally, BUT it’s not the only market the professional’s trade and it’s not always the easiest market to trade either.

A note on leverage:

The brokers and platform providers want you to trade FX on high leverage because the profit margins are very high for them. However, if you trade FX on lower leverage, the profit margins shrink dramatically for them. When you trade FX, start thinking about what can go wrong instead of just thinking about what can go right. I suggest avoiding stupidly high leverage like 400 to 1, as this can be very dangerous for you if the market moves quickly or experiences a price gap and your stop-loss orders aren’t executed at the price you set. A more sensible leverage level would be 100 to 1 or 200 to 1, but any higher seems crazy. (Using too much leverage is what wiped a lot of traders out during the Swiss Bank Crisis in 2015, The Brexit vote in 2016 and the Currency flash crash in early 2019).

Broaden your view:

Going forward, it will serve you well in your trading career to start watching a variety of global markets including FX, Stock Indicies and Commodities. In addition to FX, I personally trade GOLD (XAUUSD), S&P500 Index USA, the SPI200 Index Australia, and the Hang Seng Index Hong Kong, and sometimes individual stocks on various global exchanges. In short, there is more to the trading world than just FX. I discuss the most popular markets I trade in this lesson here.

Day trading isn’t what Pro trading really is

The internet is filled with marketing trying to convince people that the definition of a trader is a person who spends all day actively trading in and out of the market on a short term basis, all whilst living the lifestyle of a Wall St millionaire. There is a serious agenda in the industry to push this story to the masses, it has been relentless for decades.

I am yet to meet one successful day trader who is consistent over the long term and I have almost 25,000 students and 250,000 readers on this blog. I am not saying there isn’t a few out there, but 99.9% of the people who try this style of trading or try to live up to the typical day trader stereotype are going to fail and maybe even harm themselves financially or mentally. Watching a screen all day and looking for trades constantly is the equivalent to a compulsive gambler playing roulette in a casino.

The successful traders I know of (myself included) are looking at higher time frames and longer time horizons (minimum 4-hour chart timeframes and predominantly daily chart time frames). They have no restriction on how long they are looking to hold a trade for and they tend to let the trades find them. The professionals I know, do not day trade, they do not watch screens all day, they do not look for trades constantly. They will typically fall into the category of a swing trader, trend trader or position trader.

The obvious paradox and conflicting reality in the ‘day trader story’ is blatantly obvious. How does a trader who is constantly looking at a screen and constantly trading have time to enjoy his life and live the lifestyle? They chose to trade as a profession to have a life, they didn’t choose it to watch a screen 24/5.

Here are some points to consider that work against the so-called ‘ day trader’:

• The shorter the time frame the more noise and random price movement there is, thus increasing your chance of simply being stopped out of the trade.
• Your ‘trading edge’ has a higher chance of yielding a result for you if you’re not trading within the intraday noise.
• The same trading edge does not work or produce the same results on a 5 min chart compared to a Daily chart.
• Commissions and spreads churn your account, so the more you trade the more you lose in broker platform costs. (I will talk about this below)
• Risk-Reward ratios are not relative on shorter and longer time frames. Statistical average volatility across different time periods as well as natural market dynamics play a huge role in this. There is far more weight behind higher time frames than lower timeframes.
• Great trades take time because the market moves slower than most people ever anticipate. Trading from the higher timeframes and holding trades for longer time periods will offer you greater opportunities to see trades mature into big winners. However, shorter timeframes don’t offer you this same opportunity very often.

Commissions, Spreads & Swaps eat into your profits

I briefly touched on the hidden costs of trading above. It’s not always obvious to the beginner trader that for every 100 trades they make, they will spend around 70 to 100 pips equivalent costs via the broker’s price spread, commission and overnight swap. If you’re day trading, this is going to add up extremely quickly and eat into your account (the industry word for this is ‘churn’). Every second lesson I seem to write on this blog is about the benefits of trading less frequently, trading daily time frames, slowing it all down, letting trades take time to play out. One of my best lessons on trading daily time frames can be found here.

There is no such thing as an ECN broker for retail traders

There is a serious epidemic of absolute B.S marketing by brokers who call themselves an ‘ECN broker’ or a ‘True ECN’, and try to make out they are ‘more legitimate’ or ‘more transparent’ than their competitor brokers. I hear about ECNs multiple times per day on our email support line and my response is very frank when I try to explain the reality of what’s really going on here.

Let me explain the truth about ECN Broker Accounts…

ECN is an industry term originally coined by banks and institutions which really just means ‘Electronic Communication Network’. It implies your order from the broker is sent directly to the market with no middle man and no market making activity by the broker. However, the truth is that 99.9% of all brokers and platforms are market makers and they are not always sending your trades through to a bank or liquidity provider at all.

The forex market is not like the stock market, there is no central exchange where one trader’s order is matched with another traders order, the prices in FX are ‘market made OTC products’. These products and prices are created by banks, institutions and brokers. With FX and CFDs, even when trading with a so-called ECN broker, there is still no central exchange and no real transparency.

Undeniable Proof:

Recently one of the largest brokers in the world who claimed to be a ‘True ECN’, suddenly removed this wording from their website and no longer claims to be an ECN broker! Rumour has it the broker was forced to remove this wording on their website by various global regulators for misleading customers. I had actually been warning our members about this broker for years and I always struggled to convince people it was just very clever marketing. All along these ECN brokers have still been market-making part of the order flow coming from clients and have not always sent every trade through to the banks or liquidity providers.

Even if ‘magically’ they did send every trades through to the banks or liquidity providers, you still don’t really know what’s on the other side. There is ALWAYS an institution or company making a market (settings the prices you trade on). The price is never the same across all banks and brokers. There is no central exchange to compare prices or dispute prices either.

In short, do not rate a broker higher just because they use words like ECN, STP or DMA. There are very reputable brokers out there for sure, but don’t be naive or fooled by clever marketing and choose one because of a story they are peddling you. A bank or broker somewhere is always taking the other side of the trade when it’s an OTC market, there is no exceptions to this.

It’s best you decide on a broker based on things like regulatory conditions, global presence, payment and banking conditions, customer service, and overall reputation in the industry.

Market Makers are not always a bad thing, and we need them too

A bank, an institution, a broker, or a liquidity pricing provider are the counter parties that take the other side of the trade when it’s an ‘OTC market’ such as FX and CFD’s. Did you know that Banks are ARE market makers too? It’s amazing how much respect and credit is given to Banks, as they are really just very large brokers at the end of the day. There is nothing wrong with reputable FX brokers who make a market and don’t send every trade through to a bank. Think about that for a moment… We seem to judge brokers for being market makers, yet if they send your trade through to a bank or large institution, they are just sending it through to a market maker!

This is actually a massive misconception. In fact, what you don’t know is that you will often get a better price and better experience with this kind of provider. This is assuming the broker is reputable, has international offices and a global client base (regulated), and upon your own testing is offering good order execution and good trading conditions.

Other benefits of Market Makers:

• You can trade very small lot sizes, whereas you can’t if going direct to the banks.
• You will often get tighter/better spreads.
• You will often experience better order execution and speed of execution (better fill price on orders)
• You can often access a broader range of markets including Cash CFD’s as apposed to just Futures CFD’s. (overnight swap vs monthly swap)
• The broker is often taking less risk by making a market, there is actually more costs and way more balance sheet risk sending every trade through to banks. This is actually why some retail brokers survived the Swiss Bank crisis in 2015 and some didn’t, it came down to the brokerage model they had been operating.

A Quick Note On The FX Broker Platform We Use:

We currently work with an Australian regulated and reputable global broker offering FX, CFD’s, Metals & Commodities. More importantly, they also offer the correct charts that myself and members use to trade the price action strategies I teach in our courses (ie: New York Close Charts). You can test drive this FX Broker Platform Here. (this will save you emailing me asking for the link).

Trading is simple, BUT it’s really not easy

If you actually think that trading is a get rich quick scheme then you should probably leave this blog now and never return. If you believe in hard work, ongoing study, and learning through life experience and the school of hard knocks, then stick around and read on.

Finding and placing trades is actually a pretty simple process once you have a trading plan in place and have mastered your trading strategy, BUT it’s NOT in any way an ‘easy’ activity to manage on a day to day basis. Humans didn’t evolve to sit in front of screens and look at price bars and bet money on those prices bars moving up or down. In reality, it’s probably the furthest thing from what humans were designed to do.

Our mind struggles with the emotional roller coaster that inevitably holds us ransom on almost every price tick, every trade entry or exit, and every trading decision we make. Unless we learn to master this emotion and implement sickening military-grade discipline, we are pretty much screwed as traders or investors. Even after 10 years or 20 years in the trenches, trading nor a professional sports game will ever be an easy experience for the average human being.

The game can be simple, but doing it is never ‘easy’. As with anything that makes serious money or produces a life-changing result, trading is not going to be smooth sailing and there are barriers to entry, both mentally and financially.

Trading robots and EAs don’t usually work

After almost 18 years of trading, I am yet to see a single EA (expert advisor robot for MetaTrader) or automated trading system make money consistently. Automated trading systems and robots on retail trading platforms very rarely work for a long period of time. This isn’t an opinion it’s just the industry statistics. They say only 5 to 10% of traders succeed, and with robots/systems, it’s an even lower % that succeed. Sadly some of the most popular trading robots/EA’s are using terrible money management techniques (some even use martingale, doubling up on positions when they lose), which ultimately leads to a massive drawdown for the trading account when the system experiences a string of losses.

The snake oil sales techniques with automated robots/EA’s are by far some of the worst kinds of marketing every seen on the internet. We are talking blatant scammy stuff, total lies, total b.s. Sure, some robots/EA’s do make money and there will always be a few that do, but the chances are your not trading the one that’s been programmed by a NASA scientist geek, because that NASA scientist geek is not going to give away a robot that makes automatic money. EAs are a broker’s favourite tool because they turn over a clients account constantly, increasing the trading commission and spread revenue, far beyond any other type of client. Remember, every 100 trades is 70 to 100 pips or so in costs, it adds up fast.

One more thing here, don’t ever send your money to a broker or person who wants to trade and EA or automated system for you, you won’t get your money back 99% of the time. If you’re going to ever operate an EA, always maintain full control and watch it like a hawk.

Beware of those selling you ‘shortcuts’

Many trading courses, systems and strategies are marketed to aspiring traders claiming to be able to teach them to print money, quit their job and change their life. With the popularity of Instagram, Facebook and other social media channels, this marketing tactic is becoming a more prevalent and more effective tactic to lure in traders and take advantage of their inner greed and the brain’s obsessive desire to find the shortcut to get a result (mentioned earlier).

When I was younger and naive, I fell victim to these traps as well, so don’t beat yourself up too much if this has happened to you already. It’s important you do not trust anybody who promises you any kind of financial results or returns, if they do, run in the other direction. It’s a genuine minefield out there and sometimes you won’t be lucky enough to come out the other side of an experience like that intact. Some of the stories I hear about traders spending huge amounts of money with ‘so-called experts’ both buying courses and investing in managed accounts with these traders (all the bolt-on upsell offers), are both terrifying and outright sad. Don’t get suckered into it!

Sure I understand you’re probably thinking right now “Hey Nial don’t you sell a trading course?’, and my answer is yes I do and no I’m definitely not able to escape the stigma of selling something, but in a capitalist world I simply have to charge something for all the time I spend composing education materials, writing daily newsletters and answering all your emails each day :). The key difference here is that I don’t engage in deceptive and hype marketing tactics, and I don’t make any financial promises or try to deceive people about the realities of trading.

If you’re going to find a mentor or information resource, you need to be very selective and should filter people based on how much they will do for you for free as opposed to what they promise to do for money later. I actually started this trading blog back in 2008 purely as a passion project to share my ideas and meet other traders. I never intended to charge for anything (which is why a lot of the information is still available for free to everyone). It’s always been my hope that myself and this blog will offer aspiring traders like you the right balance of free and paid information, as well as add genuine value to your life.

Even the best mentors are not enough

You are here to learn about trading from a professional trader, so it may disappoint you to hear from me the candid truth that I, nor any trading mentor or course has the ability to make you a consistently profitable trader and change your life. Even if I armed you with the best trading strategy known to man, and even if I proved it worked 7 times out of 10, it’s simply not going to be enough. This kind of thinking is a pipe dream, it’s completely unrealistic and if you are still thinking like this after reading a few books and courses and after experiencing real-world trading on a live account, you need to get your head checked.

If you have been into trading for some time and have purchased courses or books, you probably know by now that these products/services (Including mine) can indeed help you immensely by fast-tracking your trading knowledge and skillset, but they are not going to be enough in their own right to magically turn you into a consistent trader.

The missing ingredient here is real-world experience in front of the screens over a long period of time (let me reiterate the word ‘long’ here). Trading experience and the intuition/gut feelings that come with it can’t be purchased, it’s simply something you have to live through in real-time and experience for yourself. They say 10,000 hours trading experience and you will be an expert, and I don’t disagree with that.

The cost of education is irrelevant

It’s important to note that a higher-priced education vs lower-priced education in any field has absolutely no bearing on the quality of the information or the credibility of the person teaching the information. As of 2019, we have almost 25,000 students here at LTTTM, all who have paid just a few hundred dollars for our professional trading course, many of whom tell us this is the best course they have taken, as well as being the cheapest. I myself have read $10 books from amazon that are some of the most superior sources of trading and investing knowledge on the planet (we are talking life-changing aha moments). So as you can see, good sources of knowledge are not always expensive.

The majority of the self-made rich and elite in this world didn’t attend or finish university, they didn’t pay huge sums for a fancy degree. They developed a hunger for success and a hunger for knowledge, and once you develop this ‘bug’, nothing can stop you. With Google, access to books and affordable courses all over the internet, you are in the BEST period in the world’s history to start learning about business, investing and trading. No degree or training course that costs an arm and a leg is ever going to teach you what the real-world experience can teach you, and in a much shorter space of time too.

For the rest of your trading career, don’t ever think or believe that by paying more you’re getting more. As I said above earlier, I regularly hear stories from our followers and members about how they have spent huge sums of money attending courses, seminars, buying software and or investing in the educators managed account service. These are situations where the trader literally ends up spending so much money that they don’t end up having enough money left over to ever start to grow a live trading account. They have effectively finished before they have even started. In my mind, it would have been better to use all that money to invest in your own live trading account, at least you have a chance at making money and also learning something tangible along the way. Better in your pocket than somebody else’s!.

So you want to become a successful trader? Well, you are going to have to avoid making many common mistakes that traders often fall victim to. You’re GOING to make mistakes as you learn to trade, but the traders who actually start making money are the ones who LEARN from those mistakes and figure out how to stop committing them over and over. In this lesson, I am going to discuss the most common mistakes that traders make and give you some simple solutions to them. After that, it’s up to you to learn from them and make sure to avoid them as you continue to analyze and trade the markets.

Being in Too Many Trades at Once and Over-Trading

This is perhaps the most classic mistake that 100% of beginners make and about 90% of the rest make. Also, it’s no surprise that about 90% of traders lose money over the long-run when about 90% of them are trading too much. Another interesting tid-bit is that if you find you’re in more than one trade at a time, you’re probably trading too much. There really is no logical reason to be in more than one trade at a time, ever.

Most people simply cannot learn to ignore the temptation to constantly be in a trade, so they make up all sorts of reasons why they should trade or they make up trading signals that aren’t really there. The cold hard truth of it all is, unless you learn to control yourself and stop over-trading, you are never going to make consistent money trading the markets.

Perhaps the quickest and easiest way to train yourself to stop over-trading is simply to change the way you think about trading and what “making money trading” actually consists of. Once you start remembering that less is more and that you will literally MAKE MORE MONEY by TRADING LESS over time, you will begin to look for reasons why a potential trade might not work out, instead of trying to find any little reason possible to enter the market (like most traders do).

Spending Too Much Time Thinking about Trading and Looking at Charts

Similar to over-trading, is generally just thinking about trading too much. Traders often make the mistake of spending too much time flipping through the charts over and over, even when there are no obvious price action signals to trade. As a result, what ends up happening is that they enter a trade they wouldn’t normally take if they where following their trading plan.

If you find yourself at the point where you are thinking about the markets and trading / trades you’re in, nearly all the time, it’s safe to say you are also over-trading and losing money as a result.

You must build in planned time away from the charts, into your trading plan. Then if you are following your trading plan, those regularly scheduled times you’re away from the charts are just going to be “part of the plan”, “part of the process”. If you start deviating from the process and end up losing money as a result, you have only yourself to blame. So, in the end, it comes down to how good you are at staying disciplined and sticking to a plan, which is why most people lose money at trading; because they simply can’t stick to a plan and stay disciplined over a long period of time (consistently).

Trying to Make Trading Decisions From Short Time-Frame Charts

One of the biggest mistakes that new traders make, is day trading. Many people hear about “day trading” before they learn much else about it. This leads them down the wrong path right from the get-go, starting them on a cycle of trading off of short-time frames like the 5 minute or 1 minute charts for example, and this leads to severe over-trading and gambling as well as trading addiction.

Lower time frame charts are simply not as important as their higher time frame chart counterparts. The reason being is simple, the higher the time frame, the more data it reflects and so it carries more “weight” than a short time frame. A daily chart bar is far more important than a 1 minute chart bar, for example. You need more patience to trade higher time frames, but in return you are getting more reliable trading signals and less stress, a pretty good trade off if you ask me! When trading daily charts you can simply set up a trade and walk away for 24 hours or more; this is how one achieves trading like a nomad and enjoying the lifestyle that trading can bring.

Trading With Real Money Before You Have Tested Yourself on a Demo Account

This mistake is like a death-sentence for your money, yet time and time again, beginning traders do it. The mistake is, trading with real money before you have even tried your strategy on a demo account. What ends up happening is typically a number of things; traders aren’t familiar with the account and how it works, so they make silly mistakes like risk more than they thought they were or not enter a stop loss properly, etc. This causes them to lose money, of course.

Also, since you have not tested your trading strategy on a demo account (in live market conditions) you don’t even know if your strategy or your ability to trade it, are going to be effective. It seems insane that anyone would take their real, hard-earned money and just start risking it in the market with zero practice on demo, but hey, people go to Las Vegas and gamble all their money away, so it’s really just another form of that.

Your mission as someone who wants to become a skilled and profitable trader, is to TEST your strategy as well as your ability to trade it, on a reputable demo trading platform, BEFORE you try trading live! This will allow you to work out the ‘bugs’ with the platform that you may have and it also allows you to get a feel for the market and your trading method, without real money on the line.

Getting Sucked Into The ‘Black Hole’ of News Distractions

The “black hole’ of news distractions is a real thing in the trading world, and if you’re not careful you will fall into it and never get out until all your money is gone.

What happens is that traders end up “looking for reasons” why their trade should work out, and as we all know, you can find just about anything you want on the internet and you can find many opinions both for or against any argument or position you want to take, trading included. Another thing that happens is that traders go on the internet and start “researching” economic and trading news and start thinking they have “figured out” what will happen next based on XY or Z economic news release. Then, they place a trade based on that opinion, this is very dangerous. It’s dangerous because very often the trading news or economic news is ALREADY PRICED INTO THE MARKET, in other words, it’s already reflected in the price action and the “big boys” have already acted upon what they believe will happen, before the economic news comes out.

Then, when the news is finally released, a whipsaw will occur in the market, where price quickly spikes one way but then whipsaws back the other direction. This is obviously near impossible to trade and causes most uneducated traders to lose their money. This is the main reason why you should not trade solely on news.

Trading raw price action removes the confusion of trying to trade the news. As mentioned above, news and everything that affects a market is already reflected via the footprint on the chart; the price action. So, once you learn to read and trade the price action you are also learning to read and trade the news without having to actually analyze or read any of the news itself.

Not Understanding That Every Trade Has a Random Expectation

One huge thinking error that most traders have about trading is that they simply do not understand that every single trade they take has about an equal chance of ending up a loss or a win. Now, that is not to say you cannot have a high-percentage winning strategy, because you can. BUT, the thing about trading is that for any given series of trades there is going to be a random outcome of wins and losses, so that means you never know the sequence of wins and losses in a sample size of trades. However, if you expect that your strategy will win 60% of the time, then you can expect that percentage to manifest over a large enough sample size.

It’s the same thing when you flip a coin; you know that you will get heads 50% of the time and tails 50% of the time, but within that 50% expectation, you can have say 10 straight heads in a row, which could be confusing if you didn’t understand that you need to flip the coin a lot of times to get 50% heads.

Same thing with trading! You could get 10 losses in a row within say a 100 sample size of trades, but after those 100 trades you could still win 60% of the time. The implications of this are massive. If you don’t stay true to your trading plan and remain disciplined EVEN DURING THAT LOSING STREAK, you’re GOING TO freak out and probably over-trade and get so far off course that you end up blowing out your account!

Remember: ANY ONE trade means essentially nothing! It is the end result of a large series of trades that will show you whether or not your edge and your ability to trade is actually profitable. This also means you need to manage your risk to a level that allows you to get through a large enough sample size to see your edge play out!

Feeling a Sense of Desperation or Urgency to Trade

A huge thinking error that many traders commit is feeling a sense of “urgency” or “desperation” around their trading and to be in trades. This comes from putting all your “eggs” into one basket essentially, the trading basket. This is a huge mistake because trading is inherently risky and inherently difficult due to the fact that it requires such mental strength that many people simply don’t have or aren’t willing to develop.

Hence, you absolutely must realize and accept that trading cannot start off as your Plan A, so to speak. And, even if you get really good at trading and start making consistent profits month after month, you should absolutely still maintaning a side job or side hustle and make sure you do not put “all” your money at risk in the markets. You could even have a long-term investing / stock market strategy or put your money into something like a Roth IRA into Vanguard funds or something similar. Whatever you do, just do not put all your eggs into the trading basket because once you do that you are putting too much pressure on yourself for your trading to become profitable.

If there is one way to surely fail at trading, it’s putting too much pressure on yourself to make money at it. Trading success comes when you are calm, collected and literally do not care if your trades win or lose. That may sound silly, but I’m telling you that once you commit too much emotional and mental energy to any one trade or to your “trading” in general, you have already written signed your “death certificate” in the market.

Waffling Too Much, Not Trusting Your Decisions and Sticking to Them

When you enter a trade, you need to stick with it unless there is a monumental shift in the price action on the SAME time frame you entered the trade on. Please, re-read that last sentence at least 10 times, let it really sink in, because it’s uber-important to your trading career. You see, very, very often, traders spend time analyzing the market, finding a trade signal, setting it up, placing it, then they go back an hour later and start freaking out because the price moved against them a little bit and they are seeing that “negative” sign next to their open trade profit. I hate to tell you this if you don’t already know, but this is NORMAL. You’re GOING TO HAVE trades that go negative and you’re going to have losses, but if you freak out every time a trade goes against you, you will very quickly blow out your account.

This point goes back to the one above where I discussed the random outcome of any given trade. You simply cannot afford to give too much weight to any one trade because it’s stupid to do so when it’s the large series of trade outcomes that matters, not any singular trade! Hence, you must not waffle on every trade you take, you must let them play out and let the market do the ‘thinking’ so that you can trade stress-free and profitably!  In other words, GET OUT OF YOUR OWN WAY and let the process take over!

Focusing Too Much on The “money” and ‘reward’ and Not Enough on the Process

As I mentioned at the end of the last point, you have to get out of your own way and let the PROCESS TAKE OVER. Traders spend way too much time focused on money and rewards and a relatively tiny amount of time actually focusing on the things that matter; the strategy, trading it properly, sticking to it, managing risk, position sizing, setting and forgetting, etc. You do not need to think about ‘rewards’ and ‘profits’ because those things are ONLY a ‘symptom’ of correct trading process and correct thinking, they will not come forth just because you are thinking and worrying about them!

Meddling in Trades After They’re Live (set and forget!)

Do you want to screw up your trading and constantly shoot yourself in the foot in regards to your trades? Well, I have an easy way for you to do that! Simple start messing around with your trades after you enter them! I’m being sarcastic here of course, but seriously, one of the biggest mistakes traders make is meddling in their trades after they enter them.

I would say about 90% of the time, after you enter a trade, the most profitable course of action is to simply do nothing most of the time! Yet, most traders, especially beginners, do the complete opposite; they meddle with most of their trades, screw them up and lose money as a result!

You MUST figure out how to ignore the never-ending temptation to mess around with your trades after they’re live if you hope to have a chance at making consistent profits over the long-run in the markets.

Chasing a Signal You Missed – Entering Late at a Bad Price

It happens all the time; you saw a trade setup you liked, you didn’t’ enter it for any number of reasons, then you came back later to the charts and saw price took off in your favor, without you aboard. It can be maddening. But, the last thing you want to do is enter the market after it’s already taken off without you. You simply have to wait for the next opportunity and remember that the market will be there tomorrow. So, don’t be in a rush to trade or to enter a trade you missed, because this is emotional thinking that will only cause you to lose money.

Not Pre-defining Your Per-Trade Risk Allowance

Do you know what your per-trade risk allowance is? Is it an amount you could risk and sleep soundly at night with potentially losing? If not, then you have some adjusting to do.

Many traders don’t even sit down and work out what dollar amount they are comfortable with losing per trade, let alone make sure it’s an amount they are financially and emotionally OK with losing on any given trade. If you have not done this and you’re trading live, then you need to stop trading live until you have worked it out.

Shares vs. Stocks: An Overview

The distinction between stocks and shares in the financial markets is blurry. Generally, in American English, both words are used interchangeably to refer to financial equities, specifically, securities that denote ownership in a public company. (In the good old days of paper transactions, these were called stock certificates). Nowadays, the difference between the two words has more to do with syntax and is derived from the context in which they are used.

KEY TAKEAWAYS

• For all intents and purposes, stocks and shares refer to the same thing.
• The minor distinction between stocks and shares is usually overlooked, and it has more to do with syntax than financial or legal accuracy.
• To invest in stocks or, more specifically, to invest in shares of a company’s stock, you will need your own brokerage account.

Similar Terminology

Of the two, “stocks” is the more general, generic term. It is often used to describe a slice of ownership of one or more companies. In contrast, in common parlance, “shares” has a more specific meaning: It often refers to the ownership of a particular company.

So if someone says she “owns shares,” some people’s inclination would be to respond, “shares in what company?” Similarly, an investor might tell his broker to buy him 100 shares of XYZ Inc. If he said “buy 100 stocks,” he’d be referring to a whole panalopy of companies—100 different ones, in fact.

That comment “I own shares” might also spark a listener to respond even more generally, “Shares of what? What sort of investment?” It’s worth noting that one can own shares of several kinds of financial instruments: mutual funds, exchange-traded funds, limited partnerships, real estate investment trusts, etc. Stocks, on the other hand, exclusively refer to corporate equities, securities traded on a stock exchange.Volume 75%0:59

What’s The Difference Between Shares And Stocks?

Stocks

Let’s confine ourselves to equities and the equity markets. Investment professionals often use the word stocks as synonymous with companies—publicly-traded companies, of course. They might refer to energy stocks, value stocks, large- or small-cap stocks, food-sector stocks, blue-chip stocks, and so on. In each case, these categories don’t refer so much to the stocks themselves as to the corporations that issued them.

Financial pros also refer to common stock and preferred stock, but, actually, these aren’t types of stock but types of shares.

So, when people talk about the stock of a company, they are most often talking about their common stock. Common stock represents shares of ownership in a corporation and the type of stock in which most people invest. When people talk about stocks they are usually referring to common stock. In fact, the great majority of stock is issued is in this form. Common shares represent a claim on profits (dividends) and confer voting rights. Investors most often get one vote per share-owned to elect board members who oversee the major decisions made by management. Stockholders thus have the ability to exercise control over corporate policy and management issues compared to preferred shareholders.

Shares

A share is the single smallest denomination of a company’s stock. So if you’re divvying up stock and referring to specific characteristics, the proper word to use is shares.

Technically speaking, shares represent units of stock.

Common and preferred refer to different classes of a company’s stock. They carry different rights and privileges, and trade at different prices. Common shareholders are allowed to vote on company referenda and personnel, for example. Preferred shareholders do not possess voting rights, but on the other hand, they have priority in getting repaid if the company goes bankrupt. Both types of shares pay dividends, but those in the preferred class are guaranteed.

Common and preferred are the two main forms of stock shares; however, it is also possible for companies to customize different classes of stock to fit the needs of their investors. The different classes of shares, often designated simply as “A,” “B,” and so on, are given different voting rights. For example, one class of shares would be held by a select group who are given perhaps five votes per share, while a second class would be issued to the majority of investors who are given just one vote per share.

Special Considerations

The interchangeability of the terms stocks and shares applies mainly to American English. The two words still carry considerable distinctions in other languages. In India, for example, as per that country’s Companies Act of 2013, a share is the smallest unit into which the company’s capital is divided, representing the ownership of the shareholders in the company, and can be only partially paid up. A stock, on the other hand, is a collection of shares of a member, converted into a single fund, that is fully paid up.

When a company goes public, it raises money by issuing stock, where each unit represents an ownership interest. After the company’s initial public offering (IPO), shares trade on the secondary market on stock exchanges like the New York Stock Exchange (NYSE) and the Nasdaq. Shares are normally categorized differently based on their rights and who holds them. Common stock is one category, which is reported on a company’s balance sheet under the stockholder’s equity section. This category of stock can be divided further into different share classes. These are designations assigned to different securities such as common stock or mutual funds. This article looks at different share classes of common stock and what they mean for investors.

KEY TAKEAWAYS

• Common stock is categorized as Class A, Class B, etc. shares.
• Companies commonly assign more voting rights to one stock class over another. 
• Class A shares typically represent a company’s generic common stock.
• Shares with voting power are collectively known as the super-voting class.

Common Stock Classes

As mentioned above, common stock is a type of security that represents ownership in a company. Shareholders with common stock are allowed to vote on certain corporate issues like appointments to the company’s board or whether the company should go through with a merger or acquisition. Common stockholders also receive regular dividend payments based on the company’s profitability. Common stock represents the lower-ranked and much more prevalent form of equity financing. However, a company can choose to issue different classes of common stock to certain investors, board members, or company founders.

But don’t confuse common stock with preferred stock—a different type of security altogether. Preferred shareholders are given a higher position on the ladder in the event of a company’s liquidation or bankruptcy. This means they’re among the first to get paid if the company goes under. They also receive priority dividend payments compared to other shareholders.

Common stock is usually divided into different classes including Class A and Class B shares. Although there is no standard nomenclature for multiple share classes, Class A shares are normally superior to Class B shares. In other cases, the reverse is true. That’s why investors should research the details of a company’s share classes if they are considering investing in a firm with more than one class.

Voting and Super-Voting Shares

Different share classes also have different voting rights. For instance, a company’s founders, executives, or other large stakeholders may be assigned a class of common stock that has multiple votes for every single share of stock. This super-voting multiple is about 10 votes per higher class share, although some companies may choose to make them much higher.

Super-voting shares give key company insiders greater control over the company’s voting rights, its board, and corporate actions. The existence of super-voting shares can also be an effective defense against hostile takeovers since key insiders can maintain majority voting control of their company without actually owning more than half of the outstanding shares.

Voting issues aside, different share classes typically have the same rights to profits and company ownership. Even though retail investors may be limited to purchasing only inferior classes of common stock for a given company, they still enjoy a proportionally equal claim to the company’s profits. In these cases, investors see their fair share of a company’s returns on equity (ROE), although they do not enjoy the voting power their shares would normally provide in the absence of dual classes.

This should be of little concern to investors as long as larger stakeholders are successful in running the company, especially retail investors who have a very tiny stake in the company. The existence of dual-class shares is only a problem if an investor believes the disproportionate voting rights allow inferior management to remain in place in spite of the best interests of shareholders.

Mutual fund share classes refer to their fee structure rather than voting rights.

Example of Multiple Share Classes

Let’s use Google and its parent entity, Alphabet as an example. The company has different share classes, notably:

• Class A shares: These shares trade on the Nasdaq under the ticker symbol GOOGL. Anyone who holds these shares has one vote per share.
• Class C shares: This stock trades on the Nasdaq under the ticker symbol GOOG. Class C shareholders have no voting rights.
• Class B shares: These shares don’t trade on the secondary market. Instead, they are owned by Google insiders and early investors who each get 10 votes, making them super-voting shares.

These classes were instituted after a stock split resulting from the formation of Alphabet as the parent company. Anyone who owned Google stock before the split got one share of the voting GOOGL stock and one share of the nonvoting GOOG stock.