The Learning Curve
Hola from Mexico City! I have another great question from a reader this week. Hopefully the answer will help prevent some of you from making the same mistakes I made when I got started in trading. Read on!
Question of the Week
Q) Mr. Ponsi, I found your response to the automated system very interesting. I am in the process of training myself for the Forex....hopefully in the correct way. I realize as well (having worked with a demo account) that you can be "punished" if you do not know what you are doing!
I would like to know how YOU got to be where you are. Did you have struggles? How long was it before the "light bulb" went off in your head? I consider myself an intelligent person; I am a physician and have had extensive training, 12 years beyond college. How long was it before you felt comfortable with what you were doing? I have heard some say six months. Of course no one can truly predict where the market will go after you get in and I have heard statistics that even the best Forex traders are correct 50-70% of the time. Do you feel bad when your trades go the wrong way or have you disciplined yourself to extract from the emotion?
Ed Ponsi) Thank you for your question. I started out as a part time stock trader in the mid nineties, and I freely admit that at that time I had no idea what I was doing. Luckily for me, I began my trading career at the beginning of the biggest bull market in history – at a time when all you had to do to make money was buy tech stocks and watch them skyrocket. There was a popular saying at the time, "don't confuse brains with a bull market". After making money on my own for a few years, I realized that I was not yet a good trader, just fortunate to be in the right place at the right time. If I wanted to make a career out of trading, I was going to have to learn how to do it properly.
Determined to succeed, I went about the task of getting hired on Wall Street. After months of emailing my resume and trading record to every Wall Street firm that I could find, I finally got an interview, and I was hired. Let me tell you, it wasn't Goldman Sachs. I was hired by what is called a "boutique" trading firm, based on my trading record for the previous two years, and because of my determination. Part of that determination was my willingness to travel over 100 miles each way, every day, to get to work.
The beautiful thing was, this firm was a meritocracy – you rose or fell based on your performance. Unfortunately, most of us fell. I was one of a group of 20 that was hired. What I didn't know at the time was the firm expected most of us to fail, they were just hoping that one or two of us would pan out. The next month, there would be 20 more new hires, and 20 more the month after that. Out of all of these new hires, only a handful of us were expected to survive.
And so I began. I was confident, having done very well for myself in the two prior years, despite my lack of real trading knowledge. My new employers gave me a blueprint for success and put restrictions on my trading, using good risk management rules. I had never even heard of risk management up to that point, and I soon learned that it would be the key to success. My instructions were simple; I was to have no large losses, period. This was a big change from my prior freewheeling style, but I was trading their money and I wanted to do it right, so I set about taking small losses.
The next two months were psychological torture, as I could not seem to reconcile my old style of trading to the new, stringent risk rules that were imposed upon me. During that time, I couldn't sleep and I could barely eat. It really bothered me that I was losing, and it bothered me even more that I was losing someone else's money. After surviving the dreaded "learning curve", I finally began to win and I never looked back.
Why did the firm stick with me during this difficult time? Because they monitored my actions closely, they could see that I never took a large loss – no matter what. They knew that the ability to avoid large losses is the most important skill in trading. Since I already knew how to lose like a professional, it was only a matter of time until I learned how to win like one. Once I learned how to hang on to my winners, the account balance began to rise, and I never looked back. It was a long two months, but life was never the same after that.
Do I still feel bad when trades go the wrong way? A little, but I understand that my feelings don't matter, and that losing is a part of winning. I'm not going to change my tactics if I have a few losses, because those techniques have worked for me for many years. Small losses lead to large gains, as I learned long ago; in fact, small losses are a necessary ingredient to winning. If I see someone who is not taking small losses, or a trader who never seems to lose, I know that person is setting himself up for a big loss.
It's true that markets are unpredictable, and that's why we have to use a stop on every trade, without exception. One of the things that I learned on Wall Street is that nobody is right all of the time; that is just fantasy. The beautiful part of trading is you don't have to have a crystal ball or the ability to see the future in order to make money as a trader. You create your analysis, put on your best trade, and if you're wrong, get out. On the other hand, if you're right, know how to maximize the gain. If you use this philosophy, win-loss percentage becomes meaningless. There are many successful traders who have unimpressive win-loss percentages, but it is not our job as traders to be right. Our job is to lose small when we're wrong, and win big when we're right
