#5: 4 Things I Wish I Knew When I Started Trading
Hey hey what's up my friends!
In this lesson…
I want to share with you the biggest mistakes that I've made in my trading career so that you don't have to spend countless hours and money on all these mistakes that I've made.
So, profit from my experience and my misery in the past.
That’s what you'll discover in today's video.
Let's get started…
Mistake #1: I was hopping from one strategy to another
When I got started in trading…
The reason why I got started in trading is because I know that I don't want to work for somebody out there.
I wanted to be in control of my destiny.
I don't want to answer to anybody or get involved with politics.
I don't want someone to limit my income and say, “Hey Rayner, you can only make X amount each month because you're worth this much.”
However, when I got started in trading, no one taught me or told me how to go about it.
Naturally, the most common approach is to:
- Read books
- Read blogs
- Watch videos
I got my hands on any information I can find.
I’ve tried several trading methods such as:
- Harmonic trading
- Price action
- Trend following
I have also tried several indicators such as:
- Bollinger Bands
- Privot Points
As you can see, therein lies my mistake.
Whenever I come across something new, I would try and trade that particular strategy or technique.
The first 3 trades could be price action.
The next 2 trades are Chart patterns.
The next 2 trades are maybe harmonic patterns.
As you can see, I was simply hopping from one trading strategy to another.
The problem with this is that my actions are inconsistent, and when you are inconsistent, you get an inconsistent set of results.
If you want to be a consistent trader, you must have a consistent set of actions.
However, if your strategy doesn't have an edge in the markets…
You will lose consistently, but knowing what doesn’t work puts you closer to something that works.
So that is the first mistake I made.
Moving on to mistake number two…
Mistake #2: I had the wrong expectations about trading
As I mentioned, I wanted to get involved in trading.
But this plan I had was going to take up all my savings that I had borrow some money from my parents so that I would be able to raise $50,000 in trading capital.
I figured that if I make 40% a year, or about $20,000, I would be able to live off that cash.
It sounds reasonable because I was single back then and I had no commitments and liabilities.
Along the way, I realized that if I could do this for 5 to 10 years…
I would still be back at square one.
Because if that 40% of my trading income ($20,000) would be my living expense…
Then I won’t be able to compound my capital, my standard of living will not improve!
Eventually, I realized that I had the wrong expectations about trading.
Because when you have a trading business...
You need more money to make money in this business.
Sure, you can make a 100% a year consistently, but if you only have a $100 or $200 trading account, that’s not enough to survive.
So in trading…
You need money to make money in this business.
That was my second mistake.
I thought I can take a small amount of money and turn it into a few thousand or million dollars along the way because of how the media seems to make look trading that way.
This led me to my third mistake…
Mistake #3: Trading full-time makes the most amount of money
I thought that if you want to be a trader, you must be a full-time trader.
Because I thought that it’s where you make the most amount of money.
I kind of realized that it’s not really true.
Let me explain.
Let’s say that you are a full-time trader with a trading system like this…
Full-Time: 40% return on a $50,000 account
Having that system would earn you $20,000 a year.
If you have a family to support, then that amount would not suffice.
However, if you are single without a family, then $20,000 a year would make sense, right?
You withdraw again and again for your living expenses and you’re back to $50,000 in the next year.
You would always be back to square one, and again, your standard of living would not improve.
But let’s say you go with a second approach where you trade part-time…
Part-Time: 20% return on a $50,000 account but add in $6000 every year
Since you trade the higher timeframes, your return percentages may not be too great.
But because you are trading part time and you have side gigs and/or a full-time job…
You can actually add extra funds to your trading account every year or even every month.
And because you are having a full-time job elsewhere, you don't have to touch the money in your account.
That money inside your portfolio is something you can grow and grow and grow.
Since you have the opportunity to grow your funds compared to the last method, at the end of 20 years, you could potentially build this much wealth…
But then again, there's no such thing as a “guarantee” in trading so I use the word “potential.”
But you're looking at $3.2million!
I think that's something you can pretty much retire on!
Can you see how powerful part time trading can be?
As you can see, full-time trading doesn't mean that you can definitely make more because of the fact that you need to pull out funds from your account time to time.
And it makes compounding more difficult compared to someone who can trade part-time and grow their account.
Trading is not a get rich quick scheme, it is a get rich slow scheme.
Mistake #4: I focused on the strategy and not the concept
This is important…
I focused on the strategy and not the concept.
This might seem foreign to you so let me explain…
If you have seen my videos and comments, traders will always ask me…
“Hey Rayner, what is the best moving average?”
“Hey Rayner, what is the best timeframe to trade in?”
I’m sure that you know that there is no such thing as best out there and you need to find something that suits you.
You need to focus on the concept that I'm teaching in the videos and not specific parameters or indicators.
Focusing on the concept could be something like trend following…
The concept of Trend following
Trend following is a trading concept.
It is a trading methodology
The key idea behind it is that you:
- Trade a wide variety of markets (diversified)
- Risk small
- Trail your stop loss
- Ride trends as long as you can
I haven't talked about a strategy yet, because what's important to know first is the concept.
Let me share with you an example.
I'm going to test a trading concept and I'm going to trade these markets over here from 2000-2017…
Markets (2000 – 2017)
- Gold, Copper, Silver, Palladium, Platinum
- S&P 500, EURJPY, EURUSD, USDMXN, GBPUSD
- US T-Bond, BOBL, BUXL, BTP, 10-Year CAD
- Heating Oil, Wheat, Corn, Lumber, Sugar
This is about 20 markets in total.
The so-called strategy that I’m going to use is this…
The Rules (Long)
- Go long when the price closes the highest over the last 200 days
- 3 ATR trailing stop loss
- 1% Risk per trade
The Rules (Short)
- Go short when the price closes the lowest over the last 200 days
- 3 ATR trailing stop loss
- 1% Risk per trade
Here are the results of this trend-following strategy…
Results (200-day breakout, 3 ATR)
- Annual return: 10.44%
- Maximum drawdown: 24.60%
At this point of time, many traders ask, “Hey Rayner, why did you go with a 200-day breakout, is that the most profitable parameter?”
You can clearly see that the question focuses on the strategy itself and does not focus on the concept.
And I can tell you that there’s nothing magical with the 200-day breakout.
I can do a…
And the strategy will still be profitable.
Don't believe me?
Then check this backtested strategy with a 50-day breakout and 6ATR trailing stop loss instead…
Results (50-day breakout, 6 ATR)
- Annual return: 8.85%
- Maximum drawdown: 14.99%
I’ve changed the trailing stop loss and breakout parameters but again…
You can see that it is generally still profitable.
Still don’t believe me?
Then check this strategy out with a 200-day breakout but with a 6 ATR trailing stop loss..
Results (200-day breakout, 6 ATR)
- Annual return: 8.05%
- Maximum drawdown: 11.31%
As you can see, no matter how you change it, the concept still works in the long run!
This is why I tell traders not to focus on the exact parameters.
Because if your concept is wrong to start with…
No matter how you tweak, improve, or modify your parameters, it won’t matter, it's not going to work.
I know that you’ve learned a lot in this lesson, so let's do a quick summary to what you've learned today…
- You must have consistent actions to have consistent results
- You need money to make money
- You can grow serious wealth even if you’re trading part-time
- Focus on the concept, not the parameters