Why You Need To Understand Your Trading Paradigm
Most retail journeys are similar. Interest in the market begins, we then get sold on some guaranteed method, get stressed at it not working, move on, realise we’re dazed and confused and then either give up or hop onto whatever the new shiny method is and repeat until either broke or entirely deflated. There is of course, another way. A way that is much more logical, smoother and easier to follow. The problem? It runs counter to our natural behaviour, calls for discipline and the ability to tune out the noise.
what follows isn’t something I can say I figured out myself, it’s the coming together of ideas and perspectives of wise people that now, after many failures, make sense to me. I’ve come to believe that if we are to make progress trading we need to build from the ground up a robust understanding of markets and a construct that is the basis for our future actions in those markets. Like anything in life, we need a Paradigm.
Obviously, the objective is to try and shorten the time between starting out and finding a trading model we are comfortable using as much as we possibly can. If I were starting out again I’d do things completely differently. I wouldn’t buy books on technical analysis or trading methodologies, I wouldn’t worry about how many screens I needed or even which timeframe I should be trading. What I would do is read about market mechanics, auction theory and anything I could about those who’ve had successful careers trading. In essence, I’d formulate ideas on the bigger picture, not just obsess about trade entry.
Figuring out that the markets (that all markets) are a representation of human interaction is the single biggest lightbulb moment I’ve had so far. For me, it just happened to be Order Flow that brought that particular message home. It’s pieces of information like this that are the building blocks of what ends up being what I like to think of as our trading paradigm, our holistic view of markets and trading.
First comes the mental model of the markets, then comes the method we chose to trade them. Once we have this, I believe we have a strong foundation on which to work with, and with the help of those who think along the same lines, we can put one step forward on the road to achieving our goals.
As I said earlier, trading is a representation of human behaviour. It’s a fairly open book, and what you bring to trading psychologically will have a huge impact on how your journey plays out. For me, I brought some baggage and limiting beliefs. In return, unsurprisingly trading played on those beliefs. When I started my preconceptions were that only highly intelligent people could be successful at trading. People from a specific background. Alpha Individuals. I wasn’t one, so I built my trading experiences on a blanket of under confidence and low self worth. Whenever I stumbled, took a knock or had a loosing trade, you guessed it, it confirmed these hang ups and I failed to learn from my mistakes.
This got pretty tiring. So tiring in fact that I had to think long and hard about why I wanted to be a trader, what it was I wanted out of it and ultimately if I it was something I still wanted to pursue. This is where community helped. I reached out to a few sources and re-listened to some opinions on markets that I valued. The result? An affirmed belief that markets themselves had nothing to do with how I felt.
Markets don’t care about who I am or what makes me tick, they don’t wake up in the morning deliberately trying to hurt or help me, they are just markets. Often times, we need to step away from ourselves in order to see the wood for the trees.
I’m just a trader trying to make it work, I’m no quant, I’m not even making money. That said, I’ve enough experience in the markets to now understand that trading comes down (I think) to perhaps four key areas.
METHOD & RISK
CAPITAL & THE LAW OF LARGE NUMBERS
This is how I chose to view things, based on the opinions I trust and the experiences I’ve had. The overall most important thing however, is we build our model of the markets on an individual basis. The hardest thing to do in a world where everyone has the best way of doing things, a world where there is always a more recent, better approach, is to build a model of our own.
For many years I viewed trading through charts, just like most people starting out. It wasn’t until I started looking at what makes markets move on a granular level that I realised I never even knew how price moved. I looked at a chart and extracted information based on what lines were doing what. It left me confused, totally confused. After I went away and spent time learning about the theory of auctions, the real difference between market and limit orders and the concepts of liquidity, did I start to piece together what drives a market to move.
It wasn’t until I realised that human emotion and decision making are fundamentally what dictates where significant price action is likely to occur, and ultimately come to the conclusion that the longer term direction of the market is something that for me at least, isn’t something I wanted to try and predict.
Humans have objectives, they meet at a market to trade to meet these objectives and the resulting interactions between the variety of participants causes them to have emotions based on these objectives. How these humans then act on these emotions are what drives the markets. These objectives at constantly changing, in turn so are these emotions and so it goes on, making price extremely hard to predict, at least outside of the very short term.
This is what I mean by building a paradigm of how we view markets. This is just mine, I think we should all build our own. I’m not a theorist or a psychologist, I’m not even a successful trader. Many will tell me that I’ve got it all wrong but for me having this foundation in place has given clarity like never before. Build your paradigm.
Method and Risk
I’ve tried a lot of methods. For a long time I’d bounce between the newest thing in my trade group, convinced it had merit. Convinced that starting on a new method could absolve me from the feeling of being bogged down by a lack of progress and propel me towards eventual success. I don’t think method is important. Of course, it needs to not be based on idiocy and have some sense to it, but it certainly doesn’t seem to have anywhere near the level of impact on eventual success as is sold to retail traders.
In my eyes, a method just needs to have a few objectives. It needs to be simple, have the ability to be executed repeatedly and have sufficiently robust risk parameters attached to it in order for it to be able to be implemented in the market enough times to have a decent number of trade instances for subsequent analysis. Method and Risk are models that need to be built in tandem, they are in my view, not exclusive.
Capital and The Law Of Large Numbers
This is a lesson I learned the hard way. I ran my account down from $1100 to $500. I fell below capital requirements for day trading and subsequently stopped trading. If your account isn’t big enough to place enough trades to figure out if you’re doing something right or wrong, you end up where I was — drifting through the waters of trading with a knackered engine, utterly confused as to how fix it.
When I ran my account down I did three things. Firstly I wrote about it here, secondly I took a break from trading to concentrate on other things and latterly, I reached out for some advice. Of all those things reaching out was most beneficial. Firstly, it confirmed my thinking that I was giving myself too much of a hard time about running the account down. It wasn’t the money, that was largely to be expected. It was that by bringing my baggage to the table I’d allowed the success of this small account to become a metaphor for how I viewed my own sense of worth in the world. Stupid I know, but true.
Finding this out meant I could step away from it. I could ask myself objectively why I wanted to be a trader, if I believed I could do it, and if I wanted to allow past events in other areas hinder my progress by tainting how I viewed myself in the world. It allowed me to give myself a break, accept I’m human and move on objectively.
So on reflection what have I learned? I’ve learned that you need a big enough account and enough capital to be able to place enough trades to get some decent data on how you are doing. That data is what will help decipher what your strengths and weaknesses are the capitalisation is what will allow you to exposure your account to the markets for long enough, to allow probability to play it’s part and your risk parameters to bring out the best in your method.
I’m certainly no mathematician and these ideas aren’t my own but they have helped me realise that the 35 or so live trades I was able to place in my account before I hit intraday day trading minimums, probably wasn’t enough to identify if I was making progress or not. I think If I’d had a bigger account that allowed for even 50 or so trades, I’d have enough data to see if my risk model was being adhered to, if my executions were in line with the behaviour I was trying to identify in the market, and if ultimately I was making progress.
When you’re sweating about every tick, it’s hard to be objective about your actions in the market, and objectivity (within the bounds of normal human behaviour) is pretty essential. Be big enough so that you can trade enough to see if anything you are doing is working enough to be making progress.
Trading is a lonely endeavour. Unless you’re fortunate enough to be working on a trading desk, prop firm or other financial institution the retail trader at least starts out alone. As we walk the road towards whatever our trading goals might be, it is often the thoughts, feelings and skewed experiences of trading that can throw the biggest obstacles in our path.
At some point down the line most of us reach out for some sort of community, we’d be silly not to. However it’s very hard to know what is good advice, it’s hard to know the difference between what we think what can help us and what might feel like being helpful advice, but despite the warm and fuzzy feeling is in actual fact a bum steer simply leading us down the garden path.
I myself have been a member of a number of skype groups, trade rooms and educational courses. Truth be told, I’ve taken something positive away from each of them, but most have led me to become overwhelmed with conflicting trade strategies and eventually confused by conflicting advice and transitory stories of success.
Community is important. It’s much more important that I ever gave it credit for. I learned this through parenting. We live and work a long way from any family, like a lot of people, we tackle life’s issues largely on our own. Like any parents we find a way around these problems, overcoming what seems like major issues only to look back and see them as progress and instances of for growth. We look back and think how much easier these things would have been to tackle if we only had just a little bit of guidance.
Trading is exactly the same. Looking back at the years I’ve been trying to make progress in the markets I firmly believe that community is much higher up the priorities list than we perhaps give it credit for. That’s easy to say though. What is hard is finding the right community for you.
This I think is just part and parcel of the trading journey. I went from Forex to Spread Betting to a mixed trading room before I found Order Flow and the US Treasuries. I like where I am now, for a number of reasons, but it took a while to find something I wanted to sit down and work at, something that I understood and something that I felt worked with my psychology. When you get to the stage where you have some idea of where you want to head, how you understand the markets and your method of choice to trade them, that’s when you need to reach out and find a group of people who can help bring you on.
Getting Out Of Your Own Head
Today, there is far, far too much information available to the retail trader. This is true of trading as anywhere else in life. It is extremely easy to spend too much time reading conflicting information and get lost in the merry go around of our own thoughts. I’ve been there countless times, re-watching learning material in the hope I’ll have more aha moments, jotting down more notes in the hopes it’ll make something stick, all the time avoiding the things I really need to do, avoiding the things that are hardest of all to accept, and the most difficult to implement. There is no golden chalice.
Recently, I watched a webinar and it felt like the host was speaking directly to me, he was describing me down to the nth degree, and I realised I was no different to anyone else. I was not special in anyway in my pursuit of trading. I was just another info junkie hiding from the work I knew I had to do, and the reality of trading.
I can’t tell you how many times I’ve rattled around inside my own head evaluating my ability, the extent of my potential and even my eligibility with regard to trading. I can’t convey how much time I’ve spent whilst doing other things thinking about superfluous to do lists for trading. Because so much of my journey has been on the side-lines, not actually trading, I was wasting time, working fruitlessly at fringe areas of trading so that I could rest easy I was “getting serious” about this endeavour. Looking back it was pointless.
Of course, we need to spend time analysing our interactions with the market and our progress. We do not, need to obsess about trading endlessly trying to figure out things we can’t change or simply don’t need to know.
Usually, these thought processes end up with me having some new plan of action, a new schedule of work that proves I’m doing what I need to do in order to get ahead, to be defined as a trader. What I’m actually doing is a bunch of futile work that makes me think I’m putting in the required effort, but ultimately does me no good. In order to be a trader, you need to trade.
What I need to be doing is trading, that’s how you make progress. You need to be executing, exiting and spending time watching the market’s behaviour, that’s where real learning comes. After that, you can do whatever analysis is required. What is not required is learning a new system, jumping on the new hot thing and lulling ourselves into the idea that if we are learning, we are growing. Sometimes, an addiction to learning (something a lot of traders suffer) is one of the biggest things that stands in our way. As someone once told me:
“There comes a point where you know enough, now you need to trade”
Tying It All Together — Clarity For The Future
As I wrote in my article about my life without trading, I’ve felt the pull back to trading strongly since closing out my account. This isn’t the first time I’ve been here though. The children’s author Dr Seuss would call this the waiting room. A place where it is easy to get trapped. A room who’s décor I know well. In the years since trading first came into my life I’ve spent many a month, sometimes year here.
This is where aspiring traders can go mad. Trapped in a place without the ability to trade the markets, but with endless time and internet access to do all the learning our hearts desire. The difference now is that I’m not staying, just passing through.
Currently I’m working hard on getting things in order to build an account and garner my return to trading. In truth, it’s hard to resist the temptation to start again with something completely new, after all, I’ve no guarantee I’m on the right path. It would be easy to once again just learn what someone else has figured out, reinvigorate the trading juices with the excitement of a new promised methodology.
I know now though, that would be a mistake. This time I’m on a different path. I’m building my own models, working on my own paradigm and reaching out to those with similar beliefs to bounce me back on track when I stumble.
Finding your own path is daunting. Believing you’re even worthy of it for me, is sometimes hard. I now believe however that walking my own road with the help of some emotional objectivity and a dose of old fashioned community down the line is the best hope I personally have to reaching my destination of choice.
If I were to offer advice for anyone starting out in trading it would be this. Walk your own path, reach out to others along the way and treat the markets for what they are, don’t take them personally, if you do I promise they’ll bounce back on you whatever demons you subconsciously project their way.