Sunday, February 21, 2016

What I've learned from 4 months of trading

A few  months ago I met a guy who had recently become unemployed. He was working in the oil business and as you might know: things are not going so well in the oil business. As he was trying to find a new job he was also learning how to trade. I had no clue about stocks, indexes, EFT's and currencies, but I found it some how interesting as I am too looking for other ways to make some money (other than my job and some business ideas I've invested some time and money in). After a 10 day vacation in Italy I signed up at an online broker. It was around October 20th 2015. During the following days I wrote some Facebook posts about my first days as a "trader". It was my uncle who then suggested I should write a blog about this subject. Today I found the motivation to at least write a blog POST about it.

During my first few days I was a bit lucky. The US markets were rocketing more than they had in many years from a relative LOW ("support line" - a low point where people tend to buy) to a historical HIGH (making a "resistance line" - a high point where people tend to "short". A short is when you "borrow" a certain amount of units of something and sell it for a price and then later on you have to buy it again to give it back to the lender - if you can buy it back at a lower price you will make a profit on it). So these fantastic days created an illusion for an amateur like me. I thought the market always was like this and I made stupid "buy"-trades at any time thinking it could not fail. I also made these buys with a ridiculously high "leverage" (Leverage is like taking up a loan to make a trade - however, as soon as you are about to lose more than your own money on this trade, the trade will automatically close so that the broker can have their money back - they don't want to lose THEIR money - obviously). Needless to say, after having made some nice profits, I soon started losing most of my money simply because I could not wrap my head around the fact that markets SWING and that means you'll have up-times and down-times - usually within certain boundaries. 

It's interesting how things you learn can be transferred into other contexts. A couple of years ago I started playing chess again. I played a bit when I was little, but hadn't really played for a while and I was not very good at it anymore. I started playing online and I lost and I lost and I lost. But I kept playing. And I kept learning. Watched some You Tube-videos about various strategies etc. So I got better and better. I started identifying some weaknesses about my own personality (shocking!). For example, I was pretty bad at thinking AHEAD. In Chess I would often "shoot blanks" at other players. By that I mean that I'd do silly moves that I thought would some how "bluff" the player to make a mistake. As I realised this I tried to correct it by trying to always make a plan that had good potential - but very low risk. If it works: great. If it does't work: No problem! I tried to learn this in my daily life as well. For example: Some times I would make claims that I could not prove - I just believed in it strongly. Thinking that the people I spoke to would not be able to disprove it. Normally, people should be careful about making absolute claims unless they can back it up. So I've become better at either 1) Find proof to back me up, or 2) State that I'm not sure and that it's merely my opinion/belief (belief with good reason though).

Trading has also taught me something. Make a plan and stick to it - at least as long as nothing unforeseen happens. Take a look at this chart first:

Let's say I "buy" at the 4th arrow from the left in the chart above. I can see from 3 previous low points (the 3 leftmost arrows) on the chart that I could be able to make - let's say - $100 if I wait until the value reaches the expected "top level" (resistance line). However, once the value increases and, if you close the trade, your profit could be maybe $10. It might be tempting to close the trade because you feel like you might miss this opportunity. What if the value goes down again - then you get nothing. I've done this many times. But patience is the key. Long term! I don't know what the real answer is. What if it reaches $80 and goes back down? You could miss out on $80 because you were stubbornly waiting to make $100. 

My current strategy is still a "work in progress". It's real painful to stick with a trade, hoping it will make it all the way to the top. Right now I like to make many small trades. Let's say I open 4 "buy"-trades. I could close the first trade at 25% of expected max. Close the second trade at 50%, 3rd trade at 75 and 4th trade at 100%. And if I close the first one at 25% and the value goes back to square 1, I could make the trade again. Making similar profits repeatedly. As soon as the level reaches it's full potential (according to my strategy) I might start opening "short"-trades - expecting the value to go down again. However, should the value exceed the "max expected value" significantly I would be very careful. Now the instrument (for example an index or a currency pair) has broken out of it's regular pattern - something could have happened in the world that might affect this instrument significantly. I should not be tempted to take advantage of this situation, because it's too risky - I have less edge now than I ever did. The previous behaviour on the chart might not mean anything anymore.

Trading "knowledge" can be transferred into real life as well. It can help you "learn" to focus on long term profits rather than panicking and "settle" for a short term profit. It sounds very easy to do, but for many people it's simply not. In my first months of trading, a professional trader could have told me to "hold on to a trade" because it would give me the best profit, but I would still close it early to gain a small profit. To this day I close trades too fast. But I'm getting better. It's an adjustment I need to convince myself about based on personal experience. In the end I will definitely say "I should have listened to the pro's from the start". The pro's can say something like "Spend max 2% of your equity on a trade". I have easily spent 30% of my equity on a trade. But then again, what is your real equity, is it what's deposited to your broker, or is it what you have in the bank. 

Trading is not for everyone. But it could be if you're willing to lose, wait, learn and adapt. I've seen plenty of videos, listened to a handful of audio books, programmed many scripts for back testing. It has all added up to a certain understanding of how markets work. 

Currently my trading strategy is this: I will find an instrument that has been stuck inside a certain frame on the chart for a few weeks/months. That way I will conclude that it's likely that the instrument will keep swinging inside this frame for a while longer. So I can make a few buy-trades in the low zone and a few short-trades in the high zone before the instrument eventually breaks out of its pattern and I will lose a few trades. But as long as the instrument stays within the frame, my trades will always make a profit. So let's say I manage to make a $1000 profit before the instrument breaks out and then I lose $300 because of the break out. It's still a $700 profit in the end. Time to find a new instrument that I can - possibly - rely on. 

I've tried to write about what I can think of, in no particular order. If you have any questions, please write them in the comment area and I will give my best response. Keep in mind that after about 4 months of trading I'm still not a successful trader, however, I did make a 50% profit over the last 7 days. That means that my equity increased by 50%. That is good, but it does not cover up all my losses before that. And it is no guarantee of future earnings. Trading is hard!

Hope you liked it!


  1. Anders.

    A nice formations in that chart!

    I am back to work now after learning trading and now motivated to make a living of trading. Many have done it, some have lost and others are winners and I believe the winners are those that comply to the down-side money management! And some winners are simply lucky.

    I am ready to do some more backtesting with a new break-out model which looks good. Enjoy Thailand.

    Per Inge

  2. Yes, you don't always get those charts :) My worst habit is that I cling on to losing trades. If I respected my SL and TP I think I would do better. Easier said than done. Let's do some more back testing soon. It's been quite busy down here, but hope that will change soon.

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