SECRETS OF THE TRADING MASTERS

‘Trading strategies that work don’t change with time, markets, or changing markets conditions. Quite frankly, to think market conditions ever change at all is a strong illusion that can only be removed when one focuses on the foundation of price movement, pure demand and supply.” — Sam Seiden

Hello:

Yes I’d iterate that trading principles that really work are timeless and non-market specific. There’s a need to conclude this topic today as there’s an interesting issue I have to discuss next Friday. I’ll simply summarize the most important aspects of trading for lack of enough time.

There are traders that are making money on the markets consistently. They survive the markets because they know the simple secrets of trading. In the long run, they make much more money than they lose. Some have been on the markets for so long that trading, to them, is just like playing Nintendo games. They even feel that looking at prices on their laptops is like luxury. They’ve been on the battlefield for so long. They know all the war tricks – excellent survival skills.  One of the most experienced and the most respected traders and the best trading coaches in the world is Joe Ross. He has been trading for decades and as such finds it so easy to trade successfully. Just looking at his charts, he can trade without any indicators, with over 80% accuracy. If you stay long enough on the markets or you’re disciplined enough to follow the principles of successful trading, you’d find trading easier and spend less time on the markets (because you’d be doing well). The markets aren’t doing anything wrong; it’s traders that are doing wrong things on the markets.

If you’re already a successful trader with many years of experience, this article isn’t for you, for you probably know the secrets of successful trading. But if you’re a beginner, or you’re still struggling with the markets, then the following points are for you. The points discussed below may look a bit repetitious but if you consider the fact that the number of those who’re hopeless at trading is staggering, then you’d agree that these points really bear repetition. These points, simply as they seem, aren’t easy to follow. People are looking for the real ‘secret’ of trading success, but their mental biases usually have them looking at wrong places and at the wrong things. They think their solution lies in some magical systems. While trading masters don’t give us any hard-and-fast rules, their standards are very clear. Practically all top traders agree that the key ingredients to your success are the rules below.

Rule No. 1: You Need a Trading System That Fits You

This has been explained in the first part of this topic. You need a trading system so that you can have (a) reason(s) for placing a trade. Any trading system whatsoever makes sense as long as it makes you survive the markets over a long period of time. Even if you claim that your system is revealed to you by an alien from Planet Mars, it still makes sense as long as you’re making money with it. As a rule, if a system causes you consistent loses in the long run despite your good money management tactics, never give that system second chance!

Rule No. 2: Take Only High Probability Trades

Successful traders buy at wholesale prices and sell at retail prices: they buy low and sell high; and do it right. They also buy when things are on sale in the context of an uptrend, or sell when prices rally in the context of a downtrend. In fact, there are several methods for determining high probability trades, while filtering suboptimal trades. This concept will be explained further in full details in a future article.

Rule No. 3: Cut Losses, Cut Losses, and Cut Losses

Even if you’re OK with the rules numbers 1 and 2, you’ll still have occasional losses. The best traders in the world aren’t always right. Therefore the accuracy of your system and your entries isn’t the ultimate ladder to long-term success. We traders tend to think we’re smart, but there are times when the markets will tell us that we aren’t smart after all, and then the best action to take is to truncate that losing trade. Actually it doesn’t matter how you control your losses – the most important thing is to avoid letting them run. Never, ever sit back and let your loss continue to run. A very important key to survival is to abort your loser, especially when it’s clear the market is no longer going in your direction. If you often find it difficult to cut your losses, then your chances of making money on the markets are very slim. Most traders aren’t surviving the markets because they run their losers. If a market were to start a 3000-pip journey in a direction and you were caught on the wrong side, what would happen to you if you tried to ride the loss for as long as possible?

Rule No 4: Ride Your Winners

Nearly all traders have heard this, but concrete examples are absent in their account histories. This trading rule is extremely powerful if you can capitalize on it. Only a feeble-minded trader would cut their profits short out of the fear of a potential reversal. In one trading example, great Sam Evans went short AUD and long USD in early March, 2010. The initial risk on the trade was $700, but because he rode the trend for as long as possible, he made a profit of a minimum of $14,000. So his ultimate risk-to-reward ratio turned out to be 1:20. He would’ve missed a good chance if he’d taken his profit at, say, $700 or $1,400 if he had some misgiving about a possible trend reversal. Joe Ross, mentioned earlier, can ride a trend for many months, even years – gaining thousands of pips in a single trade. He doesn’t exit until it’s clear a trend has changed on a bigger timeframe. Based on our Trend Setter strategy, we secretly entered long EUR and short AUD on July 27, 2008, and on October 5, 2008, we’d gained far above 4800 pips in a profit (though without a trailing stop)! A word is enough for the wise. By letting your profits run, a system with reliability of 30% would have an award-winning ROI per annum. This is also the only way to gain more during winning periods than you lose during losing periods. That’s why the survival skill lies in exits, not entries.

Rule No. 5: Position Sizing/Money Management/Risk Management

In the past, I devoted an articled to these related terms. This rule tells you how much you risk on a given trade. It’s also the greatest contributor to ‘how much’ you’ll make on the market. One reason why it’s difficult for most traders to abort losers is because they’re risking too much per trader (the ramifications of high risk would be exemplified in my article next Sunday). We want to get rich quickly or present an account history that’ll attract praises. You might’ve been taught at college that business is for profit maximization. This concept of profit maximization doesn’t work in trading. This is a paradox: a high risk with the objective of a big gain increases your probability of a margin call. If you have $100 in your account, you’ll find it easier to close an open loss of -$2. But if your open loss is -$10 or -$20 or -$30, then closing it would be difficult, while running it may even lead to a bigger loss. By risking $1 on an account of $100, you’ll find it very easy to be indifferent to any individual trade. If you’ve adopted a strategy of betting a high percentage of your account per trade, you mayn’t survive any losing streaks you must face with any trading system, or the drawdowns you’d suffer may be unbearable. If your trading capital is gone simply because of a short-lived losing streak, where would you get money to execute additional similar transactions during a nice winning streak?

Rule No. 6: Rock-solid Discipline

You must be disciplined to carry out the simple rules above. Great traders plan their trades and they trade their plans. They all agree that discipline is the primary key to their success. Without it they’d go bankrupt. It’s the key to performance. Discipline for traders involves mental state control to allow you to maintain your objectivity and stick to a predetermined trading and investment strategy. It isn’t easy to have patience on the markets unless you’re disciplined. This isn’t merely winsome, it’s crucial. Doing the right things isn’t as easy in practice as it sounds easy in theory. But if you can follow the above rules, you’ll survive the markets, thus joining the ranks of the 5% or less women and men who are truly successful in trading.

You might also want to read these books for further information:

  1. Trade Your Way to Financial Freedom, by Van K. Tharp (Trading)
  2. Technical Analysis of the Financial Markets, by John J. Murphy/Oliver Velez (Technical analysis)
  3. Trading in the Zone, by Mark Douglas (Trading Psychology)
  4. The Art of War, by Sun Tzu (Classic)
  5. Why Smart People Make Big Money Mistakes, by Gary Belsky/Thomas Gilovich (Behavioral Finance)

That’s just it. Many people are preaching great things about forex, but very few people are doing what they preach. So it takes a great mind for those who know the secrets to reveal them. I humbly conclude the final part of this topic with the quote below:

‘… (Trading mastery) is an ongoing journey, a trader is only as good as his last trade…” — Mike Baghdady (brackets mine)

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Email: amustapha@fxinstructor.com

NB: There is risk of loss in trading, but it is possible to be a successful trader.

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