Learning to Fish

This week is an extremely busy week for me (next week also)! Very the sian. Some of you asked me if there are any stocks to buy, but frankly if i cannot watch the market, i usually wont trade. As a result, i missed several trades such as MMI and Advanced Holdings even though i was contemplating entering these trades at one time. "Someone" actually owed me a lunch because Advanced Holdings crossed 40 cents today. hehehe... one free lunch next week. :P

I would encourage everyone to learn how to fish for yourself. I have been learning to fish for the last 6 years and i can assure you that once you acquire the ability to fish for yourself, you have no fear of the market or anyone. Today, in the world where jobs are no longer secured, i know that even if i get retrenched, i wont go hungry because i have acquired the skills to fish from the market.

Learning to fish is a continuous process and the best time to learn how to fish is when you actually dont need to fish. (just like the best time to look for a new job is when you dont need a job). If you are currently working full time, it is actually the best time to learn how to trade. This is because you dont need to 'trade' for a living. Your family dont depend on your trading to have food on the table. You can choose when you want to trade, you can withstand periods of drawdown because you can cover your losses with your salary (provided you dont kill yourself through reckless trading).

My personal experience (roughly) has been loss-making in the initial 1-2 years, breakeven for the next 0.5-1 year and then positive equity curve from the 3rd-4th year onwards. This is my 3rd year of positive returns and frankly i only trade when i am free. Based on my records this year, i only traded actively for 6 out of 8 months and there aren't actually many trades. The return so far has exceeded 20% but i guess this kind of return may not attract you when all the futures/option trading 'seminars' boast of returns exceeding 100%. However, i am happy with my 20% p.a. target. It is a return i can achieve without excessive risk.

The key to learning to fish is to be still in the game 10 years from today. Start small, learn how to trade, why you enter the trade, set up your own 'trading system' that tell you when to enter and when to exit a trade, put in place money management plan and learn about yourself. Trading is like a mirror. The more you trade, the more you will learn about yourself.

According to Dr Alexander Elder who wrote Trading for a Living, there are 3 areas which you need to focus on when you learn how to trade. He called it the 3Ms. Roughtly it means, Money Management, Mental (psychology) , Methodology. These are the 3 aspects which you need to 'train' yourself in when you want to learn how to Fish. Roughly it means:

Methodology - How do you enter/exit trades. What is your trading system. Devise a trading system that suits you. Set up a trading system that will let you enter a trade during quiet period and exit a trade during hot period.

Mental - How you handle winnings and losses. Do you have the mental strength to stomach drawndown? How to you pysche your brain so that you can perform consistently, able to handle losses and winnings, make money consistently. You can learn all you want about methodology and be well-versed in all the 'chart patterns' BUT if you cannot handle the mental aspect of trading well, (e.g. how you handle your attitude towards wins and losses), you can never be in the right frame of mind to trade. That is why some traders can trade well on paper but when you put him to trade 'live', he cannot do it because he is unable to overcome his mental barriers. Some people just cannot 'cut loss' because cutting loss is like admitting you have lost. If you are unable to overcome that 'cut loss' barrier, you can never be a trader.

Money Management - Do you have a money management plan when you initiate a trade? Money management is like 'knowing when to stop when you are wrong'. If you enter a trade and the market tells you that this is a mistake, your money management plan will force you to 'cut' that position before it spiral out of control. Before i enter any trade, i already know how much i will lose. The key to money management is to make the cut loss 'bearable'. How do you know what is a 'bearable' cut loss. That means if you cut loss of $x amount today and you can still sleep very well, this means it is within a bearable level. If you cant sleep if you lose that $x amount, means it is beyond your tolerance level. The trick is to keep it to 1-2% of your trading equity. I used to have a cut loss level of $500, but i have since shifted that to $1k-$2k.

If you ask me to rank the importance of the 3Ms, i will rank them in the following order: (1) Money Management, (2) Mental Management and (3) Methodology. Methodology is ranked the lowest because it is a skill which anyone can learn (even the hard core Fundamentalist know something about Technical Analysis) but (1) and (2) is something which the pure FA finds it hard to accept. Pure FAs find it very difficult to accept that they are wrong in their analysis, so they are unwilling to put in place a money management plan and as a result, they can never acquire the mindset of a trader.

Happy Fishing.