I believe every trading education has three parts:
The first step in learning about trading is often referred to as the mechanical stage because it refers to using “the tools of the trade”. In this instance, the word “tools” is defined very broadly to refer not only to aspects of trading that are literally “hands-on”, such as scanners and software and Hotkeys, but also to those with direct human involvement, such as brokers, chatrooms, news feeds, and journaling.
Your platform (DAS Trader is one name you may have come across) is, of course, one of the most important tools in trading, and fortunately, like these other aspects, can be learned relatively quickly and easily. In Chapter 2, I write about the mechanical aspect of trading. Like any other career, a professional needs to learn how to use the required tools in their profession. Auto mechanics, dentists, engineers, pharmacists and lawyers all have various tools that they need to master with practice. Similarly, traders need specialized tools for their trading career, including a proper trading platform, software, scanners, and more. I discuss these tools in Chapter 2 and dive deep into their use.
The technical stage of trading is the how-to-do-it part of trading. Although many people believe this is the crux of trading, the technical stage can actually be learned relatively quickly. Some of the skills to be learned include building a watchlist, finding the Stocks in Play (finding the correct stocks to trade), identifying and practicing strategies, finding patterns, and learning about positions. Again, fortunately, there are many books and mathematical formulas available to facilitate learning about these aspects of trading, and classes on these topics are readily available. Chapter 3 discusses how to find the Stocks in Play and Chapter 4 teaches how to define proper support and resistance levels.
Chapter 5 discusses price action, trade management and reading chart patterns.
In Chapter 6 I explain the main trading strategies that I use. These are more advanced strategies than I described in my earlier book, with more examples, as well as information on recent developments in their effectiveness. Many traders might think this is the most important chapter of the book, but I disagree. In Chapter 7 I provide some thoughts on risk management and, in my personal opinion, Chapter 7 is more important than Chapter 6 because recognizing trading patterns is not enough, you also need to execute them flawlessly. A perfect execution requires excellent risk management, position sizing and, of course, trade management (Chapter 5). To make that point clear, in Chapter 7 I set out a detailed analysis of my thought process to provide a so-called “behind the scenes” look at some successful trades that I have made.
If there is such a thing as a secret to the nature of trading, this is it, the psychological side. It is easily the most challenging aspect of trading. Some of the psychological pitfalls that beginners and even experienced traders can encounter include emotional trading, fear, greed, revenge trading, not knowing how to manage losses, and not being in an appropriate mindset. In the last chapter, I briefly provide some thoughts regarding the psychology of trading, but I have plans to write a separate book about this subject very soon. Many famous traders say trading is 80% psychology and 20% technical knowledge. I think that's a fairly accurate estimate because it emphasizes that success in trading is primarily based on the psychological aspect.
As you are learning how to trade, you should certainly learn about the technical and mechanical aspects, but you will especially need to concentrate on the psychology of trading. Even when you are practicing in a simulator and not dealing in real money, you still have to treat it as a real account. It is easy to buy and sell on paper rather than with your real money, but you must practice being in the right mindset for trading. You have to control your emotions, even though there is no real money involved. There are courses, books, and many other resources available on this topic. I personally devote some time each week to studying books about the psychology of trading. I don't read much about the technical aspects anymore, because I think I know enough to make a living out of trading, but I'm always constantly reading about the psychological aspect.
There are a number of psychological snares awaiting the unwary trader, and they can turn out to be disastrous in both personal and financial terms.
“Emotional trading” is a very broad term that can apply to a wide range of situations and, in some ways, it encompasses the other traps discussed in this section. It basically means basing trades on emotion rather than on rational thought. Emotional decision making during a trade is the main reason new traders fail. To be a successful trader, you need to practice self-discipline and excellent money management. As Dr. Alexander Elder writes in his book, Trading for a Living, successful traders watch their trades and their money as carefully as professional scuba divers watch their supply of air.
In the financial market, simply being better than average is not good enough. You have to be significantly above the crowd to win in day trading. Trading is a minus-sum game. Just by entering into the market, you start losing. Your bank charges you a fee for wiring out to fund your trading account. Your broker will charge you an incoming wiring fee for funding the account and then start charging you for their market data, the use of their platform and a commission on each trade that you make. If you do not make enough monthly commissions for them, they will then charge you an inactivity fee. When you make a trade, market makers profit by charging you the bid-ask spread and slippage on your fills. Regulators such as the Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC), as well as the actual exchanges, also live off of the markets by charging fees.
In summary, the “industry” constantly needs a fresh supply of losing traders bringing their money into the markets. People think trading is a zero-sum game, but it is not. Trading is a minus-sum game because winners receive less than what losers lose as the industry ecosystem drains money from the markets. The market is not a level playing field; it is slanted against you.
Unfortunately, day trading often appeals to impulsive people, gamblers, and those who feel that the world owes them a living. You cannot be one of them, and you should not act like them. You must start developing the discipline of a winner. Winners think, feel, and act differently than losers, and this will reflect in all aspects of your life. You must look within yourself and your life, discard your illusions, and change your old ways of being, thinking and acting. Indeed, change is hard, but if you wish to be a successful trader, you need to work on changing and developing your personality. Day trading is not a hobby. It’s not a weekend pursuit. Once you begin trading with your real money, you need to treat it as your job, as your career, and as your profession. I personally believe you must start developing the discipline of a winner. You need to get up early, get dressed, and be seated in front of your trading station, just as if you were getting ready to go to any other job. You can’t be casual about it. You can be successful, but in order to succeed, you have to be better prepared than many of the other traders that you are competing against. A significant part of achieving that success is to learn how to control your emotions. You have to be “calm, cool and collected” as the saying goes. You have to somehow find a way to control your emotions.
Fear is nature’s way of responding to a threat, and in trading it can undo the best of intentions. It is an emotion that can affect not only beginners but veteran traders as well. At one extreme it can result in paralysis – the inability to make decisions. At the other extreme, it can lead to bad decisions and bad trades. People often become fearful when they are faced with situations they don’t fully understand or don’t feel comfortable in. There are two basic solutions to this kind of fear: knowledge and experience. The more someone has learned about trading, the more time they have invested into developing a repertoire of useful skills, and the more they have put their training into practice in both simulated and actual situations, the less they will experience fear.
In the context of trading, the emotion of fear is what can either keep us from making decisions or can lead us to take unnecessarily cautious approaches in deciding on trades. While risk-taking in trading needs to be carefully and rationally managed, an excessive avoidance of risk can be a major roadblock to success.
Greed is closely associated with fear. While fear makes us want to back away from a threat in order to avoid harm, greed makes us want to move forward as much as possible toward something we find attractive. Greed is probably a more common occupational hazard in trading, especially among novice traders. Although virtually every training program and book emphasizes that trading is not a form of gambling or a get-rich-quick road to wealth, many traders, including some with extensive experience, see some opportunities as too good to pass up. Instead of relying on their training and exercising their discretion, they succumb to the temptation of greed and go on to trade impulsively.
“Revenge trading” is an understandable but ineffective way of dealing with losses. It especially affects traders who have enjoyed extended periods of profit and have developed a sense of invulnerability. Lulled by their successes into the belief that they can’t lose, they disregard what they have learned from their training and experience and make some foolish moves. Then, not unexpectedly, they lose and wipe out some or all of their previous gains. And then, the “revenge” part kicks in, and that can potentially make a bad situation much worse.
People will ask me, “How is it that some traders can make it and many fail despite having the same education and tools?” Why does that happen? What exactly is that quality, that attribute, that some people have but others do not? Why do very few new traders make it? And what makes others bend under the pressures of trading and ultimately fail?
These questions have fascinated me ever since I started trading and later entered into the world of teaching and mentorship. The answer, in my opinion, is “resilience”. My trading career has taught me much about resilience, although it’s a subject none of us will ever understand fully. Resilience is one of the greatest psychoanalytic puzzles of human nature, like creativity or the religious instinct. To get the exact answer, we have to look more deeply into the human psyche.
Why do some people experience real hardships but do not lose their strength? It’s a question we would all like answered. We’ve all seen that happen in our own circles. For example, a family member, friend, or acquaintance who cannot seem to get their confidence back after a layoff; another, persistently depressed, takes a few years off from life after their divorce.
People react very differently to challenges in life. In 1983, a talented young guitarist, Dave Mustaine, was kicked out of his newly formed band in the worst possible way. The band had just been signed to a record deal to record their first album. But a couple of days before the recording was to begin, without any warning, discussion, or a dramatic blowout, the band asked Dave to leave. He had to go back to his hometown the same day. He sat on the bus back to Los Angeles from New York and kept asking himself: How did this happen? What did I do wrong? What will I do now? By the time the bus hit L.A., Dave had gotten over this bad experience and self-pity and vowed to start a new band. He decided that this new band would be so successful that his old band would forever regret their decision.
He worked hard, he spent months recruiting the best musicians he could find, he wrote dozens of songs, and he practiced religiously. The combination of anger and ambition eventually led him to form the legendary heavy metal band Megadeth which sold 38 million plus albums and toured the world many times over. Today, Dave Mustaine is considered one of the most brilliant and influential musicians in the history of heavy metal music. The band Dave was fired from was Metallica, one of the best-selling bands ever. Although he never reached the same success as Metallica, he did put his life back on track. This is resilience at work.
Now let’s look at the life of another musician who got kicked out of another band. His story echoes that of Dave Mustaine, but ended differently. In 1960, an English rock band formed in Liverpool with funny haircuts and an even funnier name: The Beatles. John Lennon (the lead singer and songwriter), Paul McCartney (the boyish-faced romantic bass player), George Harrison (the rebellious lead guitar player) and Peter Best founded the band. Peter Best was the best-looking member of the band - the one who girls went wild for, and it was actually his face that began to appear in the magazines first. He was also the most professional member of the group. He didn’t do drugs and had a steady girlfriend. He was “too conventional to be a Beatle”, according to the autobiographical book of their manager, Brian Epstein.
In 1962, after receiving their first record contract, the other three members quietly got together and asked Brian Epstein, their manager, to let Peter Best go. No reason, no explanation, no condolences, just wish him the best of luck. As the replacement, the band brought in Ringo Starr. Within six months of Peter Best’s firing, the intense fan frenzy of Beatlemania erupted, making John, Paul, George, and Ringo four of the most famous faces on the entire planet. The Beatles became the best-selling band in history, even to this date, with estimated sales of over 800 million physical and digital albums worldwide. Meanwhile, Peter Best fell into a deep depression and alcoholism. The rest of the Sixties were not kind to Peter Best. By 1965, he had sued two of the Beatles for slander and, in 1968, he attempted suicide, only to be talked out of it by his mother. Peter Best didn’t have the same redemptive story Dave Mustaine did and, if you ask me, it’s mostly because of his lack of resilience.
This is my story. I first began day trading after I got unexpectedly laid off from my job. Unemployed, feeling embarrassed in front of my partner and friends, I proceeded to lose all of my savings and severance package to the market. I did not give up, even though I lost over $10,000 in the first few months. I was forced to find another job to be able to pay the rent and my bills. But I did not stop trading. I switched to trading in a simulator and kept waking up at 5 a.m. in the morning to be able to trade from 6:30 to 8 a.m. before leaving for work. I was lucky that I lived on the West Coast, in the Pacific Time Zone, where the market opens at 6:30 a.m. instead of 9:30 a.m. for those on the East Coast. I could trade and still be at work by 9 a.m. It was not easy but I managed to handle it. Did I know what was driving me at the time? Not really. Resilience is something you realize you have after the fact.
I recently watched a movie on Netflix, The Founder, about the life of the legendary Roy Kroc, the middle-aged and below average milkshake salesperson who began to build the McDonald’s empire at the age of 52. In the last scene of the movie, he is practicing the speech he is soon to give in front of the Governor of Illinois. Standing in front of a mirror while getting dressed, he says:
“Now, I know what you're thinkin'. How the heck does a 52-year-old, over-the-hill milkshake machine salesman... build a fast food empire with 16,000 restaurants, in 50 states, in 5 foreign countries... with an annual revenue of in the neighborhood of $700,000,000.00...
“One word... PERSISTENCE.
“Nothing in this world can take the place of good old persistence. Talent won't. Nothing's more common than unsuccessful men with talent. Genius won't. Unrecognized genius is practically a cliché. Education won't. Why the world is full of educated fools. Persistence and determination alone are all powerful.”
It is true. More than education, more than experience, more than training, a person’s level of resilience will determine whether they will succeed or whether they will fail. That’s true in business, it’s true in the Olympics and Paralympics, and it’s true in the world of trading.
Many academics and resilience researchers believe in the role of genetics. Some people are just born persistent. There’s some truth to that, of course, but there is also much evidence showing that resilience can be learned. Resilience can be systemically taught and implemented by not just individuals, but also by communities and organizations.
The famous investment bank, Morgan Stanley, was the largest tenant in the World Trade Center on September 11, 2001, with over 2,700 employees working in the South Tower between the 43rd and the 74th floors. On that horrible day, the first plane hit the North Tower at 8:46 a.m., and Morgan Stanley started evacuating just one minute later, at 8:47 a.m. When the second plane crashed into the South Tower 16 minutes after that at 9:03 a.m., Morgan Stanley’s offices were largely empty. All told, Morgan Stanley lost only seven employees despite receiving an almost direct hit.
Of course, there is no doubt that the company was lucky to be located in the second tower. The other companies such as Cantor Fitzgerald, whose offices were hit in the first attack, couldn’t have done anything to save their employees. Still, truth be told, it wasn’t just luck. It was Morgan Stanley’s resilience that enabled them to benefit from that luck. Soon after the 1993 World Trade Center bombing by Ramzi Yousef and his co-conspirators, Morgan Stanley’s senior executives recognized that working in such a symbolic center of the U.S. financial industry could make the company vulnerable to possible terrorist attacks. Thus, they launched a serious program of preparedness for their employees. Few companies, and even fewer employees, take their fire drills seriously. Perhaps on September 10 many of Morgan Stanley’s employees saw the training as redundant and a waste of time, but on September 12 the program seemed as though it had been inspired by a genius. It was genius indeed, but it was also undoubtedly resilience that was at work for the organization.
The fact is, when people truly stare down reality, they prepare themselves to act in ways that allow them to endure and survive extraordinary hardship. This is also true for successful traders. They’re resilient. They can and will train themselves in how to survive before the need arises.
Once again, I have included at the back of my book a handy Glossary of the most common terms you will come across in day trading. If, as you are reading this book, you come across a term or phrase that you don’t recognize, please go and have a look at its definition in the Glossary. I’ve used easy to understand language to explain the “lingo” of day traders.