How to Avoid the 3 Most Common Causes of Trading Failure
I have served as a trading coach and advisor to traders, investors and portfolio managers for over twelve years. During that time I have worked with several hundred traders. Whenever I work with individual traders, whether they are newbies or experienced professionals, I put them through a trading profile inventory I developed. The results of this inventory give me a good idea what type of trader I’m working with, where his or her strengths and weaknesses lie, and thus how to tailor my coaching to best meet his or her needs. While this information is useful, I have discovered over the years that nearly all the clients I work with fall under one of two categories: either they don’t know enough about trading to make it work for them; or they know too much about trading which causes them to be indecisive and unable, even unwilling, to follow any one system consistently.
All things considered, those in the first category are easiest to work with. Their lack of trading “baggage” makes them far more teachable and willing to follow the rules of successful trading. Let me tell you about one client who clearly fell into the latter category. Let’s call him Joel*. Joel and I met in the conference room of an airport hotel near our home. Joel had flown all the way from Seoul, Korea, and, despite his jet-lag, he was alert and eager to get to work. On the surface of things, Joel had all the makings of a trading wizard. He had an Ivy League degree in business; he was clearly bright and a quick learner; and he was the only son of a successful private equity investor who had been grooming Joel to take over the business. Joel’s problem was that he didn’t want to work for his Dad. He wanted instead to make his living trading.
One year prior to our meeting, Joel’s father had given him a million dollar trading account to get him started. This was pocket change to the father, but to Joel it was his chance to live in freedom. Equipped with his business education, and quality experience gleaned from the years spent at his Dad’s side, Joel put that money to work in the markets. Unfortunately, things didn’t go quite as planned. By the time Joel came to me, his account was down over 70%. He was desperate. From his profile inventory I learned that Joel was making a number of critical mistakes, not the least of which was allowing himself only three hours of sleep each night as he scanned the news for trades. To make things worse, his trading profile showed me that he was trading way out of his comfort zone. His temperament was better suited to a rules-based systematic approach, but his actual trading was more “fly-by-the-seat-of-his-pants” as he chased after every hot tip and trading “hunch”.
I told Joel I could help him turn things around, but that he would have to do exactly what I told him to do. I explained to Joel that he would have to radically change his methods; but if he did, he would be a much happier and more successful trader. My approach was simple: I would teach Joel a clearly defined, long/short trading system and his first task was to work it — and no other — for three months. After that, I said I would slowly add more systems to his trading arsenal as long as he demonstrated complete fidelity to each one. Joel gave me his assent; or at least I understood his lack of complaint as a form of compliance. So, for the next three hours, I carefully explained to him one of my trading systems that was a good match for his profile. After a lunch break, we spent another two hours working through various scanning techniques, position management strategies, and live chart examples of the system at work. All the while, Joel seemed to me to be very engaged. My impression was that he was fully on board with what I was teaching him.