One of the most important keys to success in trading is to take the long-run view of things. If you are expecting immediate results you will almost certainly end up disappointed.
This morning I came upon a forum post whichÂ speaks directly to this very matter:
If I only had 1,000 bucks to play with and since not having enough capital will get you killed, where do I put it?Â …. I don’t want to take a decade to make any money worth mentioning, but I also don’t want to lose all my money in the first week either.
Naturally, in certain markets you couldn’t evenÂ trade with only $1000, but in this particular case the inquirer was referring to forex where one can trade with very small accounts quite easily, so his enough capital insertion isn’t really that meaningful in this context. The thing to focus on is his need for short-term gains.
This is a big problem among new traders. People come into trading with the expectation of turning small money into big bucks. It’s the lure of easy profits. Of course it’s entirely possible to do just that. One can run a small account up to a very large one. The markets are replete with examples of folks who have done exactly that. The Market Wizards books are full of them, and that is a big part of what makes them a great source of inspiration. It’s definitely worth noting, though, that the interviewees took years to get where they were. Most of them struggled early in their careers and even once they got things figured out, it’s not like they turned $1000 into $100,000 overnight.
Consider this. A 100% annual return is, by most folks’ standards, considered excellent performance. To be able to do it year-in and year-out forÂ a numberÂ years running is something the only the very smallest percentage of traders are capable of accomplishing. Now think of how many times you would have to double your account to run $1000 up into six figures.Â The answer is seven. That’s seven years of 100% annual returns.
Consider how few people have ever done anything like that. It’s the vast majority of traders. I mean more than 99%. Again, that’s not because it isn’t doable. It’s just that there are a lot of things that can happen along the way,Â things thatÂ trip up most traders at some point. One of those things is the desire to makeÂ money fast, as expressed in the quote above.
If you are not prepared to take a long-term view of your trading then you quickly start moving into the realm of gambling. In order to generate the types of profits you want to achieve you will almost invariably take on much more risk than is prudent, which means your odds of taking a severely damaging loss increase dramatically.
Brett Steenbarger spends a great deal of time on his blog talking about trader development. He and I share a lot of theÂ same views, though we come at things from different directions based on our respective backgrounds (his medical, mine athletics & finance). On his blog yesterday he outlined a framework trading curriculum. It’s one with which I whole-heartedly agree.
Brett’s curriculum has four basic steps:
1) Foundational Knowledge – Basic education as can be obtained from books, videos, instruction, etc.
2) ObservationÂ – Watching the markets, observing the behavior of experienced traders (directly or indirectly), identify your niche
3) Practice – Demo trading, system development,Â work with a coach/mentor
4) Application – Real money trading
Trading is like any activity. It takes a focus and commitment to learn and develop if positive results are to be expected. In Brett’s post he uses the medical profession to highlight his point, but it’s quite easy to make the same points with playing a sport.
The first step is learning about the sportÂ – rules, terminology, etc. That often overlaps with watching others play, which also then overlaps with practicing the skills involved yourself. Eventually, after sufficient learning, observation, and practiceÂ one isÂ ready to give it a shot yourself. Of course, to continue to improve and expandÂ one’s skills, thenÂ one will repeat at least the practice stage, and potentially the other two as well.
My focus in writing The Essentials of Trading was first to help the trader with step 1Â – the foundational knowledge. Secondly, it and this blog, also seek to encourage and support the second step – the oneÂ focused on getting a handle on how you, as an individual, will tackle trading. These were the things I found lacking in a big way when I was looking for something I could use when I was teaching trading to college students, and the lack of any kind of structure in the whole process has been something Brett and I have discussed on several occassions.
Continuing the sports analogy, theÂ thing to keep in mindÂ is that someone getting involved with sports from a competitive perspective (as opposed to a recreational one) doesn’t just throw themselves into the competition unprepared, nor do they immediately jump in at the top level. Brett would say the same thing about medicine.Â Participants know it’s a process that will take time and they are committed to putting forth the effort to progress.
Traders need to take exactly the same perspective. Some folks call that a professional attitude, but I think that term can sometimes muddy the discussion. Most traders are part-time and will never trade for a living, so the idea of trading “professionally” confuses them a bit. The idea is that good tradingÂ needs to be looked at likeÂ a business, which means the pursuit ofÂ long-term objectives whichÂ requires consistent, focused effort. (Chris Perunna recently wrote Focus on Decisions, Not OutcomesÂ on his blog, whichÂ speaks directly to that sameÂ point).Â
So to conclude, realize that you are much more likely to find success in trading by not focusing on how much money you can make in some short period of time. Instead think about the power of compounding over time and realize that if you focus on doing things right the results will eventually follow.