Becoming a Great Trader

Anyone who has ever traded knows that it can be an exhausting psychological battle that leaves you mentally and physically spent at the end of the day. Although trading is not easy, many people choose to make it even harder for themselves by simply jumping in without laking a second LO understand the different styles and
how they relate to their personality. By trading "against the grain", you are setting yourself lip for a constant personal psychological battle (should I cut or stay) that often leads to bad decision making, losses, and unhappiness.
Matching up your personality with your trading style helps to minimize these personal battles, and if you arc a new trader, the first step should be to figure out what kind of trader you have inside you.
TRADING TO YOUR STRENGTHS
Assuming YOLI think you have the skills and drive needed to become a great trader. figuring out what kind of tnldc r you want to be (more than just a "winning trader"!) is a critical step that requires some personal reflection. Although this does not
require you to tra vel 10 the Gobi Desert {Q find yourself, you should spend some
lime figuring Ollt what trading approach best suits your personality.
For example, if you feel you are patient methodical. and can generally keep your emotions in check, then you may benefit from trading on a longer time frame ::Ipproach. Do you prefer to play chess or video games? On the other hand, if you arc a high-energy, impatient, and emotional individual, you Illay choose to trade intra-day for the instant gralific3Iion it provides.
The difference between holding longer•term positions and going home every night flat is more than just a technical one, since watching profits flyaway during momentary retracements can prove more painful to some than taking small losses intra•day. Needles.!. to say, the best lraders are completely detached and have abso¬lutely no problem watching their P/L gyrate, but in reality they are few and far between.
Beat the Forex Dealer
All traders, whether self-Iaught or not, must at some point ask themselves this
question: "Am I improving?" Answering this question honestly will save you a mountain of heartache down the road. since it is of no use to waste valuable lime and money doing something that docs not fit your sk ill sel, If you feel that you are improving (measured by your P/L), then Slick with il. If ancr several years you do nO( see any improvement in your trading, then you must have the courage to call it quits. Some people make good archilcclS, some make good traders: it is as simple as that. I cannot make a jump-shot to save my life, so I make no pretension of an NBA career.
If, for whatever reason. you are set on becoming a trader. proper money man¬agement is by far the most important factor in achieving success. When you think about it, most traders spend most of their time trying to figure out when to trade. instead of how much to trade, which is surprising given that money management is the ollly thing a trader can actually control!
There is no guaranteed way to make money (except collecting spreads), and even the best and the brightest arc often wrong more than they are right. The market is bigger than you, biggcr than me, and definitely smarter than all of us. We are bound to be wrong and make mistakes, bUI proper money management techniques enable us to weather sustained drawdowns and live to fight another day. Funnily enough. the biggest public misconception about traders is that they regularly take huge risks, whcn in reality great traders aim to minimize their risk relative to their returns at any given moment.
Whether trading a mechanical system or in a discretionary fashion, all traders should know beforehand how much they are willing to wager. Ask yourself: how do I determine my position size? How do I set my stops? All too often traders choose arbitrary numbers that have little to do with proper money management, and ex it according to their " pain threshold" instead. Our innate fear of failure makes us place too much importance on not losing. rather than learning to manage our losses comfortably.
The good thing about money management is that it is easy to implement. Although good trading systems may be impossib1e to find. good money man¬agement rules do exist, and the best way to see if your money management needs tweaking is by looking at your results. For example, if your losers are substantially smaller than your winners, then you may want to consider taking slightly larger posilions. If you consistently post large winners and losers, you should consider tak ing smaller positions to mitigate the risk of ruin. Proper money management maintains the all-imponant risk -reward balance in check, and although your plans may vary from those I present here, the bottom line of any system should be the same: to minimize the chance of blowing-up. Long-term success in this business is achieved by accumulating steady profits and occasionally hitting the home-run trade, and the longer you stay in the market, the more times you get to swing at the bull.
Becoming a Great Trader
OVER LEVERAGE
Some years ago, Procter & Gamble blindly entered into a series of leveraged deriva¬tive trades and discovered to their great surprise thal leverage nO{ only magnifies gains but, more importantly, it also magnifies losses, in their case to the tune of $300 million. This incident brought to life the risks of leverage to the corporate crowd. bUl retail traders are still all 100 often unaware of the inherent risks. Lever¬age. or gearing, is a double-edged sword that should be used sparingly, something not helped by the fact that retail FX brokers constantly extol the virtues of 200-1 leverage. By making it seem that "with $1000 dollars you can cOnlrol $200 000" is a good thing, they suck naNe traders into the leverage trap, since constantly over¬leveraging your trades is the equivalent of always driving at 100 mph ... sooner or
later you are going to crash and burn.
Taking a $1000 starting balance. if you were to trade $200 000 in EURUSD. a mere ten point move (a 0.1 % move) against you would translate into 20 % of your account equity getting wiped out. In fact, just by entering the trade (spread), you would alre;:ldy be down 6 % on the trade, which is much more than any permissible loss. Trading position sizes this big in relation to your account size mean that you are essentially trading yourself into a corner, and any market noise is bound to wipe out your account. The brokers love this. of course, since it means easy money for them. If you are overleveraging your trades. then you may as well be handing over your cash to your broker.
Professional money managers generally use no more than two to live times leverage. and the retail investor should definitely not use more than ten. To put that in perspective, using ten times leverage on a $1000 account means that the price would have to move 1000 points against you before your account is wiped out. That is a lot of room to maneuver. and it gives the trader greater flexibility.
FLEXIBILITY
Choosing the right amount of leverage is the first critical step in maintaining your Oexibility in the market, which is critical if you are to survive for the long-haul. Flexibility in trading means giving yourself options: options to enter a trade, to stay in it, and to exi t. By becoming overexposed to anyone position, you essentially remove options from your table lIntil you are faced with an "all-or-nothing" trade, and in the FX world your survival is measured in days, not years.
Since the currency markets are not one-way streets, the normal gyrations of the market mean that. given time, you will usually have an opportunity to get out of a bad trade or elller a posilion that you may have missed. Most traders have had the frustrating experience of gelling Slopped-out, only 10 see Ihe market relurn back
Beat the Forex Dealer
to your entry at some point later in the day. The only way to gel around these sometimes arbitrary market movements is to Slay flexible and trade multiple lots.
By trading only one lot you are essentially making a 50/50 bet that the rate will move in your direction. Besides not being very wise (it has a negative expected outcome when you take the spread into consideration). it is also not much fun. You should try to think of your initial entry as your lOe testing the tcmperalllre of the w.ater in the pool. If you find out it is too cold. then you can sit it oul. but if it is just the right temperature. then you are free to j ump right in. Trading small until you think yOli have all of the information and confirmation YOll need gives you the flexibility to properly posi tion yourself for the move, or pull out with a small loss
if your analysis proved incorrecl. As YOll may well know. for some reason the FX
gods see fit to lest our mellie every time we enter a trade by moving the market immediately against us, but trad ing mUltiple lots means that our first entry does not become critical and we give ourselves a cushion while the market decides where it wants to go. Trading in this way also means missing out on far fewer trades when compared to the all-in approach. since pulling the initial trigger becomes rather painless and makes the decision-mak ing process much less stressful.
To properly trade multiple lots you must fi rst calculate the total amount you are willing to risk before you enter your trade. Again. different traders take different risks, but it is safe to say that the intra-day trader should not risk more than 1-2 % of their account size on anyone position. This means that for 11 $ 10 000 account. your loss should never be greater than $200 0/1 alt lors combillel/. Look back on your trading and see how big your losses typically are. If you are an intra-day trader and every time you lose you end up taking a 3-5 % hit, then YOll need to stop immediately and come up with better money management rules. This is the same type of analysis that professionals regularly run on their trading. and it proves very insightful since the reasons for your underperformance wi ll most often be glaring.
Trading with proper money management rules will not guarantee you ~uccess, but it will prevent you from falling into the money trap. The "more I bet. the more I win" mentality is not for traders but for gamblers, and using their logic is a sure road to ruin. Avoiding this trap simply means learning to manage your lo!;ses by using simple guidel ines:
•Never risk more than 2 % on anyone position.
•Never trade more than five times leverage on any onc position.
•Trade Illultiple lots wilh multiple enlries.
•If you cannot afford multiple 100 000 lots. trade mini lots.

Becoming a Great Trader
If you don't think trading mistakes will happen to you, just take a look at what some "pros" did:
2003: Shares in now•bankrupt internet finn Exodus surged more than 59000% after a bank trader accidentally bid $100 for shares that were trading around 17 cents at thetlmel
2002: A colossal blunder by Bear Steams saw the firm sell $4 billion worth of stock at the closing bell instead of the Intended $4 million I Fortunately for the finn, they were only filled on $6oom or so of the orders before realizing their goof.
2001: Just before the close of the UK mar1<.et, a fat-fingered Lehman Bros employee mistakenly sold $SOOm worth of stock -100 limes the Intended amount. The slip-up temporarily dropped the FTSE more Ihan 2%!
2001: An absent•minded UBS trader hoping to sell 16 shares of Japanese company Denlsu al6oo000 yen each mistakenly sold 600000 shares al16 yen each! Before he knew it, the trader was already $120m in the hole ..
1998: Perhaps the most classic blunder of all time was made by a now-infamous Salomon trader who Is said to have accidentally sold £850m worth of French government bonds ...... slmply by leaning on his keyboard!