I was reflecting on a conversation from one of my recent Enlightened Stock Trading Certification Program coaching sessions and this message really came home to me. I really felt like it is just so important for you to understand, so I made this quick (super casual) video just to share the idea with you. Have a quick watch and let me know what you think by commenting below the video.
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I think one of the big reasons why people fail at this game, the trading game, is that they do things or they assume that the things that are obvious, the things that just makes sense intuitively are the things that are going to work and make you money in the market.
I think the trouble with that is if everyone is assuming that something is going to work, then it’s no longer going to work. Maybe it did once upon a time but what happens is if everyone believes something to be true and everyone is doing it then the more people try and pile in and use that strategy, the less and less effective it becomes because more people are trying to get in and out of the same prices.
What happens is if everyone believes something works and everyone is actually doing it the edge goes away and all of a sudden it’s not profitable anymore. People who are doing what they assume works because it’s intuitively obvious start losing money.
What you really need to do is think about well what is it the people aren’t doing or what is the people can’t psychologically do in the trading environment? They’re the things where you can extract an edge, where you can actually make money.
Take for instance profit targets. Profit target’s a great one because who doesn’t want to make a profit, right? You see some books out there and lots of websites and courses and everything that talk about once you get to a certain level of profit you should take that off the table or at least take some of it off the table. Close the trade and move on. Find the next one. That’s great because what happens is you get a certain profit. Once you’re up a little bit, you grab that profit, you bank it and you move on. You find another trade.
It feels good to do that. Why does it feel good?
Well it feels good because you were right. You got to be right. You got to have a winner and having a winner in the markets makes you feel like a champion. It makes you feel like you’ve outsmarted the market like you know how to trade and all of these things. The trouble is you’ve missed out on something.
When you take that profit off the table, you miss out on the opportunity for an even greater profit and that’s what kills your overall profitability. Maybe you made money on that one trade, but what about the money that you left on the table? See the less intuitively obvious thing to do is to not grab that certain profit. It’s to let it go. Let it run. Let it build and grow even more over time because if you’re able to do that instead of getting that certain 10 or 20% profit. Every now and then you can get a 10 times, 20 times, 50 times return on your initial investment from one of your trades.
If you can grab that sort of profit. That’s like a five-bagger or a 10-bagger or a 50-bagger then that totally changes the game but doing the obvious thing like using a profit target and taking a small profit off the table will never ever allow you to capture those huge, multi-bagger profits that can really change the game for you. My first 20-bagger really just changed the whole trading game for me because what happened is all of a sudden instead of trading 30, $40,000 all of a sudden I was trading a couple of hundred thousand dollars as a result of one trade.
Some people might say, “Well that’s luck, right? Because you know you took all these trades and just happened to come across that one trade that return those huge return.” It’s actually not luck because what it is, it’s something different. It’s having a repeatable approach and putting yourself into the market in a measured, cautious and strategic way or systematic way to allow you to take advantage of those opportunities when then come along.
Having a set of rules that guide when to get in, when to get out of the market and putting yourself into the market many, many times with a very small risk age time is something that’s going to allow you to capture some of those really big profits. Doing that obvious thing of setting a profit objective and taking that money out of the market, that’s really not going to allow you to capture those super profits. I think that’s one of the prime examples of why people fail because they assume in trading that what’s obvious, what intuitively makes sense is going to make them money. It’s just not so.
It’s one of the reasons why when I’m trading for myself and when I’m teaching other traders, I teach them how to build their own stock trading system. I’ll teach you how to build your own trading system too if you wanted to. What it allows you to do is take those intuitively obvious ideas, the thing that everyone talks about in the markets and test them and make sure they actually work. The amazing thing is when you know how to test an idea, when we know how to put together a system and evaluate it on past data and all different markets, and pressure test it, optimize it, all those things, when you know how to develop a system properly and test a system concept properly, you discover something really interesting…
You discover is that all of the intuitively obvious things like I said earlier just don’t work or if they do they work so poorly in comparison to some other things. Other concepts which are much more psychologically challenging to do like letting your profits run, like having a trailing stop exit instead of a profit target like taking less trades but allowing them time to grow instead of trading frequently like you’re running on a hamster wheel.
When you know how to develop your own trading system you can test all of these concepts and all of a sudden you don’t have to take anything like that on blind faith anymore. I think if more people knew how to build and test their own trading systems, or to test other people ideas. If you’re reading a trading book, you know a certain signal or certain rule or indicator or whatever, you can’t just take that on blind faith because maybe it worked for the author once upon a time or maybe it works on this one particular niche in the market but you are different. You might be trading a different market. The book might have been written five years ago.
You need to be able to test that concept and even again, even if that indicator, even if that idea seems intuitively obvious, and it’s probably not going to work or at least as well as you would assume.
You need to be able to test those ideas.
Anything that you think should work in the market, I encourage you just don’t take it on blind faith. You need to learn how to test and back test your trading system ideas or test other people’s ideas rigorously so they actually get that confidence that it works. Once you do that, nothing is taken on blind faith. Most of the actions that you are or most of the signals you were taking in the past you realize they just don’t work. You can start to narrow in and find a set of rules that really work for you and allow you to make money out of the market consistently.
When I learned to take, to build systems and to test ideas and everything in the stock market things changed dramatically for me. As soon as I went systematic, as soon as I started following rules in my trading all of a sudden I traded less. I had less stress and I made way more money because I wasn’t making mistakes following these ideas that just don’t work.
If that sounds like something that’s interesting to you then just click the button below and answer a few simple questions. It’s going to give me a bit of an idea of where you are with your trading. Based on those questions, I’ll give you some feedback. You can schedule a session. We can have a chat about how you could proceed and improve your trading from here.
Again my key message for today is don’t just assume the obvious things will work. If it’s intuitive and if you think it makes sense it’s probably not going to work in the markets. You need to learn how to test and analyze all of those types of signals and ideas to make sure that they actually work in the market. If that sounds like something you’re interested in then click the button below, answer a few simple questions about your trading, and I’ll get back to you with some ideas about how you can improve and move forward from here.
That’s all for this video and I’ll see you on the next one.
Bye for now.