Essence of Trading: Trading Is Easier Than Most People Think

Green Arrow Breaks Through Maze Walls

We were told, by traders before us, that trading is difficult – difficult to learn, difficult to turn a profit, and difficult to master. Their words, together with almost every book out there written on the subject, have painted a very grime picture for anyone who wants to learn trading and profit from the financial markets. We have to wonder how difficult can that be and what really makes it so difficult for many people to trade successfully.

I will address these areas one by one.

Alchemy vs. Science

Why trading is difficult to learn? Physical science has not been developed on the subject of price discovery yet. Well, at least I have not heard of any large scale attempt published yet.

The alchemy reference I made in Essence of Trading: Modern Financial Economics Is Just Alchemy In Disguise painted a good picture of what happens in the financial markets over the past 100 years. In fact, there is no extensive study of price movements in academia at all until recently. For some reason, if you did, you would be damned by your peers. It is like Galileo suggested that the Earth rotates around the Sun. It was a crime. Maybe it is the nature human – those who have something to lose would do anything to stop others rocking their boat.

Due to the non-scientific nature of trading techniques that are published (or exposed), they are not something a group of people can simply follow the instructions and then expect to obtain similar results across all these people. Some people will do better in comparison to their peers and some will do worse. Hence, feedbacks from traders using the known trading techniques seldom produce convincing validation on these methods.

It is human nature wanting to be in control when dealing with uncertainties. Trading is the ultimate challenge in human activities to accept uncertainties and extract profits under such conditions. That’s why many traders made the mistake of seeking explanations or using vague big picture view / theory to anchor their minds. At the end, such comfort to the minds not only hurt their bottom lines but also send these individuals to a wild goose chase on the next best explanation.

All existing trading methods have their weaknesses. There are times that they do not work. Accepting that will eventually take you to the next level of trading.

Personal Growth Takes Time

Why is it difficult to turn a profit? I don’t think it is difficult at all. The real problem is that It is just too easy to lose it back to the market.

Given a sound trading model (like the examples I posted), using conservative money management, it is just a matter of time to grow your capital to the point where it is big enough to replace your regular income. Yet, I always receive emails from readers that they want something that makes more money. They want instant gratification. They want to do what I do in daytrading, now.

I told them that they cannot. First, they need the appropriate capital size. Second, their minds have to be ready to handle the equity swings. Both take time to grow.

I discuss about the drawdown effects on a person in Know Your Odds Before You Trade, so I will not repeat that here. However, there is a different aspect in capital management that worth talking about here. Traders often increase their size per trade too quickly and that in turn messing up their minds. Even though they are going through the same cycle of winning and losing but at a magnified impact from the equity swings, these traders can no longer consistently making the correct decisions.

Many people use all sorts of techniques to avoid facing the equity swings issue so that they can keep themselves in peak performance, as if they are trading just a small size position all the time. For example, they choose to hide their account balances, net profit (or losses) from the screen during trading hours.

The reality is that the longer you delay the effect, the worse it will hit you. It is better to learn to deal with the equity swings and grow your mind to handle it. If you are trading bigger size by hiding the real equity impact from yourself, one day your mind will suddenly catch up on the reality and paralyze your trading and performance.

At The End It Is Just Buy And Sell

Why is trading difficult to master? This part is very much a Zen question so I will quote you the Zen answer here.

"Before I was enlightened, a mountain was just a mountain. When I was enlightened, a mountain wasn’t a mountain anymore. After I was enlightened, a mountain’s just a mountain again."

In the beginning you probably read everything, tried everything and blew a few accounts.

More ups and downs along the way, suddenly you think you figured out something where your trading breakthrough happened. For some, that would be the start of a profitable trading career. For others, they fell back to more ups and downs awaiting the next breakthrough.

What really separate the two groups is that those who are on their way to successful trading drawn the line – accepting what they know that works and use only things they know that works.

From that point onward, it is the personal growth that dictates what they can extract from the markets.

There is no one single best trading style or method, but there is likely a best trading method for a particular trader for the particular situation he/she is in. Knowing what is best for you in your own circumstances makes you a master in trading.


Essence of Trading: Modern Financial Economics Is Just Alchemy In Disguise


Economics Is Social Science

Many people confuse economics as a science like physics or medical science. Economics is part of social science. It is not the kind of science that can produce precise projection or accurate forecast . In this sense, most of the theories you have come to hear about in economics have no practical value in trading. If cars are made by economists with their economic theories, the cars will explode and burn the moment you drive them, even though the car never moved.

Financial Economics takes the nonsense one step further. As all human with any common sense know, the price of anything that is determined through market mechanism is controlled by the buyers and sellers. They can do whatever they want but their actions are mainly goal driven. The goal for any normal participant in a market is to make money. Yet economists assume price movement in our markets to be random without even checking if reality matches their assumption at all. When the most fundamental component in the study of financial economics, price movement, is not even properly examined at all, how can anyone believe it has any practical value?

Economics Is Alchemy In Its Present Form

With this understanding, it is no surprise that predictions and projections generated under the labels of the above disciplines are always contradictory among its practitioners. There is almost always no agreement among economists where the stock markets is heading. Financial analysts almost always giving completely diverged opinions where a stock is heading. And worst of all, these supposed leaders in the field of economics all failed to tell that the 2008 financial crisis was going to happen.

One has to realize that economics, in its present form, is no different from alchemy. Many of these so call economists or analysts are just very bad alchemists. They do not really know what they are doing. They just guess, imagine, and b#llsh*t to make their livings. All kinds of theories with all sort of bizarre analysis techniques are invented by these guys – from collecting economic data, studying corporate financial statements, to analyzing historical prices. These techniques, often borrowed from other scientific disciplines, are created to see if they can explain what happens in a market or economy as a whole. Due to the origin of these techniques, these analysis look so complicated that people assume they are legit. No, they are not because these fancy things cannot produce consistent results that match what happen in the real world.

Outside of the academia, there are very good analysis techniques developed over the years by people whom are affected most by the markets – the participants like traders and market makers. These techniques focuses on what matters most – where price is likely going. An interesting fact about these techniques is that they are practical. Their work (or trading methods) do not have fancy theories behind so there is no glamour nor talking point in parties. What these trading methods offer are consistent trading results that enable these participants to stay profitable in the markets year after year.

During Medieval Times, those alchemists who figured out how to determine the metal content in the ores, or those who figured out how to extract metals from the ores, would keep the techniques to themselves so that they could serve the powerful warlords. They might not fully understand what they were doing (and in our eyes they might actually get the concepts completely messed up). But the most important thing was that these individuals had developed repeatable processes and methods which produced consistent results.

See the parallel there?

Alchemy Is Not All Bad

For western alchemy, most of it was eventually purged and disappeared. Some part of alchemy that works becomes the foundation of modern chemistry. Process like distillation was invented by alchemists. Those bad alchemists who did voodoo things and boost magic theories are now condemned forever in history. Those alchemists who did actual investigative work with scientific (or practical) mindset leaving us with useful knowledge are praised as pioneers in modern science.

The good sign is that we are seeing improvements in the study of economics in recent years. Academics finally succumb to their failures as they are ridiculed by not just the more successful market participants but also the public in general how stupid and useless they are. The younger generations of economists have started questioning the foundation of the accepted theories in economics. New branches like behaviour economics tackle the concepts of economics from a different angle and has been showing a lot of promises.

Economic Theories And Trading Don’t Mix

Understanding the limitation of economic theories in its present form tells you how dangerous it is to shape your trading ideas from these concepts. I know it is difficult to put a block in your head to separate your trader self from your economist self (don’t we all having an opinion where the economy is going?) but it has to be done.  Do not make any financial decisions based on just big picture ideas because that will definitely hurt your bottom line.

Remember the main reason why economic theories fail in reality is that they do not produce precise projections into the future.

The predictions made by well-known economists are doing worse than the weather forecast you get daily from your local weather man. If these "experts" in economics cannot produce consistent forecast with their expertise, how can you expect to do anything useful with their theories?

Results Oriented Thinking

Then what tools should we use in trading or making financial decisions?

The various methods people are using right now that has been producing consistent results.

Make no mistakes, these methods, be that chart reading, market breadth analysis, or tape reading, are also a form of alchemy.

Comparing to accepted economic theories that always fail to forecast anything correctly, some of these methods and techniques are showing consistencies in their ability to produce better trading and projection results. These are the good methods just like the good alchemy stuff. Even though we may not know the underlying reasons why these techniques work, as long as they are producing consistent results, it makes more sense to use them over the inferior economic theories.

You know these techniques are far from perfect. In fact, you know most of them are borderline alchemy stuff. Hence, you use them in your trading decision process only after you carefully experiment with the methods (i.e. backtesting and/or manual chart verification depending on your preference) and can confirm that you can get good results.

Techniques that are not giving you consistent results should be dropped.

Most important of all, never trust a trading method 100% even though it has been working well for you over a long period of time. As traders, not only that we do not marry to our positions, we do not marry to the trading methods as well.

p.s. "An economist is someone who doesn’t know what he’s talking about – and make you feel it’s your fault."

Technical Analysis for the Trading Professional, Second Edition: Strategies and Techniques for Today’s Turbulent Global Financial Markets by Constance Brown


Required text for Chartered Market Technician (CMT). Broad coverage of technical analysis techniques with unique personal perspective in using the tools in real life situations. For readers who are not proficient in technical analysis already, this book will not help them learning or mastering the techniques. Readers who are pretty good with at least 1 technical tool, however, will benefit from this book as they can relate their expertise in one tool to the other ones with the excellent pointers Ms. Brown has provided in the book.

Book Information

Technical Analysis for the Trading Professional, Second Edition: Strategies and Techniques for Today’s Turbulent Global Financial Markets
Written by Constance Brown



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