Ten thousand hours, broken down into forty-hour weeks, is nearly five years of active trading. I’ve been through a bit more than that at this point, but in hindsight I can see why the five-year mark is a milestone in any trader’s journey. I learned a lot of lessons in those early years.
Great traders aren’t born. They are made. It takes years of actual trading before a trader can be consistently successful. You might get lucky early on by following good advice, but mistakes come when individuality and emotion creep in. It happens to everyone.
In this article, I’ve outlined the five most important lessons I learned after 10,000 hours of trading. Some of these were told to me when I first embarked on my journey, but it took experience to reinforce their importance. If you’re new, please pay attention.
Lesson #1: Risk Management is Multi-Dimensional
The concept of risk is not a static principle. I honestly thought it was when I first started trading. Risk was simple. I figured out how much I could afford to invest in trading, and I stuck to that number. Buying was done on a budget. Selling was mainly based on instincts.
Unfortunately, I did not expand the concept of risk management to the amount of loss I was prepared to absorb before selling. I actually rarely sold on a downtrend, reasoning that eventually it would come back up and I’d recover my initial investment.
What I know now is that my “strategy” was not risk management. It was gambling and gut instincts, two character traits that have ended the careers of many a trader before me. No matter how good you are at “picking winners,” trading on gut feelings alone will always fail.
Risk management is a multi-dimensional concept. Setting up a trading budget is a good start. It won’t do you any good if you’re not disciplined about stop losses. I had the unfortunate experience of hitting big on a few options early on. My ego took over after that.
The best way to ensure proper risk management is to utilize automation. Since I started using Tickeron, I’ve been able to more efficiently predict the proper exit points for both gains and losses. Risk works both ways. Greed can make you hold a position too long.
Lesson #2: Ignore the Stock Promoters
Jim Cramer jumps up and down and honks his horn. The audience goes into a buying frenzy. There’s a reason the show is called “Mad Money.” Buying positions based on a stock promoter’s theatrics is insane. It’s hype, not science.
What I have learned over the years is to shut out the noise of stock promoters completely. I don’t watch CNBC. My trading is based on technical analysis that shows me when a position is likely to gain or lose money. Anything you see on television is merely an opinion.
Cramer isn’t always wrong. I’ve heard that his win percentage is fairly high. The problem with using him or any other stock promoter as an “informed source” is that I can’t really track that to develop a trading pattern. Promoters are more for long-term investors than traders.
The rest of the talking heads on financial news networks fall in the same category. A press release announcing a merger or acquisition could be useful to me. Hours of debate about the motives behind that deal are a waste on my time. They’re not relevant on the trading floor.
Personally, I like to stick to chart patterns for trade decisions. I have a list of preferred stocks that give me the volatility I’m looking for. They are diversified across several sectors and I don’t rely on anyone else’s opinion when it comes to buying and selling them.
Lesson #3: Chart Patterns aren’t Just Line Graphs
Assume that every stock is nameless, and you have nothing but a performance chart to help you make a trade decision. Real traders analyze the chart pattern. In my early days, I looked for supporting documentation and slowed down my daily activity. That doesn’t happen today.
Financial reports and media stories are good for long-term investors. For a trader, the chart pattern tells a story. It’s much more than a just line graph. I became a better trader once I learned to properly read patterns and understand what they indicated.
No system is one hundred percent accurate all the time but eliminating background noise and meaningless chatter is perhaps the most important lesson I’ve learned. The media is good for news on sector trends, not individual stocks. Chart patterns tell you what stocks will do.
It’s easy to make mistakes when identifying specific patterns. What looks like a cup and handle could easily be a bearish head and shoulders or the second leg of a triple bottom. I made a lot of those mistakes early on. Experience has made me better at identifying the right pattern.
Another advantage to utilizing chart patterns without having to do extra research is the ability to make more trades during the course of a day. I don’t get attached to any particular stock because to me they are nameless. That means I can buy and sell without emotion.
Lesson #4: Trade Strategies Need to Evolve
No one could have predicted a worldwide pandemic in 2020 that would shake up the stock market. Would tech stocks have increased in value at the same rate if that didn’t happen? How has the election year accelerated or decelerated previously existing trends?
In times of uncertainty like we’re experiencing this year, I tend to become more of a scalp trader. Quick hits and fast exits are a great way to test the waters of an uncertain market. It also helps me watch new chart patterns as they develop.
The point that I’m making here is that a change in trading strategy needs to always be on the table. Even when the world doesn’t turn completely upside down like it did in 2020, it still evolves. New technology is developed. Markets shift. That’s just part of doing business.
This is an area where I learned another valuable lesson in my first five years. Changing strategies does not mean going “all in” on specific stocks because I think I’ve recognized a new pattern. My risk tolerance should be preset. I don’t alter it when I sense a favorable situation.
As an example, let’s look at the pharmaceutical sector. I’m not a huge fan of drug stocks, but the race for a Covid-19 vaccine has created some opportunities this year. Moderna and Pfizer are two favorites of mine that have turned some short-term profits.
I incorporated these newbies to my trading portfolio by reallocating in other sectors. I didn’t add additional funds or change dollar amounts on individual trades. These companies are simply nameless entities with chart patterns, as are all the rest of my positions.
Lesson #5: Diversification doesn’t Always Look the Same
The scenario I described above is an example of diversification. Prior to this year, I stayed away from health care and consumer discretionary stocks. My portfolio is spread across eight other sectors with a heavy focus on energy and tech stocks. That’s what I’m comfortable with.
My concept of diversification may be different from yours. That’s why the market is broken down into sectors (11), industry groups (24), industries (69) and sub-industries (158). Financial advisors create portfolios diversified across all sectors. Traders don’t have to.
The best advice I can give you is, “Don’t do it just because someone said you’re supposed to.” Diversification looks different for everyone. As a trader, you’re not looking for long-term trends that will have ripple effects across multiple sectors. Money is made and lost in a single day.
Personally, I prefer to work with fewer variables in the equation. Sectors and industries display diverse chart patterns. Pharmaceuticals rise and fall quickly and sometimes bottom out unexpectedly. Blue chip tech stocks are more predictable. Balance comes from trading both.
Some traders stay in one sector and diversify across industries. This is too narrow an approach for me, yet many traders make good money doing it. Diversification to them looks different, but the concept is still the same. Don’t put all your eggs in one basket.
Life Lesson: Discipline and Emotional Detachment
Perhaps the most valuable lesson I have learned from being a trader is to have discipline and avoid emotional attachment to any particular stock. My feelings about the companies I’m buying and selling never come into play. Only gains and losses matter during the trading day.
This is a major difference between investors and traders. Investors put together portfolios that may be heavy on “green” stocks or devoid of petroleum stocks because of their personal feelings. I’m using chart patterns and rarely even know what a company does.
The discipline component comes into play when I implement a trading plan. We’ve stated many times here that you can experience big losses in the morning and recover late in the day. That doesn’t happen if you alter the plan at noon. Discipline yourself to stick with it.