Learning technical analysis: mindset and expectations

[et_pb_section fb_built=”1″ admin_label=”section” _builder_version=”3.0.47″][et_pb_row admin_label=”row” _builder_version=”3.0.48″ background_size=”initial” background_position=”top_left” background_repeat=”repeat”][et_pb_column type=”4_4″ _builder_version=”3.0.47″ parallax=”off” parallax_method=”on”][et_pb_text admin_label=”Text” _builder_version=”3.0.74″ background_size=”initial” background_position=”top_left” background_repeat=”repeat”]

This is a continuation of the little mini-series on getting
started in technical analysis. Today I want to talk about the mindset and goals
of a successful trader. This is something I wished I had known much earlier
when I started trading.

Where we start

Most of us get started with the idea that we’re going to
find the secret key to the markets. Because we come from diverse backgrounds,
this might mean different things to different people, but some common threads

  • We might think we will find a pattern that shows
    us what is going to happen in the future. This pattern might be a shape on a
    chart, some secret ratio, or some combination of other factors.
  • We might think that we are going to find someone
    with good tips and ideas (recent examples: buy cannabis stocks and bitcoin) and
    ride their recommendations to profits.
  • We might think we are going to solve the
    fundamental puzzle and figure out some way to know what a company will really
    be worth in the future.
  • We might think that we are going to use heavy
    duty programming and machine learning to find some quantitative system that
    will pull consistent profits from the markets.

I’m guessing some variation of the above probably resonates
with each of my readers (unless, for instance, you were very lucky to come from
a family background where someone taught you how markets worked from a young

One other thing: we often expect it’s going to be pretty
fast and easy. We might be able to take a few thousand dollars and roll it into
enough trading profits we can retire in a few years and live on an island of
our choice, that we will buy.

…And then it gets hard

Nearly all of us come to the market with a dream like that,
but it’s quickly frustrated. We learn that our secret patterns aren’t as good
as we thought. (Good news lurks here: those secret patterns aren’t so important
after all.) We see that we keep making the same stupid mistakes and sabotaging
ourselves. (Another lesson here: we are one of the most important parts of our
own success. We’ll need to spend some time working on ourselves.) And we see
that we probably aren’t going to make a lot of money from a little money
quickly—that might happen, but we’ll also discover we lose more than we expect
quicker than we expect. (Alas, another set of lessons: risk management is
really important because it’s how we protect us from ourselves and from the
unexpected. On the other hand, compound interest is a powerful force and a
successful trader can indeed generate an impressive return.)

Now, most people who come to trading are going to spend some
time in some trading groups, lose some money, and go away. Some will be very
jaded (you should see the emails I get!), some will be angry for the rest of
their lives, and some will have just had a fun experience. But the common thread
is that almost everyone who comes to the market with a living color dream will
go away with a less money and with that dream shattered.

Many of those people could have been helped if they knew a
few truths about the market and trading.

Where we end up

It’s hard to give lessons that fit every trader and every
situation. There are many ways to make money in the markets, and many of those
involve doing almost exactly opposite things! (For instance, one trader might
go long on a move while another might initiate a short at the same spot… and,
over time, both could be profitable. If you understand what things could make that
statement true, you’re on your way…)

However, there are a few common threads that I think every
trader learns. Most of those traders who quit were taught these lessons in
painful ways. Many of them gave up because they weren’t ready to absorb the
lessons. Learn them before the market beats you up with them!

  1. Trading successfully, with any degree of
    consistency, is very hard. If you think you have some easy way to trade, you’re
    wrong and you won’t be successful in the long run.
  2. You are a big part of your eventual success. Your
    mental state, attitude toward risk, emotional control, focus, ability to do the
    work, intellect, personality, etc.—all of this must create a coherent whole
    aligned to support your trading. Without this, you won’t be able to make and
    keep money.
  3. Trading is really about having a small edge, and
    those edges are smaller than what you think at first. Ironically, the idea of
    having a magic pattern that shows you the future has a seed of truth in it, but
    it’s just that your pattern will work more like 55/100 times than 90/100. You’re
    going to be wrong a lot.
  4. I should qualify that previous statement. You
    get a choice: you can be wrong a lot, or you can take very large losses
    (relative to the size of your winners.) Everyone talking about “high
    probability trading” or “high risk/reward ratio” (they usually say it backwards
    like this, for whatever reason) trades is only seeing part of the picture. Both
    are important and a big part of finding your trading style (ahem, one that is
    aligned with who you are in point #2) is dialing in that combination of how
    often you want to win vs how big you want your losses to be.
  5. Math matters, but it’s more street smarts,
    common-sense, gambler’s math than calculus. (For some styles of trading, you
    may need more hard math tools, but then we’re also back to finding what works
    for you in point #2.)
  6. You absolutely can make enough money in the market
    to change your life, but it’s going to take you longer than you think to be
    able to do it. The learning curve is at least 3-5 years. You’ll likely have
    success before that, but you’ll also probably have trouble holding on to money
    you make.
  7. Stay small while you’re learning. You’re going
    to lose, and you’re going to make mistakes even when you think you are immune.
    Let’s keep those mistakes as cheap as we can—bigger trading = bigger mistakes. And
    bigger mistakes = a bigger chance of us becoming one of those traders who

If you have your mindset shaped like this from the
beginning, you can avoid a lot of the hype and misinformation out there, and
set yourself up for long-term success.



Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.