The reason why it can seem so hard to make money as a trader is best summed up by the following paradoxical statement by Ray Dalio in the book Hedge Fund Market Wizards:
In trading, you have to be both defensive and aggressive at the same time. If you are not aggressive you will not make money, and if you are not defensive you will not keep money.
It is trying to strike a balance between being aggressive enough to make money while being defensive enough to keep the money you’ve made that is the most basic problem a trader faces in the market. Today’s lesson will give you some tips on how to keep the two in balance so that you can not only improve your chances of making money in the market but, more importantly, not give that money back to the market.
The Great Paradox of Trading
How to be an aggressive trader but not too aggressive
As a trader, you face constant temptations to trade too much and to risk more than you’re comfortable with, all because there’s an idea in the back of your mind that you could “get rich quick.” It’s very hard to ignore such an enticing idea due to all the warm and fuzzy feelings it brings you and the images of being “rich” that it drums up in your mind.
In other words, it’s extremely easy to be too aggressive in the market. However, as you may well know by now, being too aggressive is a quick route to losing money and possibly blowing out your trading account. But you do need to be aggressive enough if you want to make money trading, so how do you find that middle ground between not being too aggressive and not being aggressive enough?
There’s no one answer that will easily solve this problem for you; rather, it’s a combination of realizations and abilities that you need to acquire and implement. Here’s a quick list of these realizations and abilities to help you find that aggression “sweet spot”:
Realize that you need to pick and choose your trade entries carefully. If you are not picky with your trade entries, you’ll end up over-trading, i.e., being too aggressive, and you’ll lose money as a result. You must first understand exactly what you’re looking for in the market (your trading strategy), and then commit to only trading when that strategy gives you a signal.
Realize that you cannot hesitate once you identify that your trading strategy is giving you a signal to trade. Hesitation and fear have no place in a successful trader’s mind. You need to know what you’re looking for, as I said above, and then act on the signal without hesitation once it arises. Realize that it’s better to trade less frequently but with a larger lot size when you do trade than to enter many smaller trades per month. Going in relatively “big” on two or three trades per month that exactly meet all your trading plan’s criteria is much more intelligent than constantly being in the market on a bunch of random trades that are basically just gambles.
What you need to do is be aggressive, but infrequently. If you’re too aggressive, either by trading too much (over-trading) or by risking too much, or the worst possible combination, risking too much and over-trading, you will lose money. The key lies in being aggressive only when your trading strategy is clearly telling you to trade. In other words, save your “bullets” for the easy or lucrative targets, and you’ll get the most bang for your buck. When I trade, I go in “big” relative to my account size, but because I only trade maybe 2 to 4 times a month, I am probably still risking less relative to my account size than a smaller trader who enters 20 or 40 trades per month, each with a small dollar risk per trade. All those little trades add up very quickly, and they can’t all be high-probability, good signals. So, the key is to wait patiently for the most obvious signals and then back yourself when they appear, i.e., don’t risk TOO MUCH that you can’t sleep, but don’t go in too light either.
How to be a defensive trader but not too defensive
On the flip side of the coin, you have to be defensive in trading but not too defensive. Traders very often give back their trading profits, usually all of them and more. This can be very frustrating and is a big reason why most people fail to make money over the long run in the market.
Again, finding the middle ground between being too defensive and not defensive enough is no easy task. But, the following tips should make it easier for you…
Withdraw some of your profits at the end of the month, if you had any. Doing this will not only make sure you can’t give them back to the market, but it will also serve to reinforce the fact that it’s your (real) money and not just numbers on your computer screen. This way, you will start to view profits as something more real, which should make you a bit more defensive about them.
Realize that you’re going to be the most emotional and thus most likely to give back profits right after a trade. Don’t jump right back into the market for no reason after your previous trade closes out. Monitor yourself after a trade, whether it’s a winner or a loser. Make sure you don’t jump back into the market on a “whim” and give back the profits you just made. Profits are not easy to make in the market, so protect them.
Realize that you don’t need to trade every day or even every week. Out of the market is frequently the best and most lucrative position. Strong trends are the easiest time to make money (like we are seeing now in many pairs, e.g., EURUSD, USDJPY, and other majors), but they don’t happen very often. Thus, if there’s not a strong trend underway, odds are you should be flat on the market unless your trading strategy has fired off a very obvious signal, like we discussed above.
Trading carries an inherent paradox – it looks easy on the surface, yet profitable trading remains enormously difficult to achieve for most. With rising access and technological advances, the lure of financial freedom through trading continues to attract new entrants every day. However, the brutal truth is that over 90% fail to generate consistent profits.
This leads to the great paradox of trading – if generating market-beating returns is so difficult, why do so many new traders rush in expecting to strike it rich?
In this comprehensive guide, we’ll examine the roots of the trading paradox and why embracing simplicity is the path to consistency. Let’s explore the real keys to trading success.
The Allure of Trading
It’s not hard to understand the magnetic appeal that draws new traders into the markets. Consider some of the main attractions:
- Easy Access – With retail brokers and mobile apps, getting started takes just minutes. No professional credentials required.
- Low Cost – Opening an account is free at many brokers. Commission-free trading has become the norm.
- Unlimited Upside – Massive gains can be captured from even small amounts of capital. No cap on potential profits.
- Work From Anywhere – Trading can be done remotely from a laptop or phone. No office or fixed hours needed.
- Be Your Own Boss – Traders have full autonomy and independence. You make the decisions and reap the rewards.
- Constant Action – Between stocks, Forex, options, and crypto – markets offer constant opportunities and excitement.
- Fast Results – Compared to long-term investing, trading provides instant feedback on your decisions.
With these perceived advantages, it’s easy to fall under the spell of making a living as a trader. The freedom and unlimited profit potential is an alluring prize. But reality proves much harsher.
The Difficult Path to Profitability
If trading success came so easily, everyone would be a market wizard. So why do over 90% of traders end up falling short?
Here are the stark realities of pursuing trading profits:
- Competitive Markets – Beating the market requires outsmarting ruthless competition hunting for any edge.
- Discipline Required – Patience and sticking to rules don’t come naturally. Greed and fear are constant threats.
- No Guarantees – Unlike a salary, nothing is assured. Some years may bring windfall gains, others big setbacks.
- Stress – From unpredictable swings to technical issues, trading delivers daily stress most careers don’t.
- Information Overload – Endless opinions and data must be filtered to what’s actually useful.
- Loneliness – Trading solo prevents turning to colleagues for guidance during tough times.
- Constant Learning – Markets evolve so traders must keep skills sharp through ongoing practice and study.
The business challenges of trading are far greater than newbies anticipate. Profitable traders develop an array of skills to overcome difficulties like these through extensive screen time.
This points to the great paradox – trading appears simple on the surface but achieving consistent success takes major commitment.
Why Simplicity is the Key
Faced with the market’s harsh realities, many new traders react by endlessly tweaking systems, indicators and methods in an effort to improve. More data sources are added. New tools are tested weekly. Strategies grow ever more complex.
However, this impulse often leads traders astray. The great paradox of trading reveals that simplicity is the surer path to consistency.
Albert Einstein crystalized it well: “Everything should be made as simple as possible, but not simpler.” Veteran traders understand this intuitively through experience.
Consider the advantages simplicity provides in trading:
- Clarity – With fewer elements at play, the market’s message rings out louder.
- Focus – Less clutter keeps concentration centered on the core strategy.
- Discipline – Simple setups are easier to stick to in the heat of trading.
- Skill Development – Mastery comes faster when practicing a compact set of techniques.
- Confidence – With basics mastered, it’s easier to trust your strategy and instincts.
- Flexibility – A streamlined approach adapts more nimbly to evolving markets.
Great traders aim to distill each aspect of their process down to the essentials. This applies to trading strategies, risk management, analysis techniques, and mental habits.
Trading legend Bruce Kovner summed it up in saying “I have no magic system or special formulas. It’s just a commonsense approach.” Wise words.
Streamlining Your Trading Approach
If embracing simplicity is key, how do you streamline your own trading method? Here are impactful areas to focus on:
1. Define Your Edge
Your trading edge represents your plan to exploit specific, repeated market inefficiencies for profit. Without a defined edge, you’re just gambling.
Analyze your historical trades to identify when you’ve made money consistently. Distill the exact market setups, conditions and actions taken that led to your best gains. Turn these insights into concise trading rules.
2. Master Chart Reading
All known information about a market is contained on its price chart. Effective chart reading lets you tap into the accumulated knowledge of fellow traders.
Learn to interpret candlesticks, support/resistance, trends, volume patterns and other raw price signals. Let the chart guide your decisions rather than cluttering your eyes with layers of indicators.
3. Trade a Single Market Extensively
Many traders hamper their progress by jumping across different markets. Stick with a single instrument like EUR/USD until you’ve fully mastered every nuance through hundreds of trades.
Develop such intimate knowledge of one market that you can trade it profitably in your sleep. Everything you learn will translate to other markets later.
4. Stick to Higher Timeframes
Lower timeframes seem attractive with their constant activity. But all those extra signals and noise make it harder to profit.
Focus on the daily or 4 hour charts. With fewer overall trades, your winners have more room to run and losers hurt less. Your mindset stays calmer.
5. Use Basic Price Action Setups
Endless complex strategies tempt traders, but most gains come from simple setups like breakouts, pullbacks and reversals. Burn them into your brain through practice.
Master reading price action context, instead of memorizing mechanical patterns. Understand why simple setups work over and over.
6. Take Responsibility For Your Actions
Success in trading starts with accepting full responsibility for all decisions and actions taken. If a trade loses – you own it.
Don’t play the blame game by cursing the market or your broker. Objectively examine what you could improve then focus forward.
7. Review Your Trading Journal Daily
Journaling brings clarity to your process. Review each day’s log every evening. Identify strengths to keep applying and areas needing work.
Just a few minutes of journal review keeps your trading continuously improving through a feedback loop.
Trading Mastery is a Lifelong Endeavor
The great paradox of trading reveals why striving for simplicity across the process is the surest path to consistency. But trading success remains a lifelong endeavor requiring grit and perseverance.
Cultivate daily habits to ingrain the principles above. Be comfortable with occasional failures and setbacks knowing they forge your skills and resilience.
Stick to the core basics of your edge. Incrementally improve through review and practice. Maintain focus by paring away distractions and complexity.
With this resilient mindset combined with a streamlined trading approach, you put the odds of success firmly in your favor. Your skills and account balance will grow steadily as you master the great paradox of trading.
Frequently Asked Questions
Why do most new traders fail?
Most new traders fail due to lack of skill, discipline, and realistic expectations. They underestimate the difficulty of beating the market.
Should I complicate or simplify my trading?
Strive to simplify your process over time by focusing on high-probability setups and removing distractions. Complexity often hurts more than helps.
What are benefits of simplicity in trading?
Simplicity promotes better focus, skill development, clarity, discipline, confidence and adaptability – all keys to trading success.
How long does it take to become a profitable trader?
Achieving consistent profits requires extensive screen time to gain experience reading price action. It can take 2-3 years for most new traders.
Is trading a good career option?
Trading can be rewarding but also challenging. Lack of guaranteed income and high failure rate make it unsuitable for many as a primary career. Significant dedication is required.
Should I jump around markets when starting out?
No, master one market (ex. EUR/USD) extensively before moving to others. Learn its unique personality inside and out.
What separates pro traders from amateurs?
Pros have defined edges, discipline to stick to them, sound risk management, and an obsession with continual improvement. Amateurs lack these traits.
How much money can I make day trading?
There is no limit to upside. But income stability takes time to achieve. First focus on consistency before sizing up. Many years of screening time and gradual account growth is typical.
How many hours per day should I trade and analyze charts?
Quality is more important than quantity. Even 2-3 hours of focused practice with journal review can be very effective when starting out.
Why is looking at charts enjoyable?
Watching charts engages our instinctual pattern recognition abilities. The visuals and constant motion also provide an enticing dose of excitement.
Should I use complex indicators or keep it simple?
Start with simple price action strategies like support, resistance, trends. Add indicators cautiously later if they align with your trading edge – less is often more.
Is it a good idea to automate my trading strategy?
Automation via robots or EAs is risky until you have mastered a strategy profitably through extensive manual practice. Develop trading skill before relying on black boxes.
How do part-time traders successfully trade around a regular job?
Schedule practice sessions consistently on evenings and weekends when markets are active. Dedication during non-work hours is essential.
What markets are best for beginners to trade?
Major Forex pairs like EUR/USD have high liquidity and smooth movement suitable for new traders. Stocks and crypto tend to be more volatile and risky.
The Path Starts Here
Trading carries paradoxes that confuse and overwhelm many new entrants. But by embracing the wisdom of simplicity, you put yourself firmly on the path to consistency.
Define your edge. Master chart reading. Stick to higher timeframes. Trade one market deeply. Take full responsibility. Review your journal daily. Live these principles to overcome the great paradox of trading.
With the proper skills and habits ingrained through extensive practice, you can achieve that elusive trading mastery. Success ultimately depends more on perseverance than intelligence. You decide if you have what it takes.
The opportunity for incredible freedom through trading awaits. Will you take the first step and start honing your edge today? The markets are waiting.
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