Good Advice from a Trading Coach

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The Crosshairs Trader Blog posted an interview with Dr. Doug Hircshhorn, author of 8 Ways to Great: Peak Performance on the Job and in Your Life.

"Now, the biggest mistake I see people make when setting goals for
their trading is that they set money-oriented goals. And that’s a big
mistake because for a goal, to be set up for success, it has to be
entirely in your control. Making and losing money are not in the
trader’s control. If it were, then you could just say, I want to make a
million dollars this year, and you would be making a million dollars
this year.

What is in a trader’s control, is the quality of trades they
make or the work that they do beforehand. Just like in baseball, a
batter only has control over the pitches that he chooses to swing at.
Once he hits the ball, once the trader makes the trade, it is out of
that person’s control. It goes into the environment, there’s physics
that attack it, there are players out in the field that decide whether
the ball lands safety and the hitter gets on base.

In the trading world,
once you push the button, the world, the economy, the markets, decide
whether you are going to get paid for that trade or not get paid for
that trade. Then it comes back to you and you get a chance to make
another decision (called managing the risk of the trade). You get to
decide whether you want to add to that position or take the risk off,
but your job as a trader is not to determine whether you make money or
lose money.

Your job as a trader is only to make high-quality trades
every single time. You have faith that if you consistently do the right
thing, then over time you will make money and have a successful career
in trading."

I appreciate the interview from The Crosshairs Trader.  The excerpt above does a good job of highlighting the new trader mindset.

I often get questions along the lines of:

  • How much money should I expect to make?
  • If I'm an average trader, how much will I earn?
  • What percentage return on my investment should I seek every month?

No one has ever asked what's the best way to learn to make good trades.  No one wants to know how to avoid the most costly errors.  Beginners want to know how much they will earn when trading.

As Doug cleverly points out, the traders job is not to earn a specific number of dollars. 

I'll go farther.  The trader's main goal is to survive.  To do that you must make enough good trades that you have a chance to earn some money.  If you can do no better than make a series of trades in which the risk is far too high when compared with the potential reward and the probability of earning that reward, then the math is against you and your chances of survival are very small.

If you can get past that first barricade on the path to success, then proper risk management is essential.  If you cannot pick reasonable trades, and if you cannot manage risk well enough to prevent a disaster, then there's not much hope.  Sure, you can get lucky, but lucky streaks come to an end.

Make good trades [Good is not defined by whether the trade makes money].  Manage risk carefully.  Do those two things well, and your chances of success are good.  Do neither and you would do better to give your money to charity instead of attempting to trade.


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14 Responses to Good Advice from a Trading Coach

  1. Harshad 08/23/2010 at 8:33 AM #

    No one has ever asked what’s the best way to learn to make good trades. No one wants to know how to avoid the most costly errors.
    So where do I go for answers?

  2. Mark Wolfinger 08/23/2010 at 9:44 AM #

    If you ask the questions, you may receive good answers. The truth is that beginners only see the money – they fail to see that trading is similar to any other job. It takes education and practice to do any good.
    In this blog, I’ve occasionally pointed out some serious errors that beginners should avoid. The simplest one is to learn first and trade later. That includes paper trading to gain experience watching positions and following why they work or don’t work.
    But, it’s tedious. For some it’s too boring and unexciting. So they jump ahead, use real money, and then get lucky or don’t get lucky.
    These are the traders who go broke.
    There are many places to find good answers. But, you have to ask the right questions, and ‘how much money can I make’ is not one of those good questions.

  3. Alvin 08/23/2010 at 11:33 AM #

    I’m still about a third of the way through your book so far (the second chapter on Covered Calls) but I’d like to ask you if you can recommend any other books or courses that are useful for advancing my knowledge of trading options.
    I am very sceptical of expensive courses in general since my father has spent thousands of dollars to attend/buy them and doesn’t have much to show for it — I’ve looked through his course notes and there isn’t very much content that I can’t find online for free, moreover they’re spread out through hundreds of Powerpoint slides that IMO makes them lousy for learning or review.
    So as a professional trader, could you recommend anything else that you’ve found useful?

  4. Steve 08/23/2010 at 11:45 AM #

    Thanks for this great post/reminder Mark!
    In response to Harshad, it is more than asking questions although that is a great start. It is being willing to put the time, effort and even money into educating yourself on the answers. Sure, you can pay $100/month to receive 5 sure thing trades a month. But those trades are worthless if you don’t know how to manage the trade once you place it. Find a reputable company and look into the education they offer, find the great successful traders and find out what books they read or recommend and read them.
    I am speaking from experience… I have all ready blown up a trading account because paper money was too boring. I subscribed to those must wins but knew nothing of position sizing or trade management. The best thing I did was take 3 days and get mentoring from a successful trader 1 on 1. I learned how the system works, what delta neutral means and how to accomplish it, how to have theta work for you and not against you, how to read charts etc…
    Trust me, what you spend in education will be far less than what you lose in the market if you try and teach yourself.

  5. Mark Wolfinger 08/23/2010 at 12:15 PM #

    Hi Alvin,
    I agree with the costly courses. For most people they are a bad idea.
    I don’t have a specific book/author/blogger to suggest that you follow. What I really suggest is paper trading. I know some people don’t like that, but if you consider this as the minor leagues of trading, and if you want to get called up to the majors, you must develop skills.
    By making actual trades and having the patience to take notes (that means a trade plan and a trade journal) you will learn many things. Trading leads to many ‘aha moments’ when things that were cloudy suddenly become clear. You will discover the boundaries of your comfort zone. You will know which strategy you really understand and develop a true feeling for whether you want to trade that strategy.
    I do agree that it is useful to read different insights. I offer what I believe to be the truth and the best advice. But we all know that these are my opinions, and there are other opinions.
    If you are someone who can take the time to view webinars, then both the CBOE and OIC (Options Industry Council) offer beginner webinars and podcasts. I suggest giving them a try to see if they meet your needs.
    One book that is worth reading covers a great deal of information about options and is not intended for brand new traders. But it is something you will want to keep in your library: Options as a Strategic Investment by L McMillan

  6. Mark Wolfinger 08/23/2010 at 12:20 PM #

    Thanks for the advice.
    The critical part of that advice – if you choose to hire a mentor – is to be certain that he/she is on your side.
    Too many mentors teach whatever it is that they teach – with little regard for who the student is. Interview the mentor and be certain he/she will help you with what you want/need to learn to become more successful. If that mentor has just one way of thinking, and one strategy to teach, it is not likely to work for you.

  7. Steve 08/23/2010 at 12:25 PM #

    I totally agree Mark. I wanted someone who would work with me to accomplish my goals for trading, not his. Someone who would work with my risk tolerance, not his. I was lucky enough to find that. Would not recommend anything but that.

  8. Jared 08/24/2010 at 1:22 AM #

    Yes agree survival is the key, but apart from having good trading software or a good trading system the key to successful trading I think is in having realistic expectations, those who expect to become millionaires overnight will end up disappointed and those expecting to make money every week will do too, when I started trading I said to myself I will make 100 trades to the best of my ability, and If I breakeven I would have learnt something and built my experience, my expecting to break even I watered down my expectations and now I’m a profitable trader with 100% confidence of continuing to trade well. Good things take time.

  9. Mark Wolfinger 08/24/2010 at 11:03 AM #

    Thanks for sharing. You have a winning attitude, and that’s helps.
    Too many rookie traders expect to make money immediately. That is an unrealistic expectation for the majority (who are unprepared).

  10. Burt 08/24/2010 at 12:48 PM #

    What do you consider to be a good trade? It seems a lot of this post is about making good trades regardless of money gained/lost. But how does one define a good trade? Adhering precisely to your plan? Honoring risk management accurately? It seems quite possible to present exceptions that would make a “good” trade seem like a bad trade.
    How do you characterize a trade as good?

  11. amit 08/24/2010 at 3:34 PM #

    A good trade is what makes money, how much or how little depends on your risk tolerance. Ability to limit fear, limit your greed, ability to not monitor your trade constantly i.e be hands off for a few days.
    Like Mark says, size is your friend.

  12. Mark Wolfinger 08/24/2010 at 3:38 PM #

    Difficult to define. Easier to give examples.
    I’ll have more to say about this topic. Thursday morning, Aug 26, 2010.

  13. Mark Wolfinger 08/24/2010 at 3:40 PM #

    If you believe a good trade is defined as ‘a trade that makes money’ you are not going to last a long time as a trader.
    That is a death wish attitude.
    You will never learn from mistakes, and when you get unlucky and see a GOOD trade lose money, you will never repeat the trade.
    When you get lucky and a BAD trade makes money, you will repeat that trade again and again. That is a financial death wish.

  14. Burt 08/24/2010 at 7:09 PM #

    I look forward to it. Thanks.