The Only 3 Things That You’ll Ever Need To Become A Successful Trader (Part 1)

A Methodology Dude-1
The Church Of What's Happening Now

To become a successful trader, first and foremost, you‘ll need A methodology. I realize that this is a bit of a “Captain Obvious” statement but you’d be surprised how many people just “wing it.” I’m not referring to novices trying to find their way by sampling methodologies. That’s understandable. I’m referring to the many that are much more experienced and should know better. Rather than stick to one viable methodology. They “Grail Hunt”-becoming a member of the “church of what’s happening now.” This keeps them perpetually out of phase-often fighting the last battle.

So, What’s The Right Methodology?

Man With Hands Up

That’s for you to answer. The right methodology for you is the viable one that you will follow, provided of course, that it is conceptually correct. Since the only way to make money on a trade is to capture a trend, then trend following would qualify as being conceptually correct (with some caveats). The methodology must also have the potential to keep losses in check while still allowing for unlimited gains (the caveats).

Know The Nuances

Dave's Computer Science Degree
The proverbial Black Swan

You’ll have to know the nuances. Since my parents paid for a computer science degree (thanks mom and dad!), I figured that I might as well use it. I used to wake up early and start programming trading systems. I tested everything-breakouts, trend following, mean reversion, short-term, long-term, stops, no stops, taking profits, letting them ride. The list goes on and on. Although I preach against purely mechanical trading, all of this was not an exercise in futility. My biggest epiphany was that the map is not the territory. What had already happened won’t necessarily happen in the future, at least not in an exact fashion. The worst isn’t always the worst. And, just because something bad hasn’t happened, doesn’t mean it won’t. Your biggest drawdown with a purely mechanical system is always in front of you. Hindsight is 20/20. My biggest takeaway was that there is no Holy Grail. Simple systems, while not perfect (hint NO systems are), can work quite well longer-term and will outperform more complex systems in real markets—not all the time, but over time. FYI, I cover this in more detail in the first four (free!) videos of my Trading Full Circle Course. Sign up below.

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Old Map With Price Bars Magnified

Every methodology will have its nuances. You can create a very accurate “income producing” machine that consistently makes money by taking small profits and not using stops. Unfortunately, that’ll work until it don’t. Even if you do use stops, sooner-or-later the market will blow right past them. Provided that you don’t blow up, it will then take many months or even years to recover one tiny piece at a time. And, hopefully (a word that should never be used in this business) you don’t hit another “reset” along the way.

On the flip side, longer-term trend following will make the most amount of money longer-term. Unfortunately, drawdowns are abysmal and you’re going to be wrong often more than 70% of the time. Provided the drawdown isn’t too steep, you could then be faced with a long recovery time. I know this through both experience and the aforementioned mechanical testing.

By accident, yesterday I stumbled across a track record on the net. He claimed to have made several hundred percent. Impressed and intrigued, I had to dig further. What does he know that I don’t? What I found was not unexpected. Like any long-term trend following system, he was only around 30% correct, had steep drawdowns, and extended flat times. In fact, he is still recovering from his latest which started over 2 years ago.

Two Stones

Don’t get me wrong, I am not criticizing. Kudos to him for having the stones to put it all out there-warts and all. My point is unlike the “results not typical” fine print in a diet ad, this is “results typical.” With longer-term trend following, you occasionally make a lot of money, provided of course you can survive the drawdowns both mentally and monetarily in between. This isn’t for the faint at heart.

Glass House-Source


I’d never throw stones at anyone in this business (but I do occasionally hint about those who I think are a-holes, LOL!). Seriously, I have my ass handed to me quite often. It’s not my way or the highway but I’ve learned the hard way. There’s a two drink minimum on stories here.

Holy Grail Goblet

Nothing’s perfect. There is no Holy Grail. I do know that you can’t trade a methodology that has limited gains and unlimited risks (three drink minimum for stories here). And, you can’t trade a methodology that has the potential for unlimited gains and unlimited losses. Sure, you can make 10,000% provided that you don’t ever lose 100% along the way. We all read about many famous traders who have amassed fortunes. The Paul Harvey rest of the story here is that many subsequently blow up.

So, Again, What’s The Right Methodology?

Girl Biting Nails

Well, again, it’s the conceptually correct one that YOU will follow. For me it is trend following but with a twist: trading for both short-term and longer-term gains. You can only predict the short-term with any degree of accuracy but you can follow trends forever. Since we don’t know the future, we use protective stops, take partial profits, and trail our stop higher. If blessed with a partial profit we then stick around via a gradually loosening trailing stop just in case the longer-term trend materializes—since that’s where the real money is. This helps us to transition from the short-term trader to longer-term trend following.

The methodology seeks to play a reversion to the mean move in the direction of the trend. That’s a fancy way of saying we trade pullbacks. We seek an obvious established or emerging trend and then look to get on after a correction, should the trend begin to turn back up.

Below is an example from the open portfolio (update: this stock has since stopped out for a gain of over 79%-much better than a poke-in-the-eye!). The stock made a sharp thrust from lows, setting up a First Thrust pattern. It also formed a Bowtie during this period (see Free Reports and watch as many Videos as you can stand for more here, stealing a line from my friend Greg Morris, just don’t operate any heavy machinery afterwards).

successful trade

Once the entry was triggered, we put in a stop just in case. Remember, sometimes even the best looking setups don’t work. We then took partial profits, and are now trailing the stop loosely in attempt to ride out what hopefully (did I really use that word?) will become a longer-term trend. Like the little guy that solves the “Skittles leak,” that’s how “we fix it” (the dilemma between short-term and longer-term trading).

Proper stock (or other market) selection is also key. We’ll explore that and money management more in part 2. The mechanics are relatively easy. The hard part is you. And, we’ll get to that in part 3.

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I Still Haven’t Started With Live Trading Yet, Because I Am Afraid to “Click”

Relatively often, I find myself in situations where beginning traders are telling me that they have done all the necessary work such as backtesting and profitable papertrading, but they still can’t find the courage to click “live”. Therefore I will try to summarize a few pieces of advice and tips in today’s article.

First of all, I would like to repeat that this advice is only for those who really underwent the necessary preparation work, i.e. they have done backtests to verify functionality of their system and have done papertrading for some time and were able to trade profitably for a couple of months (alternatively they have done only papertrading, i.e. without backtests, but in that case for a longer period of time and more precisely). Without these basic steps, the beginner doesn’t show a diligent and serious enough approach to trading and they absolutely shouldn’t click “live”, because they aren’t ready enough!

As long as the beginner fulfills the requirements above, then, based on my experience, there are three types of fear to “click”, which I will try to describe more closely.

Fear no.1: I am afraid to lose money

I think that in connection with trading, this is one of the most common and most natural types of fear. Nobody wants to lose money and, for the vast majority of beginners, the concept of occasional loss that is part of a long-term profitable trading, is difficult to take in. Up until now, we were used to getting some kind of reward for every activity – in trading, this type of thinking is failing and it is even getting worse because of the factor that after a few hours, days, or even months of activity the outcome can be loss. This is why the fear of loss of money is completely natural and not always wrong. This fear has its positive side, because it helps conscientious individuals and it is pushing them towards better preparation and to make an effort to not underestimate anything.

And thus, it is important to realize if this is the fear that is stopping us to “click”. If the answer is ‘yes’, then it is important to openly confess to yourself if possible loss per trade represents a considerable amount (i.e. amount that we aren’t willing to lose, because in our normal life it represents a lot of money) or if it is an amount that doesn’t mean anything significant and a factual loss of such amount won’t be a major problem.

If we are talking about the first option, i.e. situation when possible loss from trading is unbearably high and it represents a lot of money, the advice is rather simple: Either you are undercapitalized, or you risk per trade more than what we are willing to lose and bear. In such case it is necessary to increase the account or move to a cheaper market (with lower volatility), alternatively lower timeframe – to achieve decrease of our stop-loss to a level that won’t be as painful. Or alternatively to do both (i.e. slightly increase the account and through a change of market or timeframe decrease the risk per trade).

If it is the second option, then the fear of loss of money probably isn’t the real problem. Maybe you are just telling yourself that this is the main problem and that the fear of loss of money has the biggest influence on you – but it can be just a conscious belief, which is far from what is happening in your subconscious. Then the real cause can be one of the other types of fears.

Fear no.2: I am afraid to fail, I am afraid I am not good enough

This type of fear is more serious, because it is connected to subconscious models resulting from failures and lack of success in the past (which lead to lower self-confidence).

In the past if we suffered some substantial failure (even deeper, in our childhood) which could negatively influence us, or if we failed in something essential (effort to sustain a business, effort to make a significant change, etc.), our self-confidence can be considerably broken and our subconscious can slow us down from any other effort in order to protect us from another possible disappointment.

The advice here is substantially more difficult and if there is a deeper problem, it can be helpful to consult this with a professional psychologist who can help to find and eliminate such subconscious blocks and fears.

Personally, I have tried various types of meditation and other alternative ways for similar types of subconscious fears, but I respect that not everyone is willing to try them.

Yet I think that the best way is simply to click and live through the possible first loss in the market – to see that there is nothing horrible about it!

Broadly speaking, there are only two possibilities to “force” yourself into this first click.

The first one is to plan and prepare everything in advance. The better and more detailed planning of our first click, the higher the probability of its realization.

First of all, set yourself a target that for example next week (don’t postpone it too much) at a particular day and time you do that first click. For example, you can say that it will be on Wednesday, which is for some reason the calmest day for you and that it will be between 4 and 6pm, the period you have done your training on. But, ideally, you will do that first click in the first 30 minutes after the market opens and you definitely take the first trade according to plan as soon as it occurs.

Afterwards, for the rest of the week, visualize that “Wednesday” (or you can choose any other day) before you go to sleep. Imagine that the day has come, imagine in detail how you sit in front of the computer and you patiently wait for a trade according to plan and when it comes, you click on the mouse without any hesitation. Experience and envision your feelings (it doesn’t matter what feelings you have, don’t think about them too much), imagine both possible scenarios – that the first trade will be both loss and gain. The day before your set date, stop thinking about anything and when that day comes, just calmly do what you have visualised a few days ago. You will see that it isn’t as bad as it seemed – once this first experience is behind you, the other ones will surely be simpler and you will slowly get used to it!

The second option sounds a bit crazy, but it works as well. Now go to your computer (or at the earliest possible moment). Open the chart and click BUY or SELL (completely blindley, it is absolutely insignificant if you buy or sell), count calmly to 3 – and then close your position. And it is done. Your first trade is behind you; you clicked. Nothing terrible has happened, you are alive and healthy, you survived, and it wasn’t difficult at all! So why so much fuss about it? It was a piece of cake! Done; now you just have to repeat it based on your signals according to your trading plan, and you are where you want to be. There is no need to make it complicated.

Fear no.3: I am afraid of change

The last type of fear may sound a bit strange, but it also has its own reason and explanation.

The human brain doesn’t like change. The human brain prefers the past (which it likes to idealize), it declines to its deep-rooted stereotypes (this is why most of the people like to run on “autopilot”) and it refuses any kind of change. Just try to imagine how you would react if your boss arrives to your workplace tomorrow and exchanges people amongst departments and also changes their job descriptions from last week.

Trading is a change – a significant change. It can mean anything (a successful future isn’t guaranteed) and whatever outcome will be, it can sound terrifying. If we lose, it can be an unpleasant change to worse; if we succeed, at present we think that it will be great to start a new dream life – but in reality we can’t really imagine actual steps towards such a considerable life change, because in that current moment such a big change is rather dramatic for our brain! And so, our brain can subconsciously sabotage us to keep us as long as possible in our current comfort of apparent certainty that at least we know what tomorrow will bring. The brain loves its certainties (even the bad ones and horrible ones – for many people unsuccessful and depressing relationships are still better than none at all, and rubbish and hated jobs are still a better solution than to take a risk, leave a job and search for a new one) and subconsciously it can block many of our efforts to change. For example, it can constantly block our efforts to click “live”, which could be understood as a first step towards possible change.

So, what to do in such a case? Simply initiate in our life as many small changes as possible, which slightly “derail” our routine stereotypes and help us gain more self-confidence to click.

Choose a different, new route to work from tomorrow on.

Do something you have wanted to do for some time now, or do something crazy this weekend, like bungee jumping, go-carts, etc.

Try a meal you have never tried before and go to a restaurant you have never been to before.

Do something, anything, that changes your usual rhythm and stereotype for a couple of days or weeks. It is necessary to train your brain for changes, to teach it new flexibility. Then it should be considerably easier to click, because once your brain gets used to a repeated disruption of stereotypes, it will be much better prepared for a change – and so for your first click.

These are today’s advices and tips. Don’t be afraid to combine a few of them at the same time. I wish you good luck and courage!

Happy Trading!

Tomas Nesnidal is a European trader and developer, with 10+ years of full-time trading experience. You can download an example of his strategy for FREE on his blog

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