The Black Hole of Trading part 6 of 6

(c) Dean Whittingham 2011

 In this short series of articles I will look to explain what you need to do before you buy any trading system and avoid the black hole of trading. This series will cover a step by step approach to using the markets to achieve your goals by highlighting 13 key areas that traders must address. To read part 1 or begin from the start visit: The Black Hole of Trading Part 1

The essentials to building a trading business that uses the markets to achieve a goal is based on 5 steps.

Step 1 involves becoming familiar with the terrain, i.e. the markets and how they operate. In this day and age, it pays to know a bit about all the markets, even if just trading stocks. You may be holding stocks with a very high value compared to when you bought them, but if the underlying currency is weak or has dropped significantly, then the value of these stocks is artificially high.

Just getting the basics right can save you a lot early on. Making mistakes through your broker and their trading platform is quite common, such as miscalculating the spreads and commissions involved which affects overall risk. Not understanding how their limit, stop and market orders work, and also knowing when they are able to take your calls in the case of an emergency, are just a few of the basic mistakes that can cost dearly.

Step 2 involves getting clear about what it is exactly you want from the markets. Knowing what it is you want from the markets allows you to develop the trading method to do so.

But you must also know what you can bring to the markets. What are you good at and what needs managing? What do you have by way of hard resources and so on? You can’t go buying Crude Oil contracts with a $100 account! By knowing the above you can formulate a business plan that will enable you to find a trading method that fits in well with your plan. With no plan you have no way of knowing if you’re on track or not.

Step 3 is readying your mind, an integral part of your major asset, for success. If you’ve been living a life always falling short of expectations or your goals and dreams, you must understand that circumstance in life are not to blame. Your body is addicted to routine and poor results. When you embark on a trading career it’s not like your body’s addiction just suddenly disappears.

To illustrate this further, I want you to think of all the business owners, or commission based supervisors you have worked under in your life time, and compare the number of times they don’t come to work or to their business, to all those under them. I think you’ll find it’s a lot, lot less. There is no special injection one gets when they decide to start their own business, or undertake a commission based career. The fact is, their livelihoods depend on them performing day in and day out, and as such their minds are calibrated to that way of thinking. They simply don’t have time to get sick. Success in any endeavour is the same; it must become a part of your brains internal network.

Step 4 is the process of building a trading system to match your trading business and its goals. Of course you and your trading business are integrated to act as one; so ultimately, your trading system must match you.

How you go about building your trading system depends heavily on the results of going through the 4 previous steps (as you can see Jack will have to do). There is no magic formula, no special indicator, and no insider trading secret that sits at the mantle of all trading methods and boasts being the best. It simply doesn’t exist.

Those that enjoy the study of Wave theory, such as Elliott Wave, do so for a reason. They like to be involved in the markets, understanding it’s every move and why it moves the way it does. There is absolutely no point in the whole wide world for someone who feels their head will explode if they look at a chart for more than 5 minutes, to get sucked into promises of massive riches by buying someone’s trading system if it is based on Elliott Wave. Does this make sense?

If you like the idea of a system that is purely mechanical, where it says, here are three rules that must be passed for a trade to enter a trade, and here are two rules that tell you to exit, then that is all you need. Just find a system like that.

If you like using some indicators, be they technical indicators or fundamental, then do so, but learn why they have been designed. Why do we measure the P/E ratio of a stock; what was the MACD created for and what is it supposed to tell us? Why do we use trend lines and what constitutes a trend? What does a high bullish sentiment supposed to tell us, and why do some traders use it as an indicator?

If you plan on teaching others (such as your children, your spouse etc), how to trade, maybe it would be important to keep things simple, yet flexible enough to be adaptable to their own needs and personalities. If you plan on employing others to trade on your behalf, using your system, make sure it can operate within the limitations employees will face.

There are that many possibilities, tools, methods, indicators, reasons for trading, financial instruments to trade, and therefore possible systems, don’t waste time looking for the holy grail when all the time it is within.

But know this: No system is 100% accurate, and no system will result in profits every single time. Know what your system is capable of, make sure it fits your business plans and go for it.

Step 5 involves managing your business. Not the trading method itself, but the business and the business is you and what you bring to the markets. As you are the businesses main asset, it is imperative you manage yourself wisely. If you find yourself making the same mistakes over and over again you have issues that need addressing.

When you read stories of Chrysler making more money trading forex than selling cars you’ve got to realize that there’s no way Chrysler would have done so without having placed a lot of emphasis on the management of its forex traders. If they slipped up too often, they’d be replaced. For you it’s no different.

The whole process I just explained may seem like a lot of work, and I’ll take my hat off to anyone who reads this and agrees, as I can tell you now, more than 90% of you who read this will say it’s a load of @$%$#, or it’s just too hard.

For those who don’t believe that the road to financial wealth requires a step by step approach, where by you don’t even look at systems or indicators until the last few steps, then I question why you’re reading this in the first place.

For those who feel it’s too hard, I might suggest that you don’t want change bad enough.

Either way, I can suggest some ways to make the process a lot easier.

For one, finding those experienced traders willing to part with some of their time (whether free or for a fee), will cut off many months if not years of hardship. Simply put, experienced traders have made all the mistakes possible, and although I believe experience is the best teacher, having a guide by your side can ensure the mistakes you will make have a far less financial and emotional impact on you.

Pick a couple of markets and learn them. Learn what makes them tick. If you don’t know where to start may I suggest you go to Google.com, and type in the words ‘how the stock market works’, or put in any market you wish. There’s heaps of information out there.

Next, listing your own strengths and weaknesses can be a daunting task. There are processes in place that make it easier to assess yourself, however a simple phone call to an ex-employee or someone who knows you well (something I did), can reveal a lot for you if you don’t want to spend the time or money.

The same goes for building a business plan. There is a lot of free information on how to build a business plan for the average business, but not too many for a trading business. There are some subtle differences; however the basics are the same; vision, mission, goals, expenses and so on.

Seek out some information on the brain and how it works. You’ll find that we are entering a new era of understanding of the brain, and thanks to my parents losing over half a million dollars and my desire to find out why, I have been privileged to have talked to some of the greatest minds out there who understand our brains mighty powers.

When you have spent the time understanding the markets, yourself and your mind, what it is that makes up a business, and what it is you want from the markets, then creating a system becomes much easier. You’ll virtually stop looking at other traders results and instead you’ll look at whether a system or method can work for you. This is the key.

The problem with almost all trading courses and systems is that most are too hell bent on selling you on step 4, they don’t care, don’t know, or add a bit of fluff on the other 4 steps, if they are even aware they exist, leaving you with someone else’s template for success, which in reality is just a black hole; for a trading system without the right business plan and trader to operate it is just that, a black hole.