Saturday, February 20, 2016

Finding your own holy grail

While many people say there is no such thing as a holy grail in trading, I happen to believe there is, but not in the generally accepted sense of some magical set of entry and exit parameters. Furthermore, I believe everyone's holy grail will be personal and unique to themselves.

Finding your own holy grail is a two-step process:
  • Identify a method or style of trading that makes sense to you logically, is proven with a positive expectancy, matches your beliefs and personality, and which you are able to trade around your family or work commitments;
  • Once you have that, then your success is down to you being able to follow whatever rules you have incorporated into your trading plan as closely as possible.
Where most people fall down is that they try to follow someone else's method (which may well be proven to be profitable), yet the trader wanting to trade in a similar fashion may well not have the same emotional make up, skill set, or beliefs that will allow them to trade in the same manner. Or, they may simply not be able to devote the required time to trade in that fashion. 

You have to be compatible with whatever approach you decide to employ - if you are not, then you will struggle, at best, or fail at worst. Trading success becomes far easier to achieve when you trade a style that suits YOU, not someone else.

I can speak about this from personal experience. When I started out trading, it was as a day trader, but it quickly became clear that this did not suit me. I was not able to respond quickly enough to the various signals given. The analytical part of my brain simply wouldn't allow me to react quick enough. Therefore, if I wanted to remain a trader, I had to find a method that suited me and my personality far better.

The one thing I took from this period was that, the method I was trying to follow was to trade breakouts - going long on a new high made, or short on a new low. To me, that made sense. But, on that particular timeframe, it did not suit me. So, I lengthened the timeframe from using 1 and 5 minute charts to daily charts. Shortly thereafter, I discovered trend following, and in particular Richard Dennis and the Turtles, who traded in a similar manner. I was on my way...

Taking this a stage further, I am often asked why I don't trade longer-term trends - maybe with reference to weekly charts, 52 week highs or lows etc. The answer to that is partly because of my personality. By nature I am an impatient sod (although I am much better than I used to be!). I know I don't have the patience to sit in a position for months, or maybe even a year or more, and possibly see little or no appreciable gains. By using the parameters I do, it gives me the best of both worlds:
  • It is short-term enough to give me sufficient action (trading opportunity);
  • It is not too long-term that I succumb to impatience.
The fact that my basic entry and exit parameters happened to be the same as those used so successfully by the Turtle traders gave me further confidence in what I was doing.

Over time, I've further developed my own approach based on those principles. I have become even more aggressive in taking losses. I have become very patient with winning trades, and extraordinarily impatient with losing positions. That panders to my own personality, psychology and beliefs, and consequently I am able to follow my rules with very few instances of trading 'errors' eroding my potential profitability.

This is why you cannot say that one style or timeframe is suitable to all traders - everyone has to work that out for themselves.

Quite often you read some people rubbishing a particular method as not working or profitable, so its no good. Assuming the chosen method does have a positive expectancy, this may simply be as a result of that person not being compatible with that method. But that same exact same approach to the markets could work brilliantly for someone else, if they have the requisite skills, personality and beliefs.

As an example, I have dealt with a lot of people who work in the IT sector. It seems that these people are drawn towards a trend following style approach. Why is this?

Well, given their programming background, they can easily relate to a logic-based, codified approach, with hard and fast rules. In other words, it suits their personality and skill set given their work. They can also use their existing skills to help program or 'automate' their approach if desired.

I don't know, but I suspect that people who are more 'creative', such as artists or musicians, may struggle to adopt a similar approach - their creative mindset will not take kindly to following such a regimented approach.

With the guys I have mentored or given training to, nearly everyone has modified my own approach to suit their own personality or beliefs. Some traders have moved to a shorter timeframe, others to a longer one. But the overall concepts, together with developing strong risk and emotional control (which are universal to ALL types of trading), remain the same.

Once all the basic concepts and rules 'fit' the trader, then it becomes far easier to follow those rules, thereby increasing your trading efficiency.

There is also one other factor to consider in all of this - your home/work balance.

How you decide to approach trading needs to factor in any existing work or family commitments. You would be surprised how many people starting out in trading do not consider this sufficiently. For example, I've met people who want to day trade but have a full-time job.

What about your home life? What's more important to you - spending time with your kids or sitting in front of the PC waiting for a trading opportunity? How you structure your work and family commitments can play a major part in you achieving success or failure. Having an understanding and supportive spouse or partner is so important in this context.
The other day I retweeted this post from Yvan Byeajee, who talked about the importance of having some 'down time' away from the markets, and not becoming too obsessed with the markets.

Now, while you unquestionably have to be passionate about your trading, it is my own belief that it shouldn't be a 24/7 occupation. Having said that, I have spent plenty of sleeping hours thinking about my own trading! You do need to have some time to 'smell the flowers'.

"You're only here for a short visit. Don't hurry, don't worry. And be sure to smell the flowers along the way." - Walter Hagen

As it happened, the day after tweeting that link I caught up with a fellow trader who I used to mentor. Towards the end of last year he joined up with a prop trading firm in London for a some intensive training via their internship program.

As with most prop firms, the style of trading was of a short-term, intra-day basis.

Now, before I met him he had struggled unsuccessfully to be profitable trading forex on an intra-day basis, and I think there was a part of him which wanted to go back into that arena, armed with what he has learned over the last few years, to see if he could now become profitable.

Well, he was able to generate profits, but decided at the end of the second month to quit the program. I was a bit surprised, but he went onto explain the adverse effects it had on his life. If you are married to your PC and the screen all week, every week, it can quickly wear you down mentally. In particular, he struggled to concentrate looking at charts for hours at a time. He struggled to sleep. When it got to the weekend, he was hoping to unwind and rest, but his mind was constantly racing.

Dealing with this work/life balance is what my friend found out as being more important in the bigger scheme of things. There are obviously lots of people out there who can make money day trading, but he found that it didn't suit him, when looking at his own bigger picture. He compared what he just gone through with how he traded his own swing trading and trend following approaches, and concluded he would be more comfortable and compatible going back to what he knew worked for him.

When trading in his usual manner, he had less stress attached to what he was doing. He had more time to study and plan his trading. He was better able to follow his rules. He was able to sleep better. Which meant he was able to enjoy life, and spend more quality time with friends and family. His work/life balance was better. And when you are happy in other aspects of your life, your trading will generally improve, too.

As I've mentioned before, I think more traders would benefit from using an profitable approach that they could follow with few mistakes, than trading a different style or timeframe which may potentially offer bigger returns, but which he was less suited to.

My friend came to the conclusion that, even though he could make money trading intra-day, his own emotional make up and personality is far better suited to swing trading or trend following. So the last couple of months gave him conclusive proof that, while there may be many different ways to make money in the markets, there was clearly a way that is suitable for him - and others which weren't. And that may well apply to you too.

He is happy that the past couple of months have confirmed to him which is the best approach for him. He now knows 100% what style of trading suits his personality, psychology, beliefs and (most importantly) his life. And his trading over last couple of years have shown him that he can follow the rules and make money using those approaches, with few mistakes.

And THAT is your holy grail.


  1. Hi Steve,

    another very good article from you. From my experience I fully agree with what you describe as the "holy grail" in trading. Keep up the good work!

    Regards from Germany

  2. Great Article Steve!

    Rings loud especially when you've spent a long time trying to find your Trading Self. Very hard to understand for those beginning the journey as they just started their quest for the Holy Grail ... if they are able to stay in the game, they will eventually learn what you have written so eloquently about. If they have sustained passion and perseverance, in time their Trader's Backpack will have all the items needed to make their journey "Long and Prosperous."

    Sincerely from Southern California

    1. Thank you for your kind words Raven - greatly appreciated! Hopefully some trading 'newbies' will read this and be able to find their 'Trading Self'