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In today’s episode, you’ll discover my top 5 “aha” moments in trading.
So listen to it now…
Resources
The Best Trading Books of All Time
Trend Following Trading Strategy Guide
Transcript
Hey, hey, what’s up my friend? In today’s episode, I want to share with you 5 of my biggest “aha!” moments in trading.
I’m sure you have probably experienced this at one point or another, watching some video or reading a blog post, which then you got a lightbulb moment. So I’m gonna share with you 5 of my “aha!” moments in trading.
1. You don’t have to win often in trading
This means your trading strategy doesn’t need to have a high winning rate for you to be a profitable trader. I experienced back around the year 2011 or 2012. What happened was that I was long on the false break setup on the 1-hour timeframe on the USD/JPY.
The market went in my favour pretty quickly. When I went to bed at night, I was up about 1 to 1.5R in profit. Meaning, if I risked $100, and if I’m up by $100 that’s a profit of 1R.
And the next day when I woke up on my phone, I realized that my profit exploded. Instead of a 1R profit, I’m now up by 10R. Meaning I was up $1,000 in profits if I risked $100 on the trade.
Initially, I thought, “Man, what’s going on?” Then I realized that the Bank of Japan intervened the markets they bought dollars so there was a massive huge spike up and I happened to be caught in the right direction. And that one trade propelled my account strongly into the green.
That’s when I realized, you don’t have to be making money on every single trade. You don’t have to be making money on 70% of your trades, 60% of your trade because you can make money on 40% of your trades.
If your winners are much larger than your losers, you can still be a profitable trader in the long run. That was one of my first few “aha!” moments.
You don’t have to win often, but you got to make sure that when you win, you want your winners to be larger than your losers. It’s kind of similar to adopting a trend following approach.
Next…
2. You want to create multiple uncorrelated trading strategies or systems to improve your trading results
Let’s say you solely trade a trend following system in the FX and futures market, then during crisis periods, you will do pretty well because that trading system takes advantage of panic, greed and fear in the market.
Usually during crisis periods, during a financial crisis, maybe even the 2000 dot-com bubble, during the financial panic in the markets, trend following systems tend to do well. But in normal market times, and this system doesn’t really perform exceptionally well.
If all of your money is in trend following system, then you can expect good money-making opportunities during a crisis period. And in normal times, the system goes a little quiet.
What if you actually take some of your money, let’s say 50% of your original money and put it in the stock markets, trading the momentum stock trading system.
Now, things are a bit different, because if the stock market is bullish, this stock trading system will perform well. And if the stock market goes into a recession is in a crisis, your trend following system will do well.
When you combine these two uncorrelated trading systems, your overall portfolio equity curve is will be pretty smooth compared to just simply trading a trend following system.
This is more for advanced traders, but if possible, do adopt multiple uncorrelated trading systems or trading systems that trade different markets.
3. You need money to make money in trading
This is something that took me a few years to figure out. Initially, my plan was that I’m just going to take a $20,000 trading account, trade full-time, make about 20% a year and I can sustain myself.
But after which, it kind of dawned on me that making 20% a month is possible, but I have a huge risk of blowing up my trading account. After which I kind of realize realistically, that’s not really a path to go down into.
I tried to figure out what’s the next best option. I started studying successful traders, fund managers and I realized that when they set up a hedge fund to trade, they do it with a decent size of money.
You can’t do it full-time or expect to make a lot of money if your trading account is like $500 $1,000. Just mathematically speaking, even if you make like 50% a year, on a $1,000 account, that’s only $500 a year.
Mathematically speaking, taking that $1,000 account and turning it into six figures or seven figures is either by fluke or by luck, otherwise, you will likely blow up your trading account.
If you want to, make money in trading, you need money. If you look at Warren Buffett, he bought an insurance company and uses the company’s premium to invest in the market. Correct me if I’m wrong, but I think that’s the path that he took in his early days of investing.
Then also, hedge fund managers raise capital from the financial markets to set up their hedge funds, because they need money to make money in trading or investing.
4. Different markets have different behaviours
I’ve heard of the saying, the market trends 30% of the time and 70% of the time it’s in a range and I kind of took that statement at face value. I didn’t really look too much into it.
But when I did some research, credits to Andrea Unger for sharing this technique, what he did was that he studied the behaviour of different forex markets and he realized that different markets have different characteristics.
For example, GBP/USD, GBP/JPY are trending markets. How do we define them as trending markets? Let’s take GBP/JPY for example.
He did a simple backtest and found that whenever the GBP/JPY broke above the previous day’s high, it will tend to continue higher. When the GBP/JPY breaks below the previous day low, this market tends to continue lower.
That’s when he realised that GBP/JPY is a trending market, it tends to have a follow-through.
Whereas on the other hand, let’s say the AUD/CAD, that’s a mean-reverting market. This market, whenever it breaks above the previous day’s high, will tend to reverse down lower.
Whenever it breaks below the previous day’s low, it tends to rebound higher. You can see that different markets have different behaviour, different characteristics.
If you have this information, you’ll realize that you can use this statistical data to your advantage. Because if you’re buying a breakout on the market that is has a trending behaviour, the odds of that breakout working out is much higher compared to buying a breakout on the market with a mean-reverting behaviour.
That’s one of my “aha!” moment as well, realizing that different markets have different behaviours.
And finally…
5. Some of the best traders out there have multiple sources of income
Initially, my thought is that, if you’re a trader, you can only know how to make money from trading, otherwise you’re fraud trader.
But when I studied some of the exceptionally good traders out there, those who have the longest track record, I realized that trading isn’t their only source of income.
For example, let’s look at the market wizards. You have Mark Minervini, who is one of the popular stock market wizards out there.
He’s a consistently profitable trader, but at the same time he sells subscriptions to his private feed or something like that, and he has a weekend training course or agency that he runs. So he has multiple sources of income, even the income from his books.
Or how about Ed Seykota, another market wizard, he has some kind of trading tribe monthly subscription as well, which I believe he makes some money from there as well.
So if you just look around you, some of the best traders out there, they don’t just make money from trading. Trading is just one source of their income.
If you love trading great, but why not use trading to help you develop multiple sources of income, maybe after you have money from trading, you can go into property investing, etc. Those are just some ideas for you.
Let’s do a quick recap…
Recap
- You don’t have to win often in trading
- You want to create multiple uncorrelated trading systems so that your equity curve is much smoother over time
- You need money to make money in trading
- Different markets have different behaviours
- Some of the best traders I know have multiple sources of income
With that said, I wish you good luck and good trading. I’ll talk to you soon.