What Made Me A Profitable Trader

Tim Black hosts the live trading room for the Asia trading session. His background is in computers and technology. He is addicted to technology, charts and technical analysis and enjoys teaching and sharing his viewpoints in these areas.

I got an email from a trader who experienced much of what I’ve experienced in my journey to become a profitable trader. It was nice to be able to share some of these points with him. I hope this will help some other traders who are having similar problems. The email has been edited to maintain the writer’s anonymity.

The questions:

Hi Tim:
New to the website about a week and a half now and have been following you on the Asia trading session. Was listening to you Friday morning when you took over for Michael on the New York call and you mentioned you had crashed a couple of trading accounts. I have been watching and listening to you guys and trying to learn as much as possible. I can relate to the problems of the meltdown on MY account as I have come back from being down by as much as 50% to up by 25%(TWICE) in the past 8 months trading only the E/U pair and mostly shorting the big price fall from January. Unfortunately, I got careless with my account (overconfident) and left open positions (short) at the years lows back a few weeks ago. The price shot up on a weekday over lunch on those open positions and I am now looking at a real mess of an account. I have a UK FXCM account and have been using hedging strategies to avoid not closing losing positions. I have been able to work out of those positions when the price gets back close. I contacted Michael and he mentioned that you restructured your mindset and did 700% in a couple of weeks. He also mentioned (another room member) was way down before membership (like me) and now has rebuilt his account back up in 8 months. I just wanted to talk to someone that has been through the pain and suffering of drawdowns before and get maybe a little guidance to avoid the mistakes and get back on the right path to profitability. Michael suggested I order the Oliver Valez book on Daytraders tactics which I have. One thing that’s really tough in this business is checking your emotions. Its tough to not get demoralized when things are not going good. Everyone seems to doing really pretty well in the room judging from the posts. I think its great having lots of eyes in the room on the lookout for setups-helps everyone. Anyway, I want to get the most I can out of the site and from you guys as professional traders. If you could share some suggestions that turned things around for yourself and (another room member), maybe that could help me to get back on the profitability path. Thanks for your help.

This trader’s dilemma is so much like mine was, it’s uncanny. I tried to cover all the bases in my response:

I feel your pain, man. I’ve been exactly where you are. I’ve been really good at technical analysis since soon after I started trading (2004), I guess it’s the math geek in me that helped. But I really sucked at execution. I’d be WAY up in my account then do some stupid moves and be WAY down in my account. I tried trading equities and futures until I finally discovered forex and was able to manage my risk properly.

That was one of the things that saved my trading, risk management. If you’ve listened to me in the room at least once, you know that risk management is my baby. I preach it all the time.  No trade is 100% sure. No trade is more likely to succeed than another. Yes, through TA we determine high probability setups, but no matter how carefully we’ve analyzed, they can still crash and burn. SO, the solution is to ALWAYS manage your risk. NEVER put on a trade that will exceed your risk parameters (in my case 2% of my account) if you get stopped out. That having been said, I’m not OCD about the exact 2% figure. I will fudge it a little in the interest of getting a trade on before it gets away from me. But when I say fudge, I mean it may be as high as 3% sometimes, but usually not.

Second thing, you can’t trade without stops.  You don’t necessarily need hard stops put into your platform. But, be sure to identify a condition or price that will cause you to shut the trade down. I’m speaking from personal experience here. I tried it and ended up losing 75% of my account on a margin call.  I had lots of opportunities to get out of the trade at a significantly smaller loss. I didn’t. I sweated for two days; putting on/taking off hedges, etc. I lost anyway. It doesn’t work. Don’t do it.

Third thing that saved me is a concept I learned many years ago in college: The time to get pie is when pie is passed.  It wasn’t until I started being mentored by Michael that I actually applied that concept to my trading. Take profits when profits are there to be had.  I would have a trade up, say, 20 pips and just watch it go against me and stop out negative.  As you can imagine, that was demoralizing. So I will take a slice (1/3, 1/2) off if I see price action bouncing against me. With a little experience, you can anticipate the places price action could possibly reverse (moving averages, prior support/resistance, fib levels, etc.) and be prepared to take profit off at those points.  If I’m only a couple of pips up on the trade and it looks like it’s stalling or reversing, I may reduce my trade to reduce my risk and leave my stop loss where it is so the trade can still work out. Other times, I will move my stop to break even at those points.

Those are the mechanical answers to your questions. The psychological answers are a little more difficult.  I too made a bunch shorting the EUR/USD in Jan and Feb.  Unfortunately, that was like shooting fish in a barrel. You could almost not ever be wrong taking a short position in EUR/USD during that time.  If you actually started your trading in that environment, it may have given you a bad mindset.  Trading is NOT that easy – if it was, everyone would be doing it. 😉  Now, of course, there are times when it IS that easy. Your job, should you decide to accept it, is to determine when it is and when it is not. 🙂 Just so you know, trading has been atrocious since June, so don’t be discouraged if you’ve done poorly during the summer. Even the best of us have trouble trading during the summer doldrums. The smart traders just take the summer off.

I’ve always been a guy who’s had pretty good control of my emotions.  That may go back to my elementary school days when I spent several years wishing I was Mr. Spock. 🙂 Anyway, here’s what Michael had me do that helped me with any fear/confidence issues I may have had. Start trading a very tiny size. I mean VERY tiny. For instance, only risk, say, 0.01% (yes, I mean a fraction of a percent) of your account. Trade with that size until you’ve had five to ten consecutive profitable days, then double your size and do it again. Continue to increase your size as you have a run of consecutive days until you are trading your full size.  The result? When trading tiny size, it’s easy to take stops. They no longer are painful. You get used to it and it is significantly less painful and demoralizing.

Another thing to remember: Taking losses is part of the job. You have to hit the delete button in your brain when you get a loss. Your loss has to have NO emotional effect on your next trade setup.  If a trade meets your criteria, you have to execute it without emotion. You should still use your losses to analyze your execution and strategy, but you have to look at them objectively with no emotion attached.

That’s all the advice I can think to give for now. Let me know if I can answer anything else more specifically.

I hope this will help some of you in your trading. Please don’t hesitate to ask me further questions: timblack (at) winnersedgetrading (dot) com. If you would like to follow my trades, I’m on Twitter. If you would like more information about our live trading room click here.

May the pips be with you!

Tim

Secret Asian Man 😉


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