I have been learning about the markets and trading them for nearly two decades now. Trust me, when I see this written out in text, it makes me realize two things:
- I am getting old, lol.
- I have learned A LOT in those 18 years.
In fact, I have learned so much that it can be difficult to even decide where to begin sometimes, when it comes to helping beginning traders. The industry has changed dramatically since I first started trading. I remember actually calling in my buy and sell orders to my broker, who does that anymore??!
As I grow older, I feel a deeper and deeper desire to give back and to help younger traders and those who are new to the game. Trading can be a very deceiving profession and if you do not spend the time to learn from those who have already been around the ‘block’ a few times, you’re going to waste a lot of time and money.
I sat down at a coffee shop whilst writing this and I had a very long think about the most important lessons I have learned in 18 years of trading the markets.
In no particular order and all equally important, here is what I decided are the top 10 things I’ve learned on my trading journey…
1. Be a defensive-minded trader.
The famous quote by Warren Buffet about losing money goes something like:
“Rule #1, Never lose money. Rule #2, never forget rule number one”.
Beginning traders often approach the market from the complete wrong mindset. They are just trying to make money as fast as possible, when in reality, they should be trying to protect their money as much as possible. You really cannot operate in both mental states at the same time. You have to pick between the two and if you do not choose to protect your money as much as possible, you’re probably going to lose it.
- The best offense? A good defense.
You hear this a lot in the sporting world but it also applies to trading: The best offense is a good defense. Here’s why:
The way you achieve long-term consistent trading success is by being defensive in your approach. That means, you only trade when the market conditions are right, when all your trading plan criteria has been met. The goal of trading is not just to “make money”, but also to not lose money you have made! These are two different things that require extreme mental fortitude.
It is not surprising for a beginning trader to get lucky and hit a few good trades, or even to simply do well for a while by following their plan (not just lucky). However, it’s after doing well for a while that many, if not most, blow it. Traders get confident, cocky, arrogant, whatever you want to call it. The point is that winning feels good and it OFTEN goes to a trader’s head, quickly. All that good, defensive, slow, methodical work that you did to hit those winners tends to go flying out the window when the sensation of winning floods your brain with feel-good chemicals.
- Preservation of trading capital is key to success
Working to preserve your trading capital is essentially how you behave in a defensive manner in the market.
Think about it like this: you want to have as much ‘ammo’ (money) in your ‘gun’ (trading account) as possible when the easy prey comes along. You do not want to be out there shooting at difficult prey that you aren’t going to catch, then when an easy subject comes along you only have one bullet left. You want that chamber full of bullets so you can secure the prey.
In trading, you want to preserve your risk capital for the ‘easy’ trade setups, those high probability price action signals that are so obvious they are literally speaking to you! You don’t want to waste your money on those ‘on the fence’ signals that you go digging for confirmation on the internet for. The best signals are super obvious, most of the time, and that is something I’ve definitely learned over the years.
You will never get upset with yourself (at least you shouldn’t) for taking a strong and confluent trade signal that fails, as long as you managed your risk properly. But, if you take a signal that you weren’t sure about, that “sort of” looked like a signal but “not really”, and you lose, you’re going to be kicking yourself.
My goal as a trader is to never feel like I want to kick myself after a trade, win, lose or draw.
2. Watching Charts & Monitoring Trades Will Actually Hurt Your Results
Often, in life, the more we meddle with something the worse it becomes. If you’re in an argument with your significant other and you continue to bring up that argument and rehash it, is that it going to be better than just dropping it and moving on? No, of course not. Most of the time, over-involvement is a negative thing and when we are too involved with our trades, it typically is a very, very bad thing.
How many times have you been in a trade and you kept checking it and you ended up adding to the position, closing it out too soon or doing something else that you otherwise wouldn’t have, and it ended up back-firing? This is very common and one of the biggest trading mistakes that causes traders to lose money.
- Enter your trades and then stop thinking about them
The easiest way to avoid the pitfall of over-watching and over-thinking about your trades? Set and forget. I know I’ve said it a lot, but I will say it again because it’s perhaps the most important trading lesson I have ever learned: the less involved you are with your trades, the better you’re going to do. This is why I have written articles on the set and forget trading approach and on focusing on daily chart time frames. You see, when you simply follow your trading plan and let the trades play out, let your trading edge play out uninterrupted, THAT is real skill, that is real discipline and passion. These traders who are just “running and gunning” instead of trading like a sniper, are not trading with skill or discipline, they are gambling. They can’t stop trading because they can’t forget about the market.
You have to literally forget about the market for a while when you have a trade on. The most effective way to do this is to not risk more than you are comfortable with losing. The number one reason traders start watching the charts too much and meddling with their trades, is that they’ve risked too much money on that trade.
3. The results of your last trade should not affect your next trade.
Another very, very important lesson that traders often do not learn or understand until years into their trading journey is that the outcome of your last trade has (and should have) zero bearing on your next trade. In other words, you should never let your last trade influence your next trade.
Every single trade you take is different and unique from the previous one(s). There literally are no two trade signals that are exactly the same. Even if they look the same, the surrounding market context will be different, so they aren’t the same. This is important to understand because traders often make assumptions about their next trade based off their last trade or past trades.
- Winners and losers are random
The results of any trading edge / strategy are randomly distributed. What this means is, if you take 100 trades in a year and you had say 50 wins and 50 losses, the pattern of those wins and losses is totally random. You could have 10 losses in a row followed by 2 winners followed by 10 more losers, then followed by 20 winners. The question is, how are you going to handle such a random distribution of wins and losses? If you’re anything like most traders, you’re going to let it affect you very, very negatively. Can you handle 2 losses in a row? 5? How about 10? Most people can’t and that is why most people fail. It can be very hard to see the forest from the trees as a trader, but you have to if you want to succeed long-term.
What I mean by “see the forest from the trees” is not letting any single trade result distract you. If you start letting single trades influence you, you will lose sight of the bigger picture of what you’re supposed to be doing and what it takes to succeed long-term.
- Be extra-careful after a big winner
Traders often become overly-fearful after a losing trade and overly-confident after a winner. Now, whilst neither is good, I feel it’s riskier to become over-confident. When you get over-confident you end up taking bigger risks in the market and this can obviously result in bigger losses, kicking off a cascade of emotions and trading mistakes that can literally wipe your account out in a day’s time. It’s important to take some time off after a trade closes out and calm down, reflect, breathe. The market will be there tomorrow, so always remember that. You should never feel like it’s “urgent” to be in a trade.
4. Doing LESS will actually get you MORE…
Most traders fail simply because they do too much. They do too much research (yes you can do too much research), too much reading, too much thinking about trading, too much watching the charts, too much trading in general.
It’s important to realize the power of doing nothing as a trader. Many times, if not most of the time, doing nothing is the most PROFITABLE thing you can do! Here’s why:
- Low-frequency trading
Ok, I know this isn’t probably what you want to hear, but since when have I been worried about telling people what they want to hear and not what they NEED to hear?? Never.
There aren’t that many good trade signals on any given month in the markets. What I mean is, there simply is not a large amount of high-probability entry signals on any given week or month. Why? Well, because most of the price action in a market is just random meaningless noise.
Your mission, as a price action analysis trader, is to learn to filter the good trade signals from the bad by learning how to read the footprint of the market; the price action. Once you master this, you will quickly realize that good trades that are worth risking your money on are relatively infrequent. But, the good part is, you do not need to trade a lot to make a lot of money in the markets.
- Hedge-fund trader’s mindset
A hedge-fund trader, controlling millions or billions in money, is not thinking about trading constantly. Instead, they are meticulously ‘combing’ through the price data of the markets they trade to find that ‘diamond in the rough’. They are looking for a high-probability trade that is WORTHY of risking their client’s precious capital on.
You should think like this too. It’s your money on the line, that you worked HARD for. So, do not throw it away on “so-so” setups that you think are “kinda, maybe” a good setup. Wait for those higher time frame trades on the 4-hour or daily chart time frame that are so obvious you’d feel stupid for not taking them.
Also, don’t overthink this. Often, traders think themselves right out of perfectly good trade setups. We have a tendency to start thinking “This trade is too good to be true” and so we settle for lower-probability trades that we feel good about because we spent 3 hours finding confirming news pieces on the internet that agree with the trade.
I am telling you, from 18 years of live-trading experience, the best trades are almost always the most obvious ones!
5. Know where you’re getting out BEFORE you get in!
When trading the markets, there is no boss, no “authority” figure telling you what to do. Hence, you have to make the rules. You have to discipline yourself and you have to hold yourself accountable. These are the reasons why most traders fail. Most people, left to their own devices, simply are not disciplined or self-controlled enough to do these things.
One mission-critical component of the trading process is determining your trade exit, BEFORE you click that buy or sell button. This is a huge lesson that took me multiple years early-on, to learn. Don’t let it take you that long!
- The exit is MUCH harder than the entry!
The only way you’re going to make money as a trader is to remove yourself from the trade exit process as much as possible. The exit is where most people screw the whole thing up. I’ve written many articles on trade exits, but one you should definitely check out is this one on a simple trade exit plan, it will help you see why simple is better with trade exits.
Most traders exit based on emotion. Doing so, typically results in either a very small win or a large loss. Rarely do many traders exit when a trade is heavily in their favor. Why? Emotions. When you’re up big all you can think about are all the “reasons why” that winning position will grow even more. It doesn’t cross your mind that YOU’RE BEING GREEDY or that the best time to exit is when you’re up BIG. It’s exactly the same mindset of a casino-goer. They keep pulling that slot machine arm even when they’re up and they know they will probably give that money back.
You have to find a way to force yourself to exit when a trade is in your favor, not when it’s crashing back against you about to turn into a loser. The only fool-proof way to do this is to have a strict profit-taking plan that you follow religiously. If you leave the exit up to the moment, you will be left to exiting on your own discretion, which typically doesn’t end well for most people
6. Be out of the market much more than you’re in.
One of the most important lessons I have learned over my 18+ years of trading the markets, is that trading too much is a quick way to lose all your money.
Most traders come into the market and as soon as they fund their first live account they are off to the ‘races’, over-trading and dealing with the consequences later. It’s a difficult lesson to learn, and most traders don’t actually learn it until they’ve lost more money than they can stand to think about, but the fact is, if you do not learn to trade with low-frequency, you’re going to find yourself losing at a high-frequency.
- Get comfortable with the daily chart time frame
If you’ve followed me for any length of time, you know that I have written many articles about the power of higher time frame charts and why you should focus on them. One of the biggest reasons to focus on higher time frames is that they act as a natural ‘filter’ for all the noise of the market and if you follow your trading plan strictly you will naturally trade less often just by focusing on them.
The daily chart is really the key to technical analysis in my opinion. Learn to trade the daily chart first and foremost and center your entire trading strategy around it and you will already be light-years ahead of the masses of traders out there day trading all their money away.
7. Can you fall asleep and sleep soundly at night?
You will find a million different risk management strategies on the internet, but most of them either don’t work, are illogical or overly-complicated. In all my years of trading I have found no better way to gauge if I’m risking too much than the sleep test.
The most important measure of risk for a trader is their per-trade dollar (or whatever currency your account is in) risk. Meaning, what is your R-number, or your dollars risked per trade? If you don’t know this number, you’re already failing.
- The money management sleep-test
The single best way to test if you’re risking too much money per trade is to determine if you are preoccupied with that trade. In other words, are you thinking about the trade even when you’re away from your charts? Are you laying in bed thinking about that money you have risked? Are you waking up at night and sneaking downstairs to check the charts on your laptop? Or worse, laying in your bed checking on your phone?
If you are doing any or all of the above, you have a serious issue that needs fixed ASAP.
The ONLY way to have a fighting chance at sticking around long enough in the market to hit enough big market moves to make money, is by making sure you aren’t risking too much money per trade.
If you find you are overly-worried about your trades and you cannot sleep because of it, then back off the risk until you can easily fall asleep. Reduce your position size on your next trade and keep reducing it until you can confidently close up your charts and not be worried or overly preoccupied with your trades. Trust me on this, it works and it will help you avoid many other trading mistakes that are the result of risking too much!
8. Know what the h$%! you’re doing before you start trading real money!
This one may seem obvious, but many traders start trading real money without actually understanding how to use the platform their using or having a trading strategy. They are, for all practical purposes, gambling. Don’t be like them.
There are a few things you NEED to do before you star trading real money, if you don’t want to lose it all right away that is.
- Master your trading strategy
I feel like this point is so obvious, but or many traders it is something they gloss over. You simply cannot start trading live without having mastered your trading strategy. Doing so is like trying to fly a commercial airliner without any training and hoping you don’t crash. Not gonna happen.
I obviously recommend you learn and trading with my price action strategies that I detail in my trading courses, but more important FOR YOU, is to make sure that whatever strategy you do use, you both commit to it and master is before going live. Don’t waffle and wander. Don’t try combining a bunch of different trading methods, this doesn’t work, trust me.
- Master your money management
As I said in point 7 above, you have to be able to sleep at night with the money you are risking in the market if you want to have a chance at long-term success, so first figure out what that dollar amount is for YOU. Don’t stray from that dollar amount or increase it until you’re seeing consistent success.
- Demo trade it first
Both of the two sub-points above, mastering your trading strategy and money management are things you need to demo trade for 2-4 months before going live. You must learn the mechanics of the platform you’re using before you start risking real money on it, or else you will lose money just to making stupid mistakes like inputting the wrong position size, etc.
9. Have you mastered yourself yet? If not, you need to.
If I had to give you just once piece of trading advice, the most important lesson I have learned in 18 years of trading, it is to master yourself if you want to master the markets.
Until you deal with the mental / emotional weaknesses that you have (we all have some), you will never make consistent money as a trader. Trading success is much more the result of going on a personal journey and conquering the pitfalls and ‘enemies’ in your mind, than the trading method you use. Most traders don’t realize this fact until it’s too late.
- Check your ego at the door
Ego-check. Leave it at the door or it will eat you alive in the markets, every time. Being confident is a great quality in life and for a trader, but there’s a very fine line between being “confident” and being overly-confident, and it’s a line you cannot afford to cross, literally. Over-confidence sneaks up on even the greatest of traders, leading them to take a trade they probably shouldn’t have taken or leading them to make other mistakes. Typically, a trader becomes over-confident after hitting a few good winning trades, they then let this go to their heads and start over-trading because they feel like they have some secret trading power now. This is very, very dangerous.
- Show me a disciplined person and I’ll show you a good trader
What is self-discipline in regards to trading? We talk about it “discipline” a lot, but what does it look like as a trader? It looks like this: You just exited a very profitable trade, you’re feeling great, feeling wonderful. What you do next will tell me if you’re disciplined enough to KEEP making money, or not.
A disciplined trader will do nothing out of the ordinary at this point. They will continue with their trading plan. In fact, they will probably close the computer and come back tomorrow when the euphoric-feeling they got from winning subsides. You can and should build things like this into your trading plan. For example, you have a section called “What to do after a winning trade” where you detail how you will leave the market along for 24-48 hours after a winner,
An undisciplined trader, upon closing out a nice winner, will immediately jump back into the market, or jump back into a trade that same day. This is almost always a mistake. RARELY is there going to be a high-probability trade signal waiting for you right after you just exited a big winning trade. Trust me.
10. Confluence is King
As far as your actual trade entries go, the most important lesson I’ve learned over my 18+ years in the market is that the more confluence a trade has, the better. Confluence in trading means multiple supporting factors intersecting or lining up in support of a trade.
Typically, on the charts this looks like a clear signal combined with a key chart level in the context of a trending market. I call this the T.L.S. method or Trend, Level, Signal. Ideally, you’ll have all 3 lining up, but you can get away with just 2 of the 3.
- If you want a trade entry “system”, here it is:
Many traders want mechanical trading systems with strict rules to follow, to eliminate the potential for human error. Whilst I am generally not a proponent of mechanical / rigid trading systems like robot trading, the T.L.S. method can be a form of mechanical trading for a price action trader.
You simply write into your trading plan that any trade you take MUST have the trend, level and signal in agreement, or you don’t enter it. These types of things are good for beginning traders, to build confidence and discipline. I recommend you try this if you’re new or struggling.