Just recently, we had a post on our board about “making it” on your own, full time, from scratch, as an independent trader. This question naturally comes up quite a bit as it is one of the sole reasons that many people start working down the path of trading in the first place.

I still get surprised by the diversity of people that enter this business. Stereotypes of course dictate otherwise, but the fact is that anyone that seems to have general interests in:

1. Objective Thinking

2. Science

3. Making Money

…find their way to the charts. Or at least this is what I have witnessed over the years. The search for independent freedom is far from independent, and you simply need to work with other people in order to find your way. No one starts by staring a blank chart without reading how to articles, books, taking classes, etc. And especially in this business, the blind lead the blind, and for many people, this realization comes far too late.

Additionally, premature notions of your ability to trade properly tend to have you “go all in” far too early. Most people that take the path of independent learning indeed struggle greatly due to these concepts. It is, many times, an issue of self awareness. We love to think we are more advanced than we indeed truly are. This is what drives mayhem as much as it does success.

But it is always worthwhile to hear the story. One of readers is what I would refer to as an ultimate realist. He is definitely entertaining and recently wrote about his story, sent it to me, and I asked if I could post it here. And so here it is. It may be an eye opener or just a look in the mirror for some of you perhaps. Either way it doesn't come from me and I am happy to post it. Enjoy.

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The story so far… I had this great idea…

I started looking at trading for all the wrong reasons, chiefly to solve the external problem of not having enough money to meet my commitments and radically change my financial circumstances. Little did I realize when I started what a huge personal challenge this would be and the number of blind alleys I would end up running down. It seems I had have a lot of ‘stuff’ to resolve and every one of these problems made up a barrier which I have had work through to the get to the point I’ve reached now.

The silver lining in all of this has been without trading as an engine for change I doubt there would have been anything to really compel me to evolve as a person. Thanks to this pursuit I began meditating which has (on it’s own) transformed my outlook on people and life in general.

This isn’t to say I’m anywhere near ‘done’ but I’m no longer a danger to myself (in trading) and have a proper appreciation of the process I still need to go through to become a consistently profitable trader.

Working full time as a project manager does not really allow me the time to sit in front of the live market. At the moment I focus on replaying historical price moves and using these observations to further reinforce what I have been taught.

So here follows a brief history recap, some s**t I’ve noticed and what’s currently occurring.

Year 1 (Trading is Tic-Tac-Toe)

I probably spent >9 months going in exactly the wrong direction and also bought into some ‘education’ which (it later became clear) was essentially a money making scheme for the vendor. The UK trading education market is woeful and centres around spread-betting as a ‘get rich quick’ scheme without there being anything like realistic expectations. An advantage here however is that profits from spread-betting are tax free. Still this is of no comfort if you keep getting carted every day.

So in short, no methodology, no understanding, no edge and a significant lack of any sort of process. Add in indicator madness/the search for the holy grail as well as me being convinced (at this point) of my own godlike intelligence or superiority and you’ve got a recipe for unmitigated disaster.

Happily I wasn’t in a position to damage myself too badly financially – apart from getting completely ripped off by aforementioned ‘training’

Year 2 (Trading is Checkers)

Moved to ‘somewhat’ acknowledge that possibly I wasn’t as smart as I thought I was and so undertook some low level studying without really having enough knowledge to structure it properly. Started to understand that my own psychology wasn’t helping me at all in my approach to the market and begun meditating on a daily basis. I still meditate every day because of the ridiculously positive effect it’s had on my life.

Was exposed to some proper traders who made it very clear that my approach was woefully inadequate and underpinned by zero knowledge. Still not really sure what I’m looking for on a chart though and unable to hold back from impulsive trading i.e. not thinking through something before hitting the buttons. Favourite approach this year? Trying to fade one way moves without an adequate understanding of why it didn’t work.

Just enough knowledge to be dangerous and overconfident but still safe due to not willing to over-commit without being consistent. Self aware enough to know that consistent isn’t on my list of trading traits at this point.

Winning consists of luck at this point and massively compromised by the fear of missing out approach

Year 3 (Trading is Chess, against yourself)

Finally hooked up with some proper education in someone who was able to teach me how to ‘see’ the market and explain what’s actually happening. We’re not in Kansas anymore.

That combined with being exposed to other real traders ideas plus books like ‘Bounce’ and ‘Mindset’ I actually started to define the process of how to improve without cutting my own throat. More on this below.

By now I’m more interested in becoming ridiculously proficient at this craft (the journey) as opposed to fixing the external issues by some sort of force of will. Still, having learn to play chess there’s a difference between being able to play and being a master… You only get good by playing lots of games within a proper learning structure.

Year 4 (The present moment)

So at this point I’ve defined a feedback model for myself as a way of structurally driving that improvement – this is outlined below

All through the time above I’ve spent looking at FX majors since it’s actually easier to keep tabs on a half dozen of these and the associated macro drivers than attempting to capture/filter stocks/futures price moves without a significant amount of automatic filtering.

This year will be spent building my experience via historical data and continuing to add to my database/diary of trade setups. I’ve built this using Filemaker Pro because you can capture images (charts) and the context of a move rather than trying to fit this into excel or something that it’s difficult to search within…

So with the trade/research dB I need a vastly larger sample size than I’ve currently got but I’ll give you an example of how it’s useful.

The human memory is faulty and suffers from a number of biases. You discount information you don’t like and pay more attention to things that back up a thesis. Just ask any researcher – this is the reason that academic papers require peer review.

I’ve looked at three trades in the last two weeks where I’ve spotted a good level that (imho) should produce a tradeable reaction. Each time the reversal has been front run by 4-5 pips and I’ve not got my fill. Not having a record of these types of events how am I ever going to notice this stuff of improve? My next trade I will know in advance that I need to position my limit +4 above or below what I consider to be the entry point.

Knowing and getting comfortable with this in advance makes all the difference as far as trade management is concerned. This adjustment becomes a reaction to observed market conditions rather than a knee-jerk response to something I may only have a feeling for.

Other Things I’ve Learned

The more often a level is tested the weaker it gets, not stronger.

Depending on the price action prior if a level has been tested multiple times it’s more likely to fold than hold. Books, educators and many traders seem to be bought in to the idea that the more often a level is tested the more the ‘market’ will respect it. Does the door get stronger as the SWAT team is bashing it down? Nope…

Emotional Capital in trading is as important as actual capital (well for me anyway)

In fact it may be more important. If you get carted and scared the amount in your trading account and your ability to bounce back will suffer if your emotional capital/resilience is in short supply. I am dealing with this at the moment.

Prediction is for pundits and listening to (99%) of analysts is a waste of time

Having an opinion as to where USDJPY might be in 6 months is all well and fine but it needs to be underpinned by fundamentals data, caveated by possible shifts in central bank monetary policy and not a chart.

Kathy Lien’s FX market commentary is however worth it’s weight in gold if only because she clearly communicates what everyone is looking at. Kathy = legend

Patience. Do not chase price

If you missed the move at the point you wanted to get in then leave it. The bus may reverse back onto you if you chase it down the road. The reason for this is outlined below. Patience also gets you better entries.

The faster/farther price extends the weaker the move becomes, not stronger

Like a water jet the force of the move exists at the base (origin) and not 200 pips above where it broke out from.

As price extends up looking for counterparties this has an effect on orders in the market ahead of or around it and liquidity withdraws away from the spike. What happens next depends primarily on what the price driver actually was and whether you can do anything with this comes down to whether you understand the consequences in a wider context.

Price moves as a function of liquidity

I underlined this one since it’s come to underpin all my trading decisions. If I don’t understand what I’m looking at in the context of this statement then I’m not going to trade it. Thanks to Chris Lori for the lightbulb moment where I finally got this concept

I appreciate that an FX feed doesn’t contain volume data but having spent 2-3 years looking at EURUSD charts I’ve a fairly good appreciation of what/where on a chart there will be a tradeable level based on previous price movements.

Your time-frame is irrelevant (Oooh… Controversial…)

I’ve come to believe that people over-think the issue of time-frames in trading. People will say ‘oh, I only use H1 charts’ because M5 charts are all noise… Wow, really? Just think about that for a minute. Are computer models and algo’s concerned with how we humans have represented price data? What about a M24 chart? Is this more valid than an M30 chart?

The only question is this… What price is optimal to allow me to enter with a high probability that subsequently allows me to reduce my exposure to risk? After that it’s down to trade management and looking at M5 or M1 charts can really tell you a lot about where a ‘safe’ area is when moving stops.

Last one…

You are not trading the market. You are trading the traders who are trading the market

This is somewhat esoteric but this view of the market fits into my worldview nicely so I’ll include it here.

Since we’re all individuals it’s logical that we each have a perception of the world and our experience of it that is unique. No two experiences of life are the same just as no two trades or traders are the same.

We each view what unfolds through the prism of our experience, upbringing, teaching etc. and as with life so with looking at the market. This is where we have to start seeing what’s occurring from the perspective of probabilities and psychology rather than certainty and right/wrong.

If the price gets to point ‘x’ then the probability based on the psychology of the participants indicates that a reaction in a given direction is more likely and the result may well be a trade that wins for you as an individual.

This is a level of abstraction above what or how most people believe the world works let alone applying it to something else. The market doesn’t care about right or wrong in any regard since it’s only there to facilitate trade… You got your fill? Then the market did it’s job. Whatever happens next isn’t it’s concern at all

This view can be extremely useful when looking at a level that ‘everyone’ on twitter or squawk is anticipating will break. Back in October Goldman Sachs published a trade recommendation (which was made public) that called for USDJPY to break 97. This didn’t happen and we’re now banging on 106.

It really comes down to the fact that when the majority of participants expect ‘x’ and it doesn’t happen (e.g. taper as another example) then the reaction will be outsized in the other direction. Disappointment and the fear of being wrong create outsized moves.

Another way of using this is to look at a chart and ask the following question…

‘Where is everyone going to be wrong?’ Go search for Anthony Drager (ref: Market Delta) on this topic and sign up to some of his webinars – he really explains this a lot better than me.

And so to the future…

I’ve come to appreciate more and more what this pursuit of trading has done for me as a vehicle for self development. With this in mind and the structure (database) I’ve created the near term consists of looking at the markets when I have the opportunity, creating ideas and then seeing to what extent those ideas play out

Things to focus on in 2014: –

Execution – I am still not ‘comfortable’ putting on positions
Patience – especially holding on to positions longer
Trade management
More screen time
Resilience
Currently I don’t have the financial cushion to switch from my job to doing this full time and without something approaching consistent profitability that would indeed be foolish. It is a bit of a chicken and egg situation.

A very optimistic timeline would be 18 months before anyone sees significant progress here so don’t all get carried away now. Thanks for reading.

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And there you go. I always open to things like this so if you have a similar story, feel free to send it my way.