Trading is an incredibly solitary business and to help address this, one of the features we at Australian Investment Education have actively sought to build for our clients is a highly supportive community forming, if you will, a powerful traders circle for our members.
This has proven to be an incredibly important feature, particularly during the pandemic, where health restrictions exacerbated the basic human need for community, offsetting that terrible feeling of isolation.
Trading as Business
Success as a trader doesn’t come easily – trading is a tough business – and yes it is a business.
Reminds me of the old quote that “businesses make money hobbies cost you money”
And like any business, they can only succeed if there is plan, structure and team behind it. Perhaps this is why so many businesses fail (70% will be gone within their first three years) and sadly too, this is a similar pattern for so many traders.
Why – because many lack a well constructed business plan and experienced wisdom to test and measure their ideas against. In the trading World, it can be a very similar story, albeit not a business plan, but a trading plan that is often missing.
So what should a decent trading plan look like?
This should be a written and printed document. This is a very important step for several reasons:
- Writing things down can draw attention to what is critical
- In addition, writing things down enables a higher level of thinking and therefore, more focused action
- Most importantly, writing out your plan will test the robustness of the logic and remove much of the emotion – this is critical and I will explore this in more detail shortly.
From the thousands of trading plans I have seen, the typical trading plan tends to focus on several of the key areas of the mechanical side of trading. Maybe yours does too, or are starting to think about writing it now!
Some of the major mechanical signposts in the plan typically include
Position sizing – how much of your account can be invested in any one position
Analysis – what are you looking for in terms of those investments to take and those to leave alone. This may include a raft of analysis types such as Technical Analysis, Fundamental Analysis, Quantitative Analysis and more. The blend of these that the trader may choose will vary enormously based on further criteria such as the underlying instrument they are trading and perhaps most importantly, the time frame they are intending to trade over.
Time frames – incredibly important to recognise when considering your analysis process, in just the same way that checking the weather helps us decide what clothes to put on.
Typically, longer term investing requires more of a focus on the fundamental drivers of the business over a more sustained period. For example, during a pandemic, airlines are unlikely to be strong performers, given people are less likely to travel. While this may seem obvious, being able to accurately spot these micro pockets of event vs outcome in real time, rather than with the benefit of hindsight is a very high level skill – one you can learn but requires training.
For shorter term trading, where timing is significantly more important than over the longer term, technical analysis, when done correctly, can add massive value to the trader’s decisions. While beyond the scope of this article, (we run full training courses in this area) learning the art of technical analysis is a minefield for many.
When I look back at my 30 years and counting in markets, much has changed, most obviously with technology. The green monochrome monitors and a computer the size of a small car are long since gone, fortunately! Instead, any trader can have access to some of the most powerful analysis software – a good thing you may think – but not always…
If you are going down that rabbit hole, rather than dive into all things indicators, one of the biggest missing links can that I have witnessed is where the trader doesn’t truly understand the indicators they are using. Maybe they have several on the chart and they are all saying the same thing – doesn’t make it a stronger trade if they are all looking at the same thing!
One of the luxuries I enjoy, having my own trading business, is a team of experts in our team. We actually have our own Trading Lab, where we build out test, break apart and rebuild trading systems before going live with them!
Risk Management – Saving the most important to the end. Making money doesn’t have to be hard – the real challenge for most traders is holding onto their gains and moving forward on a more consistent basis. Being able to successfully resolve this challenge is ultimately the squaring away of most traders circle.
Within the trading plan should be detailed steps of what to do when a trade goes wrong. One thing I would highly recommend not doing, is averaging down – buying more of a losing position, to take down your average costs. Effectively you would be throwing good money after bad.
As a far more effective and significantly less emotional pathway, both of which are important, is the use of either stops or protection on positions. Stop/Losses are the predetermined levels that the trader decides to exit from a trade that is not working out.
Many prefer to hold on and wait for a recovery – turning a trade into a very long term investment and unnecessarily tying up their working capital. Worse yet, some stocks never recover have a look at AMP, one of the most widely held stocks by Australian retail investors.
Back in the day, one of the greatest pieces of advice given to me by one of the old timers. “Always remember, all big losses used to be small ones….” Take that as you will!
Alternatively, and this is a little more sophisticated, using derivatives and particularly options to protect your shares from any downside risk. Again beyond this article, but this really is the bread and butter of what we do at Australian Investment Education, and is a genuine game changer for traders and investors alike.
The Trading Plan and Your Mindset
The hard work of building a trading plan brings with it a massive reward, as it should.
By having a Process to follow, one that you have tested and measured, as we do in our Trading Lab, will make it much less stressful to actually trade.
“When the Process is Right, the Results Always Follow”
The reason it becomes easier to trade is that all of a sudden making a trading decision does not require thought! Yes you did read that correctly – sure there is the thought process of doing the analysis, working out your trade selection, entry and exit prices, stop levels and so on, but once that analysis work is complete, the actual decision has been made for you – its either a trade or its not.
No more thought needed – it is or it isn’t a trade. How liberating is that, to not be sweating over the screen, stressed, do I or don’t I take it etc. No more – simply follow the process and let it do the work.
For many this is a crucial break through in their trading journey is one of the biggest shifts and sets them up for a very prosperous trading career. As it should – they’ve done the work.
Unfortunately this is not the case for everyone because, rather like business failures, most traders fail because they don’t do the work in building and then testing their trading plan – or worse they simply stop following it.
Some of the Mindset Challenges
Over many years, I’ve had the privilege to personally mentor and coach traders from all around the World with accounts from 4 to 8 digits. In doing so, the conclusion I have been able to arrive at, is that success leaves clues.
As a result, we focus our attention on identifying, isolating and then scaling the things that work, while working simultaneously working to eradicate the areas that don’t. One of the biggest challenges for new traders is taking things personally, especially bad trades.
It’s not you versus the markets, it’s You vs You.
Here are some of the most frequent landmines for new traders:
Projection: This can be taking an expectation of your performance – you may be very successful in business or your career and projecting that expectation immediately onto your trading. If you are new to trading, irrespective of what you have done elsewhere in life, you are a novice and if you want to be successful need to start back at ground zero from the very beginning. In other words, baby steps – and this can cause some friction, most often due to ego.
Self Discipline: Successful Trading and investing, when looking from the outside in, seems a game of chance. Reality is markets are inherently uncertain and to bring some certainty to the table – something we as humans all need plenty of – is the trading plan. Your job as a trader is actually relatively easy – its about executing your trading plan perfectly every time. This is something that requires self discipline.
Self Doubt/Sabotage: “why does this always happen to me?” Because that is exactly what you bring onto yourself. Keeping positive and seeing the glass half full not half empty is success 101. However, this can be challenging, especially of you have had a mixed run in the market. One tool that I use to help my clients is journaling (Get Yours Here) as it provides a very transparent window into the traders’ psyche and this is invaluable when coaching people.
Importance of the right Community – your personal Traders Circle
Making money is a long term game – not that it takes forever – simply the longer you are around in markets, the more money you will make. As a result, having your own support team, offering you the benefit of experience, wisdom and a common purpose, can put valuable fuel in your tank if you find yourself struggling or going off the boil.At Australian Investment Education, we have literally decades of successful experience in working with clients, providing coaching, support, 1-1 mentoring and much more, ensuring our clients are part of a bigger community, something that helps remove that guy wrenching feeling of isolation. Our eco-system of support and ongoing training helps our clients to stay on top of their game, and in front of the market.
There is no question that things have changed. When I first started helping people get successfully started in the stock market, wannabe traders used to come to my home. Firstly one or two of them and then as word got out (this was pre Facebook) very quickly many multiples of that. One day, I recall walking into the lounge and seeing all these new faces sitting around on the floor, laptops at the ready and this was our first traders circle as we sat there and traded together. Seems like literally yesterday.
These days, we still do the same thing, not at my home anymore, as within our community, we now have literally thousands of clients, and we have had to develop our own technology to enable that same high value of personalised support and coaching, yet delivered in a convenient on demand format.
If you are wanting to become a more successful trader and investor, trying to work things out on your own will be both time consuming and let’s be brutally honest, very expensive.
Why? Because you will make a lot of avoidable mistakes as you try and work out what works and what doesn’t. Chances are you will give up before getting to any kind of success.
How do I know this? Because I went through this journey myself and by applying some of the lessons above and much more, was able to make it. Remember 70% of businesses fail which means 30% make it – the minority.
The lessons taken from my own personal experiences, over three decades in markets, have been structured into a paint by numbers trader success pack that we now deliver through our education arm, Australian Investment Education.
We have helped tens of thousands of people with this and built a huge community of like-minded traders, however, one thing I believe wholeheartedly, is that coaching is a two way process and every time I work with the ever growing circle of traders in our ecosystem, I always take away something new, reinforcing the importance of being part of a team if you want to be successful.
Andrew Baxter CEO Australian Investment Education and Professional Trader