December 19, 2015

The #1 Goal that Leads to Trading Success

I just won the trading competition at work by turning $100,000 into $214,000 in only two weeks trading SPY index options (paper money). That's a 114% return! I noticed there was one major thing that separated me from the other traders: I traded instinctively. I had finally mastered how to trade instinctively after more than 8 years of trying to learn to do so. During the trading competition I knew what to do, when to do it, and I fully believed in whatever had to be done. I then executed each trade according to what I had concluded from the price action with almost no effort. Simple and mechanical. That's not to say easy, but it was simple.

What I learned over the years was that, despite what everyone in the trading community tells you, there's really only one major goal in trading, and that everything else is either secondary or a waste of your time. And if you achieved this one goal, you could make it into the top 5-10% of successful traders after climbing out of the losing 90-95% of traders. So what is this #1 goal? The #1 goal is to learn to trade instinctively, and master it. That's the goal. Trading instinctively requires a trading system, with an edge, and your complete mastery of that system. Here's how people describe a trader when she's mastered her trading system and is able to instinctively execute it:

"That trader is so talented. She makes trading look so easy."
"That trader doesn't seem to care about how she's doing in the moment, only what needs to be done and does exactly that without hesitation."
"It just comes naturally to her, trading seems effortless to her."
"That trader is in a state of flow."
"That trader is using System 1 thinking to trade" (a reference to Nobel laureate Daniel Kahneman's research).
"That trader just trades, she does it instinctively and reacts almost immediately without hesitation."
"That trader is very mechanical, almost robotic in her trading decisions and execution."

Do you see the picture I'm trying to paint here? These traders got to a point in their trading, likely after years of experience and practice and especially failure, where they mastered how to trade any situation because the solution comes to them instinctively and immediately. It's like they're calculators. Plug in a problem and they solve it immediately for you, without emotion and without second guessing. Have a problem? Here's your answer, boom. They know how to listen to their instinct and how to execute on their instinct with speed and grace. This is a simple concept but can take years to learn. Consider some research on the subject of mastery, and the time required to truly achieve it.

In Malcolm Gladwell's book "Mastery," he discussed how studies of professionals across all domains suggest it takes 10,000 hours of practice to reach an expert level of proficiency in a given activity. The studies also suggest that because it takes so long for people to master something, people tend to give up too soon and tend to cave in too easily to the inevitable failures in any tough endeavor. So don't fall into the common trap of thinking successful trading comes easily as many Twitter Furus will have you believe. Successful traders are in one of the most elite and private clubs in the world and it usually takes years of dedication, discipline, and practice to get in. Let me rephrase that, "perfect practice."

Why perfect practice? This is a reference to Vince Lombardi's famous quote (in case you don't know who Vince Lombardi is, just know that he is considered by many to be one of the best and most successful coaches in professional US football history), "Practice does not make perfect. Only perfect practice makes perfect." Meaning you can practice all the 10,000 hours you want, but you won't get any closer to your goal if those hours are misspent practicing the wrong things or habits.

Therefore, taking all of the lessons in this post into account, it appears that failing at trading is mostly a function of a lack of mastery. But since there are many things you could master in trading, every successful trader will have to master one thing: trading instinctively. Trading instinctively unlocks and overcomes several roadblocks to becoming a consistently profitable trader such as:

1. The fear of missing out on a move;
2. The fear of locking in profits too early;
3. The fear of stopping out at the high or low tick;
4. The fear of losing on a trade;
5. A lack of self-confidence;
6. A lack of trust in your edge/trading system;
7. Emotional ups and downs; and
8. Blaming the market instead of taking responsibility for your trading decisions.

In summary, when you master the ability to trade instinctively, you dramatically increase your chances of making it into the elite club of successful traders. 

  What are your thoughts? How can traders master trading instinctively? What suggestions or insights do you have?


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