Retail traders or Robin Hood Traders as they are now referred to in these bizarre times of COVID 19 have the wrong perspective about how the Professionals Traders trade successfully.
This has created many popular myths, such as:
All Professional traders know the outcome of a trade, as soon as it is opened.
The truth is no traders know the likely outcome of their particular trade, whether it will be a winning trade or not. Their trades are based on probabilities not trying to be fortune tellers or find their likely outcome in crystal balls. However, they treat all trade signals that give them a defined edge equally and follow their system.
Professional traders know ‘secret tricks of the trade,’ information that gives them an advantage over the traders.
The truth is that there are no secrets or tricks to know about. The professional trader knows things that give him an advantage or edge, but they are not tricks or even secrets. It is a backtested system that has been tested over long-time frames in all types of market conditions. They have a clear set of rules to get in and out when they are wrong.
Professional traders are ‘closer to the markets’ and therefore able to gain particular knowledge which is not available to the average person.
If any such knowledge was used, the Professional trader could be breaking the law by insider trading. More importantly, they would violate the ‘Fundamental Truths’ in Trading outlined in Mark Douglas Book, ‘Trading in the Zone’:
- Anything can and will happen.
- I don’t need to know what happens next – It is a probability game.
- There is a random distribution between wins and losses for any given variables that define an edge. – Instead, look forward to the next occurrence of your edge or every loss puts me that much closer to another win!
- An Edge is nothing more than an indication of a higher probability of one thing happening over another.
- Every moment in the market is Unique! – If you try to know what happens next in the market, you are trying to be right and letting your ego control you.
Professional traders must be prepared to take significant risks, which they will need nerves of steel not commonly found in human beings.
The truth is this could not be further than the truth. Professional traders tend to be risk-averse and generally take much smaller risks than retail or robin hood traders. Professional traders predefine their risk for every trade they make. They will ultimately accept the risk based on developed Capital and Risk management strategies documented in their Trading Success Plan.
Professional systems traders take most of the profits from complex markets such as Futures, Options and Commodity markets – so inevitably, they must be doing something different to all the other traders?
The first bit might be valid. They do quite a lot of things differently, but that is nothing to do with any of the myths above. It is to do with their methods and discipline to follow their system.
Their methods are not particularly secret, but they are not well known or used because they are not practised very much outside professional circles or the retail or robin hood trader.
The methods of professional traders go a lot deeper than just being methodical, and they incorporate the knowledge that they have built up over many years. There are many books on the subject and one of the must-reads on Trading is ‘Secrets of Profiting in Bull and Bear Markets’, by Stan Weinstein, written in 1988 and still really relevant. Some things have changed; however, in life ‘change’ is a constant.
These methods are not complicated, but they are detailed, and they have to be applied with
discipline and consistency. Unfortunately, human beings are not good at control and consistency.
Over the years, professional traders have worked out the most important things that bring trading success. They have achieved the success they have because it has taken them generally years of experience in the markets and applying and implementing their system and or rules to learn how to trade well.
They’ve discovered the most successful way to trade demands doing things that humans don’t like doing all that much, such as assessing situations emotionally detached. For example, staying in a trade when your system says to get out and ‘market rumours’ suggest doing otherwise.
Although what I am suggesting is a basic idea, there is a bit more to successful Trading than that.
You need to know precisely what your system must do in all possible circumstances. Therefore, you need to backtest your system over a whole market cycle, or the 4 stages of the market set out in Weinstein’s Book.
Above all, you need to be able to trust your system. You will gain trust by backtesting the system and know what sort of market conditions it works.
The right ways to trade that professional traders have discovered and use can be taught.
Their methods are detailed, but not that complex. Thankfully these days, most of the intricate detail can be left to the computer software.
But some of the detail must be dealt with by the trader, either directly or indirectly.
You can create and program your own system if you want to. If not, you can obtain a system that has been programmed by someone else, either for you individually or as a generic system available on the market.
The trader must take an active part in defining his personal trading goals, which are a significant influence on the risks he is prepared to tolerate. This should all be documented in what I call a Trading Success Plan. It is the business plan for traders because Trading is a business after all.
Specialized knowledge is needed to be able to produce the total trading system necessary for Success. This knowledge can be learned from the work and discoveries of predecessors in our trade.
Learning from the beginning by personal experience is very expensive in all walks of life and especially so in Trading. It is therefore surprising how many new traders choose this perilous alternative.
The reasons why professional traders gain the lion’s share of the profits made in the markets are not well understood, and they have nothing to do with the myths which are thought by many to be responsible for their Success.
Can Trading Be Taught?
The argument between legendary trader Richard Dennis and his partner Bill Eckhardt is part of the history of systems trading and if Trading could be taught.
Eckhardt insisted that Trading was an art, not a science. Successful traders were born, not made.
Dennis disagreed and decided there was only one way to resolve the dispute. They would recruit a bunch of bright people and teach them to trade. He’d recently seen the way that they grew turtles on farms in Asia, and he was convinced he could produce successful traders on similar lines; consequently, they were aptly named the ‘Turtles’.
Jack Schwager describes the remarkable Success of the Turtles in his book, Market Wizards. Richard Dennis proved his point overwhelmingly. Not only did Dennis win the $1 million bet, but there was also no doubt that Trading could be taught.
Insights like this were responsible for Dennis turning $400
into hundreds of millions of dollars during his career.
Although systems trading can be taught, you still need the know-how and the computer resources to practice it successfully. In those early days described above, the 1970s, getting hold of these resources was a formidable obstacle that could only be surmounted by a fortunate few.
These days things are changing fast, software and data are now available on general sale at an affordable price.
To fill the know-how gap, I have decided to run webinars to teach all the essentials to aspiring traders. So that they didn’t have to go through all the pitfalls that I did learning to trade for Success. I have done a lot of work designing the material and the webinars from many years of experience. To tell people what the successful traders do and avoid the pitfalls I made at the start of my career.
Oh yes, I had to make a start in the hard school of experience. Although I began trading over 32 years ago, there wasn’t much material to help me on the way, and I made plenty of costly mistakes before I discovered where I was going wrong.
Sadly, most new traders run out of money before they ever find out what they need to know.
The lack of useful information about Trading has been a breeding ground for misinformation, mystery and downright fraud. People have come to believe that there are ‘secrets’ that you need to know and once you’ve found these out then all is plain sailing.
That is not the way it is. There may be secrets, but they are not the ones being touted by people who are just trying to take your money off you in exchange for a set of system rules or some other ‘great idea’.
Some will tell you that all you need to know is the rules that the Turtles used in their trading system. You can find places where these and the rules of other well-known systems are offered for plenty of money. My firm advice is to resist paying for trading rules, certainly until you have a thorough understanding of what really makes the difference between the winning traders and the rest.
Think about another famous remark made by Richard Dennis – “I could publish my rules in the newspaper, and nobody would follow them.”
When you attend one of my webinars, you will understand what Richard Dennis was driving at. You will also understand everything you need to know to get on equal terms with the successful systems traders. These are the 20% of people who take all the profits from the markets.