Skills, Nerves of Steal, Luck, and Experience

Do you want to be a trader? Which of the above do you think is the most important factor for you to succeed in you trading career?

Let’s start with skill. This is certainly something that can be taught. You can get together with a successful trader and he can tell you everything he knows — or at least everything he is willing to teach you. He/she may sell it to you as a part of a course for, say $1,000.00, and this would be relatively inexpensive. There are courses out there that approach $10,000. Now if you are a beginning trader, you probably would not be willing to spend that much money on “education”. You’d probably be wise because it is not even clear you could reproduce what the instructor tells you to do. I have taken expensive seminars, courses and subscribe to newsletters and I have found that they either do not tell you all that you need to know to succeed, or that there is an intangible component that cannot be taught. Perfectly reasonable approaches have easily fallen apart in my hands, even if I follow the systems to the letter. There may be several reasons for the discrepancy, here are some: The markets change and the system no longer applies. 2) I started to trade the system at a time when the markets are not suited for the system. 3) The system is not specific enough so I am lost as to what to do when the market go against me. 4) In the case of newsletter, I cannot follow the entry and exit points as stated in the newsletter because of timing. 5) I lack the perseverance necessary to make the system works for me. Perhaps my expectations where too high, or the pain of the drawdowns forces me to reconsider the wisdom of trying someone else’s approach. Within weeks or even days of trying the new system, you’d probably give it up because “it is not suited for you”. We tend to give more credit to others than to ourselves. It is the same with responsibility: We may easily say that the system does not work when you have not given it a fair chance. I would say that it would take 1 year or 2 before you can truly say that the system does not work. It takes that long for the markets to go through a period best suited for any system.

I think that traders probably fail to understand that to develop appropriate trading skills one needs time, intelligence and most of all perseverance. I define perseverance as active patience. When a system is “not working” it is time to actively seek to understand why not. Take apart the components and study them, for example, the greeks on the PCCRC techniques I use. I have to confess that it was only after some time trading the PCCRC that it occurred to me the metaphor of the Chariot with the 3 (4) horses. Suddenly, I had a clarity that could only had come from a combination of perseverance, study and repeated observation. This is the way I developed my skills. Are these skills transferable? Yes of course, but the recipient must have the same active patience as the developer. I have published hundreds of articles, dozens of video clips, and many tutorials, as well as a whole year’s worth of records of a paper trading account that I grew by 75%. Yet, I continue to publish more and more of these around the same trading strategy, even though my whole strategy can be summarized in a 3 page document in the form of recipes. I have people ask me questions that seem to reveal that not all the material have sunk in. It simply takes perseverance to carefully go through every paragraph of every article, to make notes and to understand the material well enough to reproduce it, first with paper money and eventually with real money.


Nerves of steal is probably not needed. I would suggest that it is probably dangerous to ignore your fears and stay in trades that you are not happy about. I remember in the early 2000’s when I started trading with the Optionetic’s methodology. I just could not get anything to work. They teach vertical spreads, calendars, butterflies, etc, etc. But I made the mistake of thinking that any of these would work. I would start with a bull call spread, only to be scared by a move against me, I would close the position and try another, only to see the original actually work. Eventually I would jump to another strategy, like Calendars. Then jump to the next, and then the next until I have ran out of strategies, never staying long enough to make them work. Of course trading like that is unproductive because you never figured out what would work and when. Nerves of steal would probably not be the solution either. Staying in a trade to test your guts is not a wise approach either. I think that if you are two nervous to stay in one trade, two items are probably at work: 1. You are not knowledgeable enough about the form of trading you want to experiment with. 2. Your risk is probably well above your comfort zone. If you think nerves of steal are needed, I would suggest that you don’t know enough about the trading you are trying to do. If you are too nervous to go through the drawdown periods, you probably do not have a plan to limit your risk. Limiting your risk is the specialty of Options trading. I do not place a trade that exceeds 2% of my account’s liquid value. Yet, many traders go as high as 5% of their account on a single trade.

I heard Rich Swannell (Elliottician.com) once say that if you lose 30% of your account, you should immediately stop trading, and go back to the drawing board because there is something fundamentally wrong to your trading. I did that in 2000 when I lost only 15% of my account. I stop trading for years, only to begin again in 2002, when I went to my first Optionetic’s seminar. One of the best things I ever did was to purchase a subscription of Optionetic’s Platinum, most importantly because it allowed me to back test strategies and ideas over long periods of time, well into the past. I was becoming knowledgeable as a substitute for nerves of steal. During the 2002-2005 period, I remember one particular time when despondent, I said to my wife: “This just doesn’t work, I very much doubt that anyone can consistently trade the markets day in and day out. I was simply at the right place at the right time in the 90’s using the right strategies. Today is a different time”. My frustration is not atypical. A drawdown period can last months. Then suddenly, your account bounces back strongly and you are back in the profit zone. How do you know you are doing the right thing! how do you know that your system is not actually leading you to the total collapse of your account? It won’t if you limit your risk. I don’t think I would trade again as I did in the 90’s, yet it was a robust approach. I just did not adapt to the new reality that came with the collapse of the stock market in 2000-2002. My approach was perfect for a resounding bull market. I came out a winner because I followed my 2 basic portfolio managing rules: 1. Stop trading when your account goes down 15% or more. 2. Do not risk more than 2% of your account on any single trade. 3. Trade your system consistently unless it would violate rules 1 or 2 above. Doing this would preclude the need for nerves of steel. I would suggest that if you feel you need nerves of steel, you are probably violating one of the rules above. I would suggest that there are many systems that do not lack logic and that could probably be hugely profitable over a certain period, let’s say 6 months. Understanding what to expect, become knowledgeable about that approach would probably take months of paper trading. You could try the PCCRC, or any other system for that matter, first by paper trading. Understand the basics, the risk and money management for the approach, before you actually risk $1 of your real, hard earned cash. Then you would slowly begin to actually trade following the basic rules of portfolio management, and do not make up your mind about the validity of the system until 6 months have passed. Now understand that to you need to make that commitment to that single form of trading, before you even begin, and despite steep or long drawdown periods. You have to give it a chance to work in YOUR hands, with YOUR biases and YOUR nerves of steel or lack there off. If you go back to my first few articles and original rules of entry, you’ll see an evolution of my approach. I recent go this e-mail that illustrates how a form of trading can evolve in your hands and how one can make it work:

I am very impressed with you PCCRC system but I think you are too modest in attributing the idea to Larry McMillan.  I can see how Larry's ideas led you into this but as far as I can tell two unique and critical features originated with you:  1) using the 1:2 short to long ratio to structure in those nice long delta curves in the PL graph, and 2) waiting for an easily detectable 10% move before initiating the trade.

John
 
What John noticed is that I found my own way, my own selective situations in which the PCCRC works most effectively to the point that I develop “nerves of steel” because I have come to know my techniques so well that I do not fear the drawdowns. I now see them as part of the process of making a profit. Of course the PCCRC is very well hedged of the fear is controlled by the very nature of the trade. So let’s look at another example: The Elliott wave trading. I have found that this is in many ways the opposite to the PCCRC. It is more discretionary and even subjective in the selection process, and it may not show profits right away. A forecast may take months to develop and a forecast may change along the way, leaving you with a 100% of the capital at risk. I would think that you’d need nerves of steel here, and over a prolonged period of time! well, here again, you have to have a 6 month period of trading for honest and complete evaluation. In addition, you need to sharpen your skills and pattern recognition and have faith in your own abilities over prolonged drawdown periods. To the extent that you become confident in your abilities and keep the rules of portfolio management, you will eventually begin to see progress. The problem, I believe, is that beginners feel that they are missing out, and fail to see that they must first sharpen their skills before they can become efficient traders. One bad turn of the markets and their strategy goes out the window, and they panic and become gamblers, not skilled traders. Take a look at the movie “21”. An iron-clad system can go out the window when the unexpected happens. We very quickly break our rules and become discretionary traders, which is an euphemism for gambler. The nerves of steel are your knowledge, and your trust in your system, but most of all, your ability to walk out when your approach is not working, or even trading according to your system even when it is not turning a profit. At the lowest point in your drawdown you may be fearful of committing new money when your approach is not working. So long as you are not breaking the portfolio management rules, would you enter a new position, based on the rules and keep with it according to your rules? Would you easily give up and start the search for a new system when the first drawdown shows up? Here are my suggestions for the beginner:

Find a system that fits your personality first. From Day trading to swing trading to position trading, or just long term investor.
Makes sure that it makes sense to you! This is extremely important. You MUST believe that the system has a good chance of working, or else you’d leave it at the same sign of trouble.
Make sure that the vendor gives you a good annualized rate of return if you follow the system to the letter. Don’t be persuaded unless the vendor can offer third party verification of their claims. If vendor can actually produce gains upwards of 30% per year, they would only be excited about shown you such results. If not, then there is no reason for you to try it out! that simple.
Paper trade the system for a few months. I would say 6 months. I am amazed how the new comer jumps into a system that they have not paper traded themselves first. This is not much different than flushing cash down the drain.
Back test the approach, if you have a software such as platinum, under different market conditions, if you can. I know this is difficult, but if you can do it, it puts your learning into warp speed.

It may appear to you that today’s market is the greatest time for trading, but I would say you are wrong. The sooner you jump in without preparation, the sooner you’ll bail out with a loss. Nerves of steel come from preparation. Preparation comes from knowledge and a set of rules to follow consistently. “Luck” as the uninitiated will call it, is what happens when preparation meets opportunity. Opportunity, in the stock market is happens every minute of every day, if only you learn to recognize it.

I recently got this e-mail:

[...] the day trading discipline is a young man's game, requiring nerves of steel and the reflexes of a fighter pilot.  

Proost

Well not necessarily, if you have the proper instruction, set of rules and have tested that approach sufficiently. Yes, I can see why you’d have some trepidation at first, but with time, there is no reason why you cannot turn any form of trading in a wining system. This is why it is OK to take your time to find a system that would fit your personality. I can’t imagine myself spending countless hours by the computer for a single trade. I have other things to do!

I already hinted at what I think is the rule of Luck in trading: Luck is what happens when preparation meets opportunity, and opportunity is there all the time. So YOU make your own luck with your preparation. Take the time to test your approach as I have outlined, following the rules of portfolio management and the suggestions for beginners above. Then proceed with caution, write down your own set of rules and learn from your own experience. Yes, Experience, the final item in the list. This is what is going to take you from a good trader into a superb trader, with an income of 6 figures or more a year. Constantly modify and polish your trading techniques. Sharing with others, amazingly, serves that purpose. I have learned much about myself and my own trading by telling others how I trade. Talking it out with others has a way of sedimenting the strategy in your mind so that it becomes second nature. Try that some time! share with others and before you know it you’ll be rewarded with success, unexpected in common hours, as Earl Nightingale might say.