I'm Sami Abusaad, professional trader and Director of Education at T3 Live. I’ve been trading for more than a decade and have gained plenty of experience, but in this article, I'm going to share with you the top ten things I wish somebody would have told me when I was a new trader.
1. Don’t Wing it: Do it Right or Not at All
If you think about it, trading is the only business in the world where the rank amateur has a 50/50 chance of making it.
You can’t just wing it and be a doctor, a lawyer, a plumber, or anything else.
What are the chances that you could perform a piano recital well if you’d never played piano? There’s zero chance of that happening.
It’s the same in every other profession… well, except trading.
There are only two types of trades you can make. You can buy or sell, long or short. Sometimes beginner traders wing it and get lucky, then think that they’re doing everything right.
In 2005, while still working full time as an auditor at KPMG, I turned sixteen thousand dollars into fifty thousand in less than a year, which made me think – falsely – that I knew what I was doing.
But without a methodology with an edge, do you really expect to take money away from the professionals who’ve been doing it all their life; have virtually unlimited resources; incredibly sophisticated technologies, algos, and HFTs; and who live, breathe, and eat trading?
Do you expect to go in there and take money away from them – just like that – and then continue to do that on a consistent basis? That’s not going to happen.
So, again, the lesson here is that you can’t have a shoot-from-the-hip approach and expect to win in the long run.
You have to trade a methodology that has an edge, and you have to be able to do so on a consistent basis!
2. Study Your Own Psychology
Understand that our brains are not naturally built for trading. We are actually biologically wired to lose.
In Reminiscences of a Stock Operator, Jesse Livermore says most traders lose money because they take small profits when they are right and big losses when they are wrong.
He says, “I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature… The weaknesses that all men are prone to are fatal to success in speculation.
“The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation, when the market goes against you, you hope that every day will be the last day — and you lose more than you should had you not listened to hope — the same ally that is so potent a success-bringer to empire builders and pioneers, big and little.
“And when the market goes your way, you become fearful that the next day will take away your profit, and you get out too soon.
“Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping, he must fear; instead of fearing, he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.”
So, what is he really talking about here?
He’s saying when the market goes our way, we usually become fearful that we might give back our profit and we get out too soon.
And the opposite happens when a stock goes against us: hope kicks in and keeps us in losing trades longer than we should be, which wouldn’t have happened had we not listened to hope.
Pay attention to how hope and fear influence your decisions. Don’t let the fear of giving back profits get you out too soon.
And, similarly, don’t let hope keep you in losing trades longer than you should.
There is a saying that sums it up quite nicely: traders eat like birds, and crap – pardon my French – like elephants. They make small money when they are right and lose big money when they are wrong… and all of that is due to hope and fear.
3. Your Attachment To Money Is The Main Cause Of Your Failure
“When an archer shoots for nothing, he has all his skill. If he shoots for a brass buckle, he is already nervous. If he shoots for a prize of gold, he goes blind. He is out of his mind! He sees two targets. His skill has not changed. But the prize divides him. He cares. He thinks more of winning than of shooting and the need to win drains him of power.”
That quote was written some twenty five hundred years ago by a Chinese sage named Tranx-su. When I read it I was blown away because it totally applies to trading.
You see, the paradox is that traders do all the wrong things to be successful.
By focusing on the money, we lose.
By wanting and needing to win so badly, we lose sight of what trading is all about – it’s not about the immediate result. Trading is not a sprint, it’s like a marathon – you can’t think short term. What matters is the end.
Trading is a business. Do you know of any legitimate business that tries to make all the money it can in the first week or two? I don't; the ones that operate like that are rip-offs and scams. They make a quick buck and leave town.
So again, don’t focus on the money and don’t become attached to the immediate results. If you do, you are almost guaranteed to lose.
4. Focus on the Process, Not the Outcome
This is very similar to the last point, but in here, instead of telling you what not to focus on – the money – I want to tell you what you should focus on: the process.
The paradox is that while ultimately money is what we are all after, by focusing on the money, we lose. We get blindsided by it, so to speak. We start taking shortcuts and doing things we wouldn’t otherwise if we weren’t so focused on the money.
Instead – and this is what this tip is about – we need to focus on the process and on executing our plan consistently. The money will come as a byproduct. If you focus on the money, that’s like putting the cart before the horse and you won’t be able to have the discipline to wait for the right trades. It will mess up your psychology.
On the other hand, when you focus on consistency rather than money, you’ll basically do exactly the same things day in and day out. You’ll take exactly the same setups, you’ll enter the same way, you’ll manage the same way, and you won’t deviate from your plan at all. It’s your consistent actions that lead to consistent results.
But if your actions from day to day are not consistent, how are you going to have consistent results?
Remember, random actions equal random results. Consistent actions lead to consistent results.
5. You Don’t Have To Figure It All Out Before You Can Become Successful
You don’t have to know everything to become a successful trader. If you’ve been trading for a while, all you have to do is stop doing what you know does not work… based on your experience, of course.
As the quote goes, “I do not know the key to success, but the key to failure is…” fill in the blank and work on eliminating it.
When you eliminate the bad, what are you going to end up with? You’re going to end up with the good.
Have you ever heard the saying, “Becoming a great trader is a process of subtraction rather than addition?” It’s 100% true. If you’ve been trading for a while, trading becomes more about eliminating bad habits than acquiring new information.
6. Learn How to Trade Earnings, How the Stock Market Works and Why Prices Move the Way They Do
Simply put, stock prices follow earnings. That’s why Apple – as of the date of publication – is the most valuable company in the country.
They make twice as much as the second most profitable company on the list.
But, to put it even more accurately, stock prices follow earnings growth, which is why AMZN is the fourth largest company by market cap, even though they don’t make a fraction of what Apple makes. Apple sometimes makes more profit in one quarter than Amazon has ever made since inception.
It’s also why TSLA, which loses money every year, is worth as much as F and GM combined, both of which are profitable companies.
So, if you want to understand stock prices and why stocks move the way they do, you have got to know how to trade earnings and how to take advantage of earnings plays.
I know you’ve probably been told not to hold stocks through earnings, but that’s because people don’t really know how to trade earnings.
I make a living trading earnings. That’s where the oil is, and, as they say, go where the oil is.
7. Trade in batches & Follow the P.E.A.R. Strategy.
People ask me all the time what I would do differently if I had my first six months back.
The absolute first thing I’d do is follow the P.E.A.R. Strategy, which stands for Plan, Execute, Analyze, and Refine.
First, I recommend trading in batches, say, twenty, thirty, or forty trades at a time.
Document in detail the pattern or strategy you want to trade. That’s the P in P.E.A.R.
Then execute your plan. That’s the E.
Once you’ve completed the batch, analyze the results – leave no stones unturned.
Figure out what’s working and do more of it.
Figure out what’s not working and eliminate it.
Then, make changes to your plan based on the results. That’s the Refine part of the P.E.A.R.
When finished, put on another set of trades and repeat.
How could you not become better over time? It’s impossible to not improve with experience if you follow this process.
So, again, trade in batches, then follow the P.E.A.R. Strategy.
8. Trade in a Group or Team Setting, Not by Yourself!
If you’re a beginning trader, you don’t yet have the tools and know-how to find the best ideas on a daily basis.
Being in a trading room with lots of eyes on the charts means more ideas being tossed around, which means more opportunities, some of which are probably a whole lot better than what you can find on your own.
So that’s why I think it’s really important to trade in a group setting, not by yourself.
9. Don’t paper trade for too long – definitely not more than a few weeks.
There are so many good reasons to paper-trade, such as not risking anything while you’re testing your ideas, making stress free trades, and getting comfortable with your platform.
All of these make sense, and I do think you should consider paper trading in the beginning.
But paper trading is unrealistic. You don’t experience real market conditions like slippage or getting an order filled.
Most importantly, you don’t experience the emotional reality of real trading. We don’t respond in the same way to profits and losses if we’re on a simulator.
Which is often why students don’t learn anything or learn very little while paper trading.
In this environment of zero commission, I recommend trading very small sizes rather than paper trading.
You would get a better feel for trading, how your emotions operate, and what makes you tick as a trader, none of which you’d experience when paper trading.
10. Trade in Line With Your Own Natural Personality
Jack Schwager, author of Market Wizards, was a struggling trader. He earnestly set out to interview the world’s best traders to find out what they did that made them successful. He thought they all traded alike, using all the same strategies.
Much to his surprise, he found out they all traded differently… but that there was one thing they had in common. They all traded in a way that suited their own personality.
I left this until the end because it usually takes time to figure out what exactly suits you as a trader. A true beginner doesn’t have the experience needed to learn their preferences. But it’s extremely important that you figure it out and not settle until you’ve gained an idea of your trading personality.
Is it day trading or swing trading? Is it trading earnings, gaps, reversals, breakouts, or pullbacks?
Whatever it is, you simply have to figure it out and focus most of your time around it.
To wrap up, I would like to share with you a favorite story of mine about the lion who thought he was a sheep.
It’s kind of a famous story about a jungle lion who came upon a flock of sheep one day… and to his amazement, he found a lion among the sheep!
It was a lion that had been brought up by the sheep, so he didn’t know that he was a lion. He would bleat like a sheep, eat grass like a sheep, and run around like a sheep.
Now imagine the surprise of the jungle lion when he saw this other lion living among the sheep.
He went straight for him. He got a hold of him and said, “What are you doing here?” The sheep-lion trembled in every limb and said, “Have mercy on me, don’t eat me! Have mercy.”
But the king of the jungle dragged him away and said, “You're coming with me.”
So he took the sheep-lion to a pond and said, “Look!” And when the sheep-lion looked, he saw his reflection in the water for the first time. Then he looked at the jungle lion… and he looked in the water again… and let out a mighty roar. He was never a sheep again.
At that moment, he was transformed. He was never the same.
My hope is that you are encouraged to really think about everything I discussed in this article, and that you have an inkling of what it takes to be a successful trader. Then this lesson would have been worthwhile.