The First Hard Lesson I Learned as a Trader

Once upon a time I made myself a ‘million-pound spreadsheet’.

It was a beauty to behold.

I plotted a graph projecting a rapidly growing trading bank and I virtually worshiped the thing. I could probably dig it up on an old hard drive somewhere.

And you know what, for my very first 8 weeks of trading I actually kept ahead of my fantastical plan: I was making more money on a weekly basis than I needed to, all from a standing start!

“Oh, this is going to be so easy,” I told myself.

Of course, that’s exactly when everything took a turn for the worse…

Trading with Beginner’s Luck

I often think back to those days and try to relive what was going through my mind. I suppose you store away memories of painful early experiences… your first big losing trade, the first time you completely miss a good opportunity, that time you put on a trade the wrong way around, buying instead of selling!

I definitely put this first experience down to youthful exuberance.

I mean, my calculations were utter madness in the first place. I was hoping to make annual returns of insane proportions. It didn’t seem to sink in that my forecast return on account of 50,000% in year 1 was anything out of the ordinary!

I’d put together a system of sorts and was simply pulling the trigger on the trades. I didn’t have much money to risk so there were no real emotions involved. I could pretty much shrug off any losses and I had no previous frame of reference to make me doubt the signals my rag-tag system was throwing out.

I do think ‘beginner’s luck’ is probably quite a common experience for brand new traders.

You follow a straightforward strategy and surprisingly, you get some half-decent results – exactly what the strategy would have you expect in the first place!

But in this case I’d dropped lucky by starting to trade during a strong spell in the markets and had made good money for the first four weeks. This set a dangerous precedent.

It’s what I soon came to expect EVERY week.

So when profits for week five were looking a bit thin on the ground I hatched a devious scheme (you’ll laugh when you hear this)…

Gambling for fun and profit!

I remember thinking that I simply had to hit my target that week. After all, I couldn’t let my million-pound spreadsheet fall into disarray.

So I figured I’d stick a trade on right before an economic number.

It wasn’t a huge report… it was the US Producer Price Index or something like that. But the plan was to use my ‘skill and judgment’ to figure out in advance which way the market was going to move and top my profits up for the week all in this one raid on the market.

And sure enough, that’s exactly what happened! I made more than enough for the week off that one trade.

It happened again the following week. In fact, it pretty much became my new standard strategy. I was gambling my way through the weeks!

Of course, you know what’s coming, all the money I’d made in weeks one to eight (and a little bit more for good measure) went sailing out the window in week nine! My bad habit finally caught up with me and the honeymoon spell was over.

It really knocked my confidence at the time. I overcompensated by starting to trade ultra cautiously. I was moving stop losses to breakeven far too early and snatching away at tiny profits. It meant I was leaving far too much money on the table so the losing period continued.

And that’s the way it stayed until I stumbled upon one page in a trading book that changed my outlook forever…

The First Hard Lesson I Learned as a Trader

Learning to Trade an Edge like a Casino

This technique comes straight off the pages of Mark Douglas’s Trading in the Zone (it’s on p189 of the edition I own).

I’m giving Mark Douglas absolute full credit here. I’ll paraphrase the mind-changing concept he presents but if you haven’t got Trading in the Zone on your trading bookshelf you really do owe it to yourself to get a copy. You won’t be the same after reading it (in a good way), I assure you.

(Here’s a link to Trading in the Zone on Amazon)

So here’s the idea…

You need to convince yourself that trading is a simple game of probability.

On a trade-by-trade basis the profit/loss outcome can be completely random but string together a larger sample size of trades and a profitable edge will start to show itself.

Think of a casino and how they run their gaming tables…

They don’t worry whether the next spin of a roulette wheel means they’ll have to pay-out the gamblers. And it’s not a concern if the next turn of a card means a particular high-roller helps himself to a wedge of their money.

They know the game is won over the long-term. They just need to keep spinning the wheel and flopping the cards long enough to see their profitable edge begin to materialise. And when it comes it casinos, it always does. Without fail!

The lesson?

Imagine you’re a casino ‘spinning the wheel’ every time you place a trade using your proven system…

Can you see how this subtle change in outlook can completely remove the urge for you to be ‘right’ on every trade?

That’s a very important insight for a trader.

It also shows there’s no need to strive to set weekly or monthly profit targets like I was doing. You just need to settle into your groove, keep spinning the wheel, and let your profitable edge do the business for you in its own time.

Oh, if I’d only read that book back in week 5!

I’d have saved myself a whole load of bother, about eighteen months of wasted time, and who knows… that spreadsheet I made in my early days might have actually held water.

Be Prepared: Market Moving Data Coming This Week (London Time)

Wednesday 25th January
09:00   EUR     German IFO Business Climate
15:30   USD     Crude Oil Inventories
16:00   GBP     BoE Carney Speaks

Thursday 26th January
09:30   GBP     Gross Domestic Product
15:00   USD     New Home Sales

Friday 27th January
13:30   USD     Core Durable Goods
13:30   USD     Gross Domestic Product

Monday 30th January
15:00   USD     Pending Home Sales

Tuesday 31st January
09:00   EUR     German Unemployment Change
10:00   EUR     Core Producer Index
15:00   USD     Consumer Confidence

There’s not much in the way of ground-shaking economic reports this week, but trade safely as always and I’ll catch up with you next time.

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