This article presents the major obstacles which prevent you from achieving success in the stock market. At least this is what I experienced as a self-taught trader without any background in finance over the last 11 years. Want to learn to invest and make money trading stocks? Well, you first have to get the following obstacles out of the way. The article goes on and outlines best practices to tackle and hopefully overcome each of them eventually.
- LACK OF TRAINING You are fully exposed to the stress and responsibility from day one without knowing anything or having any experience at all. You can’t fly a commercial plane without years of training and you won’t be able to steer a portfolio trough a stormy sea without the same kind of training.
Solution: Accumulate quality practice hours in chart reading and gradually rewire your sense for risk and opportunity. Opportunity in the stock market is present when your ordinary non-trading mind senses that you should go risk-off! Work on that 180° mindset early on. As in all of training, it simply takes time to develop those neural adaptions. It also gets harder the older you get. It is paramount that you accumulate practice within the same style of trading. If you jump trading styles all the time your are still trapped inside the losers or beginner cycle. Quality practice can only be accumulated once you made it onto the winner cycle.
- LACK OF HELP Almost everyone in the financial world has an interest in you slowly and steadily losing most -but not all- of your money. Always be aware of that whenever you come across an idea about a shortcut. Chances are there are none!
Solution: Apply common sense when evaluating the willingness to help of online trading gurus or fellow traders. Find a single mentor who teaches a method which suits your personality. Make sure that the guru already made it himself! It will get you nowhere if you join an open trading community and only interact with other aspiring traders without being under the guidance of a experienced profitable trader. Just like students can’t teach each other advanced, state of the art, physics. Elite schools have elite professors who excel at their specific academic field and their students typically adopt the mindset of their professors and follow into their footsteps. That’s why Nobel price or Field’s medal laureates are typically mentored by other Nobel or Fields laureates and share their field of research.
- LACK OF SELF-CRITISIM You must constantly admit failure and learn from your mistakes and make sure that you have a system in place which prevents you from repeating them over and over again!
Solution: You have to start reviewing your past trades at some point throughout the year. No matter if you messed up a single trade or many, you have to face them and identify potential causes for the bad outcome. Try to translate those causes into weaknesses and tackle them. Stop loss hits are not a failure by the way! Once you figured out a couple weaknesses, try to prioritize them and then go on and tackle only one at a time. If overtrading is your number one weakness (it was mine) you simply spent an entire year just trying to get rid of it. Don’t be in a rush and don’t try to multi-task! It won’t work. Full attention to your number one weakness!
- HIVE MIND You must learn to act counterintuitive to your ingrained beliefs! You are not allowed to act and react like the average human being.
Solution: You have to realize that almost all other traders you find online are losing traders. Make it a practice to place reasonable trades against your “feelings” early on. Do this with a reduced position size. You have to actually track the outcome of those trades. You’d be surprised how profitable they will turn out to be. All this helps you to rewire your sense for risk and opportunity over time.
- LACK OF VIRTUES You must adhere to the following virtues: Patience, Calmness, Objectivity. Being aware of them is not the same as true adherence!
Solution: If you don’t possess those traits already you have to actively work on developing them. Patience is the most important for a very simple reason. With patience you allow the market to shake off the weak and impatient traders first. This is obviously needed as the market makes sure that only few succeed. You also have to be objective! When a stock hits your stop just to reverse higher it is not personal. You simply placed a weak stop at a convenient place together with the masses and got punished for it. You also have to be detached from single trade outcomes. Don’t marry a stock but rather treat it like a short liaison.
- THRILL SEEKING Successful trading requires you to dodge all the thrilling parts of the stock market. It is hard to actually do boring stuff all day!
Solution: There are two approaches you can follow. First one would be to engage in high octane stocks but with controlled risk. This is actually what I did when I started to aggressively swing trade those higher octane mid-caps and IPOs years ago. I was sick of not participating and thus started to trade them with reduced size and strict scale-out rules. Well I had no idea that this approach would boost my profits like it did. Anyway, the point is that you can always find a low risk way of engaging with all those story and hype stocks if you really want to. The second approach would be to fullfill your desire for thrill outside of the markets. Maybe begin a physical activity which involves some risk, such as sport climbing or surfing. As my swing trading is a profitable system based on statistics by now I have to fulfill my desire for thrill outside of the markets again.
- OVERCOMPLICATING In order to master the act of trading you have to accumulate quality practice in the basics, until you reach a high proficiency. Don’t fall victim to the fallacy of thinking that you can only beat the market by adding complexity. Doing overcomplicated things shows your lack of skill and in most cases it only helps to pat your ego.
Solution: In order to master any skill you have to repeat the same patterns over and over again until they become second nature to you. In trading this means to read stock charts day in and out so that your brain can properly rewire and create the neural adaptions needed to see all those clues hidden in the chart. It also helps a lot to adopt a rather ZEN like stock picking routine to find fresh trading ideas effortlessly. The secret to trading success lies in the continuous process of grasping the market, learning from mistakes and tweaking your system. This is what I refer to as the winner cycle. If you hop systems all the time and refuse to accept and learn from losses you are on a rather destructive cycle which won’t lead you towards trading success. Master the simple things like a Basketball players masters his shot.
- TOO MUCH NOISE You must isolate yourself from the financial news media and other traders at least for some time and it can be tough to handle the solitude despite the advanatges when it comes to speeding up your learning curve. (I had to break the solitude myself and that’s why I added an educational twist to my twitter feed.)
Solution: The holy grail in trading is your skill developed over time. You have to develop the skill to act in the confirmation vacuum of the markets and you must make sure that you are not influenced by the ordinary trading crowd so that you can propery desynchronize with their “out-of-sync buying and selling”. Doing this is simple. You just chancel out ALL THE NOISE and watch charts of stocks you picked yourself and then go on and trade them yourself while not listening to what other market participants (including your mentor) or the financial news have to say. Do this for at least a full year once you are ready. Not sure when this is the case? Well, you are ready once you are more comfortable trading your own stock ideas compared to those of your mentor ;-).
- SHORT ON TIME You need anywhere between 4 to 10 years available without much distraction and drama around you so that you can properly study trading just like you would study any other sophisticated profession.
Solution: You have to realize that the markets are no shortcut to wealth. It is actually the opposite as you have to study hard for many years. For this to work while you have to provide for a family or yourself, you first need to find a style which suits your lifestyle. It doesn’t work when your trading takes a heavy toll onto your relationships with your family or friends. I started to trade when I had plenty of time during my time at the university at age of 27. While much of your skill will be applied intraday eventually you can turn profitable even when you can’t watch the markets all day. My style, which is adopted and evolved from O’Neil and Gil Morales, is actually well suited for this. I know because I strictly avoided any intraday trading during my early years as I started with just 8k and was therefore restricted by the day trading rule.
- SELF-DECEPTION And now the toughest of them all: You must be 99.9% honest with yourself. Learning to trade is a grinding battle of you vs. your inner demons hiding in a mental fortress built from deeply ingrained beliefs and guarded by your ego. Find a way to beat your ego, break down those walls and slay your demons! And don’t simply replace one rigid and inflexible mental fortress with another one!
Solution: Don’t try to tell stocks or the market what to do. You also want to avoid making any stock predictions or forecasts as this will imply a outcome expectancy. As a trader the outcome of any individual trade is not known and actually doesn’t matter. A trade is a data point and you just have to make sure that you can statistically come out ahead over many individual trades. You also have to be honest to yourself when it comes to your skill level. In the markets this is actually easy as you just have to watch your equity curve. If it goes up over a couple years with controlled drawdowns you are getting close. Your equity curve doesn’t lie. If you can’t easily make constant profits in the markets you are not in a position to tell others how it has to be done.
Finals words on overcoming those obstacles
In my opinion one can save a lot of time and speed up the learning curve tremendously simply by being aware of the obstacles above.
Even if you can’t relate to the list right now be assured that you will know what I am talking about if you stick around long enough. Don’t expect the process of rewiring to be an easy one! I tried to outsmart the markets, but it simply didn’t work out.
The transition from being a losing trader to being a winning trader can’t be forced and is likely to peak in climatic fashion. For me this happened years back.
It was like a quantum leap or and epiphanic realization and it happened almost without forewarning.
I suddently realized for good that there is truly no way around any of the obstacles mentioned above and that I must find ways to tackle them.
All this is especially true if you are a self taught trader without a rich financial background or real mentor.