Trader’s Narrative

Take it from the person who won the United States Trading Championship with profits of more than 440% in 1984 – there are five things that every successful trader needs to know how to do:

1. Have a method to trade.
2. Have the discipline to follow your method.
3. Get real trading experience, instead of only trading on paper.
4. Have the mental fortitude to accept the fact that losses are part of the game.
5. Have the mental fortitude to accept huge gains.

Bonus tip: Find a mentor.

That trader who won the championship in a record-breaking fashion is Robert Prechter, the founder and president of Elliott Wave International. Once you think you’ve mastered his 5 tips for how to trade successfully, then the best thing to do is to find a mentor. In this excerpt from the book, Prechter’s Perspective, Bob Prechter discusses how sitting at the elbow of a professional trader can make all the difference in learning the trade of trading.

Free 47-page eBook: How to Spot Trading Opportunities
Elliott Wave International has released part one of their hugely popular How to Spot Trading Opportunities eBook for free. The eBook sells as a two-part set for $129. You can now download part 1 for free. Learn more here.

(The following Q&A is excerpted from Prechter’s Perspective, revised 2004.)

Question: Has any specific trading experience decreased your trading success?
Bob Prechter: Yes. My first trade in 1973 was wildly successful, and I was hardly wrong in my first six years at it. Then I had a big trading loss in 1979, and that taught me more than the wins. The best way to develop an optimal state of mind for trading is to fail a few times first and understand why it happened. When you start, you’re better off speculating with small amounts of real money. Using larger amounts of money will bankrupt you early, which, while an excellent lesson, is rather painful. If you want to be a trader, it is good to start young. Then when you lose your first two bundles, you can gain some wisdom and rebound.

Q.: It sounds painful. Is there any way at least to reduce the hard knocks?
Bob Prechter: There is one shortcut to obtaining experience, and that is to find a mentor.

Q.: Did you have a mentor?
Bob Prechter: In 1979, I sat with a professional trader for about a year. The most important thing he taught me was to keep trades small relative to your capital. It reduces the emotional factor.

Q.: How would one select a mentor?
Bob Prechter: The best way to select one is to find a person who is doing exactly what you would like to do for a living, then get to know him well enough to ask if he will tutor you or at least let you watch while he works. Locate someone who has proved himself over the years to be a successful trader or investor, and go visit him. Listen to him. Sit down with him, if possible, for six months. Watch what he does. More important, watch what he doesn’t do. Finding a guy who knows what he is doing is the best lesson you could ever have. You will undoubtedly find that he is very friendly as well, since his runaway ego of yesteryear, which undoubtedly got him involved in the markets in the first place, has long since been humbled, matured by the experience of trading. He will usually welcome the opportunity to tell you what he knows.

Free 47-page eBook: How to Spot Trading Opportunities
Elliott Wave International has released part one of their hugely popular How to Spot Trading Opportunities eBook for free. The eBook sells as a two-part set for $129. You can now download part 1 for free. Learn more here.

A few weeks ago I did an interview with Scott Beck of the Trader’s Business Plan website. We also did a giveaway of epic proportions:

• a free trading psychological profile
• a one-year subscription to the site
• trading plan development program

After a random draw, we have our winner! I’ve contacted the lucky person and soon they will be enjoying their prize package. But that’s not all, I’ve got great news not just for the winner, but also for everyone else.

The Trader’s Business Plan has decided to offer their subscription services for FREE. That’s right, the site is now open for use by everyone. Take advantage of this to register an account and start using their templates and guidance to write your trading plan and get started on the right foot.

Scott is also doing FREE one hour trading plan development webinars. The next one is for Tomorrow 9pm. And then on June 10th and June 17th. They are also completely FREE but you have to register ahead of time. Go to his site to learn more about them and how to sign up. Honestly, if you’re starting out, or even just new to trading and want to reboot properly, take this amazing opportunity. Failing to plan is planning to fail.

You can also get extra help by doing a psychology profile test to discover more about yourself. As well as the Trading Plan Development Program which includes online videos and manuals which you can revisit again and again. Scott is also available for one-on-one mentoring over a 12 week program.

If you missed the interview, check out How to Write a Trading Business Plan. There’s a lot of great information there for people starting out.

Readers contact me with a lot of questions and although I try my best, I can’t answer all of them. But some questions get asked over and over again. One of these is how do I get started in trading? or for some with a little bit more familiarity with the topic, how should I start a trading business plan?

Since this is an pivotal question for many of you, rather than try to give an email reply which wouldn’t do the topic justice, I recently sat down with Scott Beck of the Trader’s Business Plan to discuss the how and why of writing a business plan for trading.

Stick around because at the end of the interview we’re doing an unbelievable giveaway worth $1097 to a lucky reader.

I’ve done many giveaways on Trader’s Narrative, from trading books to membership at resource sites that I recommend.

But this is the largest prize I’ve given away yet. So if you want to start on the right foot and even if you’ve already started trading without a plan, this is the opportunity to get a $1097 package for free. Make sure you read how to enter the draw at the bottom of the interview.

Here’s the interview with Scott Beck of theTradingBusinessPlan.com:

Hi Scott, please introduce yourself by giving us a little information on your background.
My background in trading began in the year 2000 when I joined Fidelity Investments working in their trading department. I spent a year and a half there, and then a year with Wells Fargo in their discount brokerage unit before being recruited by Investools to work as a trading “coach” in the summer of 2003. I had been trading my own account up until that point, but with somewhat mixed results. It was during my time at Investools that I was really able to define my trading philosophy and develop my strategies and trading plan. Starting in the fall of 2004 until I left the company in August of 2008 my role in the company was to instruct 3- and 4-day “boot camp” style trading classes. Each week I would teach 20 - 25 new students one of three classes: Basic trading strategies, Advanced Technical Analysis, and Advanced Options strategies.

One of my responsibilities was to develop most of the trading psychology and risk management content for these classes, as well as for most of the company’s online curriculum. All told over the period of four years I would estimate that I taught close to 4,000 aspiring traders.

What is your personal take on the market? how do you approach trading?
I consider myself a market technician, and rely mainly on price action and volume to make trading decisions. I mainly trade options in my personal account. Long calls and puts for short-term moves when the implied volatility is low, spread trades for most everything else.

Why do you think is the key to success in trading?
I believe the secret to trading has nothing to do with signals or entry points or exit points, and everything to do with managing risk, completely understanding your trading strategies and philosophy, and being as organized and prepared as possible. I have seen people spend up to $40,000 for a trading education, and still walk away without a sense of who they are as a trader, what their trading style is, or how to effectively and consistently execute the strategies they have been taught. I believe that trading should be perceived as a business. That is the entire analogy of my website. If you start a business, you should have a business plan in place. If you are a trader, even a beginning trader, you should have a trading business plan in place. With a trading business plan, you can improve every aspect of your trading. Without one, you are a hobby trader and should expect to lose money. To me, it’s just that simple.

You mentioned you’ve taught close to 4000 students. That’s a lot of students! What insights did you learn from interacting with so many aspiring traders? Was there a key characteristic that they shared? what differentiated the successful ones from the others?
I am very lucky for the opportunity I had to teach those students in the format that I did. The company I worked for has since switched to a primarily one-to-many delivery format using webinars, which has significantly lessened the amount of personal, one-on-one interaction. It was a “perfect storm” so to speak, for someone to have the opportunity to analyze the trading education process in that environment the way I did. What I learned was that your professional background or education level had much less to do with your probability of success than your mindset.

Hence my focus on trading psychology and trying to understand the various biases and different perspectives that traders have regarding the market, and realizing what impact they can have on trading. If you have an open mind, are willing to work hard and educate yourself with the right trading principles, and you can develop and execute your trading plan with discipline and consistency, you have what it takes to be a profitable trader. I also saw a very strong correlation between organization and success.

Those traders who took good notes and kept good trading logs, were able to see and understand their trading with much more clarity than those who didn’t. As you can probably tell, most of the things that I realized help make traders successful, I have tried to incorporate into my website.

Of course, a trading plan and a trading business plan are two different things. The first tells you what you will trade and when. The latter is about how you will execute the trading plan as a business. I just want us to remind everyone that there are no short cuts. As I wrote in the Definitive Guide to Trading Mastery, you need to put in the hours. But a trading business plan can steepen the learning curve by providing you with the adequate framework. It can also protect you by mitigating the risk of blowing up your account.
I like your comment about the difference between a trading plan (entries, exits, etc.) and a trading business plan. The nice thing about my site is it allows you to define both. Users can enter all of their trading rules according to the different ’systems’ they trade, and can then go back and individually analyze each system to see how well it is performing and identify how it can be improved. The other point I try to emphasize is that all traders need a business plan whether they are actually structured as a business or not. My belief is that if you trade at all, you need to treat it like it’s your business or else it is your hobby, and hobby traders lose money. I think one of the biggest reason most retail traders lose money trading is they don’t approach trading with the right mindset. You were spot on with your comment from your Definitive Guide to Trading Mastery about needing to put the hours in, and developing a strong trading business plan is no exception.

Yes, that’s the thing that strikes me the most, if someone wants to start any sort of business, even a franchise, they would sit down and draw up a business plan. But when it comes to trading, very few people do that. Where do you suggest new traders start in thinking about developing their business plan?
As for trading as a business, I think the best place to start developing your “trading business plan” is to address your motivations. That is the starting point on the trading plan template that is in place on the website. Before you really begin trading I think it is very important to answer the question “Why?”. Why are you trading? The obvious answer that most people give is “To make money.” I’m a big believer in keeping things simple, but never over simplifying. That answer to me is a case of over simplifying. It as an example of weak motivation, and here’s why: If your motivation in trading is simply to “make money”, then what happens when you hit a rough patch for a month or two or even longer and you aren’t making any? If your motivation is making money, and you aren’t making any, then apparently you have just lost your motivation. You and I both know that those rough patches will always be a part of trading, so we need to account for them by developing a stronger answer for the question “Why?”.

The people I used to teach paid anywhere from $25,000 to $40,000 for their trading educations. When I would ask why they were willing to pay so much, the response would be usually be something along the lines of ‘Because I believed trading could change my life.‘ But when I asked why they were trading, they still said ‘To make money.‘ My job as I saw at the time was to steer them back to their original motivation for enrolling in the first place: Because if they are successful at trading, it can change their lives. Now that is a powerful motivation. How it could change their lives depended on the person. Maybe they could retire earlier, or travel more, or pay for kids or grandkids education, or do more charitable work.

Those types of motivations are strong enough that when trading gets hard and you start to think to yourself “Why am I doing this?”, you are able to provide an answer that makes sense and helps you keep trading until you are able to get your results back on track. If your motivation is to make money, then the second you start losing it you are likely to quit. So I think the best place to start with your trading business, is to determine why you are starting it in the first place.

One of the ways you help people is through a series of questions that creates a psychological profile. Could you explain a little about how you devised this test, what it measures and how the results can help a trader?
I originally recognized the importance of trading psychology about five years ago when I first started working in the trading education industry. And I mostly realized its importance based on the effect my psychology was having on my personal trading. So at that time I began studying anything and everything I could get my hands on regarding the subject (which wasn’t much at the time - but the information seems to be much more readily available now). I did a lot of research on behavioral finance (which really is the root of all trading psychology) and some of its derivatives like prospect theory and disposition effect. Once I had the opportunity to start teaching weekly classes with new traders each week, I was able to see the impact of different perceptions, biases, and emotions could have on traders, and what mistakes they often lead too. I was able to recognize specific patterns and thought processes that correlated with successful and not-so-successful behaviors.

After I resigned as a trading instructor, I organized and developed these observations and thoughts and developed them into the trading psychology test and profile. As for how it will help traders, the first thing it will do is open their eyes to lot of trading psychology concepts that they probably didn’t even realize exist. It will increase their awareness of what some common psychological factors are, how they can impact their trading, and how they can be improved. It will also provide an objective, in-depth look regarding how likely each of the factors tested for may impact their individual trading. And probably most importantly, it will help move the concept of trading psychology to the forefront of their trading thought process, rather than an after-thought as is too often the case.

Thanks for your time Scott.
Thank you.

Here’s information on the $1097 raffle from the Trader’s Business Plan and how to win it:

• a free trading psychological profile
• a one-year subscription to the site
• trading plan development program

How to Enter the Trading Business Plan Giveaway (worth $1097)

I’ve structured the giveaway so that even if you don’t win the grandprize, you still don’t walk away empty handed - instead you’ll get to watch 4 free videos from INO tv:

So for the lucky reader that wins the raffle, they get a package worth more than a $1000 US to develop a trading business plan. And even if you don’t, you still win by learning something new from INO TV. Here are the steps to enter:

1. Please enter the draw if this is something you are interested in and will benefit from. Feel free to pass it on and tell your trading friends about it if it isn’t exactly your cup of tea.
2. Sign up for INO’s FREE four trading videos (triple check to make sure the email you use to sign up is correct)
3. Come back here and drop a comment below letting me know you’ve done the above and entered the draw (double check the email you use).

It’s that simple. At the end of the month we’ll draw a random name from those that have followed the above steps and contact him/her to award them their prize!

New to INO TV?
The list of INO’s featured experts reads like a who’s who: Linda Raschke, Tom DeMark, Larry Williams, Mark Cook, Gerald Appel and many others. These are categorized in different sections like Beginners, Forex, Futures, Day Trading, etc. The site also has many video tutorials covering different topics like how to set up your money management rules, your daily routine, trading rules and goals, etc.

Watching INO TV is like attending trading seminars, just without all the expenses and stale coffee. A full one year unlimited access is $99.95 which comes to $0.25 a day. When you think about how much people usually spend on these materials, books and seminars you realize what an amazing deal that is.

Here’s an interesting 3 minute video from TED by Richard St. John on what leads to success:

Here’s the cheatsheet:

Serve
Passion
Work
Focus
Persist
Ideas
Good
Push

Sounds good right?

No.

This is the “what”. Most people know the “what”. Most people know that passion is an important ingredient in a successful and meaningful life. That you have to persevere through setbacks, that you need to focus, etc. This is the sort of advice we have all at one point given to friends and family.

Exploring the “what” isn’t really helpful. What would really be helpful is the “how”.

That is, how do you go about finding and stoking your passion? how do you find meaning in life? how do you persevere through setbacks and rejections?

The “how” is where its at.

Don’t waste time with the “what” or the “why”… search for and develop “how” in your life and you’ll be ahead.

Check out this other video from TED: Tony Robbins, Decisions Make Destiny as well as all the other videos spanning all sorts of fields and disciplines.

It might seem comical to suggest that you can have fear of success but such a thing is not only possible, it is rather effective at stopping many from reaching their goals. We, human beings, are a complex muddle of motivations, fears and values. And yes, sometimes we act in a seemingly paradoxical way because for the most part we are driven by subconscious motives that even we ourselves seldom understand consciously.

The purpose of this audio recording is to reduce the fear and anxiety that may accompany thoughts of financial success. It is only a few minutes long and your conscious mind will only hear a light instrumental track.

Play Audio:

Source: Money for the Little Guy.