7 Lessons I Learned from 7 Years of Trading by TradingWithRayner

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7 Lessons I Learned from 7 Years of Trading

Do you know what’s the best way to learn?
From other people’s mistake.
Why?
Because you can learn valuable lessons without costing you a dime.
And in this post, I’m going to do just that.
I will share with you valuable trading lessons I’ve learnt over the last 7 years, so you can profit from my experience.

It’s fine to celebrate success, but it is more important to heed the lessons of failure. – Bill Gates   Tweet This

Read on…

1. Lagging indicators can be useful to you

Most indicators are lagging in nature because they’re a derivative of price.
Still, they can be useful tools in your trading arsenal.
The question is not whether indicators are lagging but, whether you can use them effectively.
Here’s how…

Using Moving Average to identify dynamic support

Often, when price is in a strong uptrend, it may not retrace back to previous resistance turned support.
So what can you do?
You can use the Moving Average indicator to identify dynamic support. These are areas where you’ll look for trading opportunities.

Using Moving Average to define a trend

You know an uptrend is defined by higher highs and lows. And a downtrend with lower highs and lows.
But the problem is, it can be subjective. You need to decide which swing highs/lows to take into consideration.
So what can you do?
This is when Moving Average comes to the rescue.
You can define a trend when:

• 50 MA cuts above 100 MA (uptrend)
• 50 MA cuts below 100 MA (downtrend)

That’s how Andreas Clenow defines it based on his best selling book, Following the Trend: Diversified Managed Futures Trading.
It looks something like this:

Using Stochastic to identify trading opportunities

When price is in an uptrend, you’ll want to look for long opportunities on the pullback.
But where will the pullback ends?
You can pay attention to the oversold area on the Stochastic indicator.

Two things to note…

1. In an uptrend, do not look for shorting opportunities when Stochastic is overbought. Chances are price will continue higher.
2. In a downtrend, do not look for long opportunities when Stochastic is oversold. Chances are price will continue lower.

An example:

Using Average True Range (ATR) to set your stoploss

The Average True Range measures volatility of the markets.
By using the ATR indicator, you can set your stoploss, like how the famed turtle traders did it. You can learn more here.
Similarly, I use the ATR indicator to place my stoploss, but with a twist.
Watch this video below to learn how:

If you want to learn more about indicators, check out The Ultimate Indicator Cheat Sheet for Your Trading.

2. You need a consistent set of actions to be a consistent trader

In my early years of trading, I was the most inconsistent trader ever.
I traded with bollinger bands, candlesticks, harmonic patterns and everything I could get my hands on.
Needless to say, my trading results were inconsistent. Sometimes I made money, sometimes I lost money.
And here’s the thing…
…by trading inconsistently, I didn’t know how I was making money, or how I was losing money.
So how do you become a more consistent trader?

1. Develop your trading plan.
2. Write down your trading plan in black and white.
3. Follow your trading plan day in and out.

The fact is this:
If you constantly break your rules and do not follow your trading plan, then you’re going to have an inconsistent trading performance.
If you constantly follow your rules and trading plan, then you’re going to have a consistent trading performance.
Makes sense, right?
If you’re interested, read How to be a Consistently Profitable Trader for a detailed explanation.

3. Price leads news

It’s easy to get caught up with happenings around the world.
One moment, you’re hearing about the Greek financial crisis.
Next… China missed their GDP forecast.
Then… the US central bank is about to raise interest rates.
How do you know which news are important?
You’re afraid of putting on a trade, for the fear that a news event comes out, and you’re stopped out for a loss.
Now:
What if I told you price leads news?
And you can ignore news totally?
Check this out…

NZ central bank cuts rates

BOJ announced the expansion of its bond buying program

ECB cuts interest rates

If you’re still bombarded by the amount of financial news each day, relax.
Just Remember this:
Price leads news. Focus on price and ignore the rest.

Reliance on fundamentals indicates lack of faith in trend following. – Ed Seykota   Tweet This

4. The most important thing in your trading

No, it isn’t the frequency of your wins.
Because you can win often and still lose money in the long run.
An example:
Over the next ten trades, you win nine trades and lose one trade.
Each win earns you $1, and each loss cost you $10.
After ten trades, you have a loss of one dollar (9 – 10 = -1).
Clearly, you’re still losing despite winning more often.
Okay maybe it’s the size of your wins?
Unfortunately, that’s not the case either.
Because you can have larger wins than losses, and still lose money in the long run.
An example:
Over the next ten trades, you win one trade and lose nine trades.
Each win earns you $5, and each loss cost you $1.
After ten trades, you have a loss of four dollars (5 – 9 = -4)
Clearly, you’re still losing despite having larger wins than losses.
So, what is it that matters?

1. Your winning rate
2. The average size of your wins
3. Your losing rate
4. The average size of your losses

With these four metrics, you can compute your expectancy to know whether you’ll be profitable in the long run.
Expectancy = (Winning % * Average win) – (Losing % * Average loss) – (Commission + slippage)
If you have a positive expectancy, you can be confident of your trading method as it’ll make you money in the long run.
But, if you have a negative expectancy, you’ll be losing money over the long run.

It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right, and how much you lose when you’re wrong. – Stanley Druckenmiller

5. You don’t need to know where price will go to make money

Think about this for a moment:
Do casinos know whether they’ll make money in the next betting round? No.
Do casinos know whether they’ll make money in the next 1000 betting rounds? Yes.
You’re wondering…
…how does it work?
It works by the law of large numbers.
The law of large numbers is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value, and will tend to become closer as more trials are performed. – Probability Theory
This means,  results are random in the short run, but will be closer to the expected value in the long run.
And this is exactly the same for trading. You don’t need to know where the markets are going to make money.
To make money in trading, you need two things:

1. A trading method with positive expectancy
2. Proper risk management

Here’s what Peter Brandt, a forty year veteran trader, has to say…

In this portion of my trading, I will usually trade between 25 to 35 signals per month.
When I wrote this speech in April, I took a look at the previous 3 months. Out of 91 trades, there were 31 profits or 34%. That means that 66% of the trades were losers.
But further, the net bottom line profit for all 91 trades was represented by only 4 trades. Less than 5% of the trades put in the bottom line.
More importantly, I am sure I would not have been able to predict which 5% it would have been before the fact.

If you admit not knowing where the markets are headed, it’s a good thing.
Why?

• You’ll have a stoploss in place because you know you can be wrong.
• You’ll risk a fraction of your capital because you don’t want to suffer the risk of ruin.

And these two trading principles are essential to survive in this business.

6. Pick the wrong markets and you’ll snooze

As a trend follower, I come to understand that not all markets are created equal.
There are:

• Markets which are strong
• Markets which are weak
• Markets which are flat out boring

The only two types of market that interest me are:

1. The strongest markets
2. The weakest markets

Why?
Because when you’re trading the strongest/weakest markets:

• Pullback tends to be shallower
• Price tends to move further in your favor

Here’s an example, which market would you short?


Five months later…


Do you see why I love the strongest and weakest markets?
Now:
If I’m looking to short a market, I want it to be the weakest one.
And, if I’m looking to long a market, I want it to be the strongest one.
This trading concept is called relative strength and if you want to learn more about it, go here.

7. The best trading method in the world

I’ve got your attention now, didn’t I?
The truth is this, there’s no best trading method in the world.
But…
…there’s a best trading method for you.
Now you’re wondering:
How do I find it?
This largely depends on two things:

1. Your goal in trading
2. Your personal characteristic

Your goal in trading

You must know what’s your goal in trading before you can find a method that fits your needs.
Are you looking to build consistent income from it?
Or…
Are you looking to build wealth from it?
Now:
If your goal in trading is to build a consistent income regularly, then day and swing trading suits you.
If your goal in trading is to build wealth from it, then position trading suits you.

Your personal characteristic

You must know your personal character before you can use a method that fits you.
Are you someone who prefers to win more often, but with smaller gains?
Or…
Are you someone who prefers to win less often, but with larger gains?
Now:
If you’re someone who prefers to win more often but with smaller gains, then day and swing trading suits you.
If you’re someone who prefers to win less often but with larger gains, then position trading suits you.
Ultimately, the best trading method depends on your goal and personal characteristic.

I don’t think traders can follow rules for very long unless they reflect their own trading style. – Ed Seykota   Tweet This

What’s the one thing you wish you knew when you started out trading?

This was the question I posted in our trading community…
And here’s what they said:

Conclusion

I don’t know everything about the markets and I’m still learning each and every day.
Things happen for a reason, so don’t take setback as failure on your part.
Instead, take it as feedback from the markets to improve your trading.

From loser to trader, I'm sharing everything on how to be consistently profitable.