In today’s episode, you’ll discover how you can be in the top 5% of traders (even when 95% of them fail).
So tune in right now…
Hey, hey, what’s up my friend?
In today’s episode, we are going to discuss how you can be the top 5% of traders when 95% of traders fail. We’ll discuss how losing traders think and then how professional winning traders think, so there’re two sides to it.
Winning traders treat trading as a get-rich-slow scheme
Losing traders think they can make money fast and generate a consistent income from trading by making money every day, every week, every month.
But when they try this endeavour and don’t find success, they’ll try again for a few more weeks or months until they burn out and give up trading altogether. That’s why the number of losing traders is high because they are very short-term oriented.
They think they need to only use a weekend to master trading and make consistent income.
On the other hand, professional traders, the best money managers in the world, they are not looking to make a consistent income every day or every week. They are thinking in terms of decades to compound their returns over time.
And that’s how the big money’s made. The big money is not made, trying to make 50 pips a day, 100 pips a day, and stuff like that. No, the big money is made by scaling your trading account and letting it compound over the next few decades.
That’s the first key difference in terms of expectations. Most losing traders are too short-term oriented. They want it now and they want it fast. They want it this week, they want it this month, and that’s why they failed because it’s unlikely to happen.
And when it doesn’t happen, their expectations are not met. They try to persevere a little bit more. Eventually, they give up to be part of the 95% in the statistics.
That’s the first reason – they don’t embrace compounding. If you want to be the top 5% of traders, you have to embrace the power of compounding and think long-term.
Winning traders don’t see trading as their only source of income
Losing traders structure their trading in such a way where, “Heads I win, tails I lose.”
But for the top traders out there, they structure their trading in a way that goes, “Heads I win, tails I also win.” Let me explain…
If you read the book Market Wizards, a few of them went on and manage their own hedge funds. It’s a brilliant thing because when you manage hedge funds, or when you manage people’s money, that’s how you win regardless of whether heads or tails comes up.
Because when you manage funds, you have something called management fee. Every year, whether you make money or not, you can take a small percentage of the fee based on the assets under management.
It can be used to cover expenses, like salary or office rental, whatsoever. In the past, it used to be 2% a year, though now it might be lesser. But they have a management fee which helps them cover the expenses even during a losing year.
Losing money in trading doesn’t matter. They still get paid anyway. And if they make money for the year, guess what? They’re gonna take a cut of the profits. In that way, they win regardless of heads or tails. That’s how you want to structure your trading.
No, you’re not likely going to set up a hedge fund this year or next year. What can you do about it? Well, just study the people who have excelled in this field.
For example Mark Minervini, he’s a stock market wizard and he’s doing it brilliantly. He clearly has an amazing ability to trade the stock market, but that’s not his only source of income.
He has books that he sells, he conducts seminars, he probably has a membership area for members and again, he wins regardless of heads or tails. It’s really important to structure your trading in a way such that you win both ways.
Most losing traders only think about trading as their only source of income and when it doesn’t make money that’s it, they lose. Think about how you can make this happen for you.
Winning traders are willing to do the hard work
Let me tell you what isn’t counted as hard work. If you go on to a forum and search for new trading strategy, and see what people are talking about the markets, that’s not doing work, that’s blindly following someone’s strategy.
Just because they say it works for them, and you try the strategy for the next 3 to 5 trades, that’s not doing the work. Let’s be honest. So what does doing the work entails?
For traders who are serious about this, doing the work means taking a particular piece of strategy, a concept and doing the work to validate it and find out whether it works or not based on historical data.
This means doing systematic backtesting, running through historical data and see how that strategy fares. If it’s working, great and then you can test it in a live market using a small amount of money and see how that works out.
That’s what I mean by doing the work, by validating the concepts and strategies you come across. But most losing traders, they’ll just take the strategy at face value when someone says it works great, and trade it live.
That’s how they lose, because they don’t have the confidence to continue trading when the drawdown comes.
You must be willing to do the work, be willing to validate the system, the concept, the strategy. Only then will you have what it takes to trade at a professional level.
Winning traders don’t simply focus on their win rate
I used to like a system with a high winning rate, like a 90% win rate thinking that’s how the money is made. But here’s the thing, you can have a high winning rate system that makes money 90% of the time, but in the long run, you could still be a losing trader.
How is that possible? Let’s say you have a system that makes money, 9 out of 10 times. Every time you win, you win $1, but that 1 time that you lose, you lose $50.
Can you see how all your little profits that you’ve accumulated along the way is eroded when the 10% of your losses come? Because that loss is so huge that it wipes out all your small accumulated open profits.
That’s how you can remain a losing trader despite having a high win rate.
Now, how do the top 5% of traders look at this equation? Well, they don’t just focus on winning rate. That’s the truth. They focus on a few things as well…
Average gains to losses
Winning rate is one part of the equation, they also focus on the average gains to losses, because what’s the point of having a high win rate, but your losses are much larger than your winners. That’s why they also pay attention to average gains to loss.
High frequency of trades
Secondly, they also look at the frequency of trades. For example, a high-frequency trading firm called Virtu Financial, their winning rate is about 51% with about 1:1 risk-to-reward ratio. They are consistently profitable every single day. And how is that possible?
The secret is that they have a high frequency of trades. They trade thousands of times each day. And that’s how that HFT firm can make money almost every single day.
Another example, a trend-following hedge funds, their win rate is anywhere between 30% to 40%. But how do these funds make millions, if not billions of dollars?
They don’t just rely on their winning rate. They also have high average gains to losses. This means that when they lose $1, they make $3 or $4 on their winning trades. Their winners are 3 to 4 times larger than the losers.
That’s how trend-following hedge funds make their money. You can see that professional traders don’t just focus on winning rate. It’s a combination of winning rate, frequency of trades and average gains to losses. That’s important.
Winning traders are never swayed by others’ opinions
Losing traders are swayed by the news, the noise, the others’ opinions. But what about professional traders? What about the top 5% of traders? What do they do?
Well, they let the data speak for itself, they will only make trading decisions based on the data. And where do you get the data from? It could be based on the backtesting, forward testing, your own work or research. That’s what I’ve shared with you earlier.
And that’s how the top 5% of traders make their decisions. It’s all based on data, not based on feel, not based on opinions, not based on news, not based on noise.
Let’s do a quick recap…
- The top 5% of traders embrace compounding because that’s how the big money’s made.
- The top 5% of traders structure their trading in such a way that they win regardless of heads or tails.
- The top 5% of traders are hard workers. They are willing to do the tough work to validate a concept or strategy that they come across. They don’t trust anyone or anything.
- The top 5% of traders focus on expectancy. In other words, they focus on the winning rate, the average gains to losses and the frequency of the trades.
- If you want to be a top trader or a consistently profitable trader, you must follow the data don’t follow the news. Don’t follow the opinions, don’t follow your feelings, or whatsoever. Follow the data.
With that said, I’ve come to us to the end of this episode.
I wish you good luck and good trading.
Until next time!