Rules of the Retail Trader

Retail trader = any trader who is not trading for an institution, a.k.a. YOU!

Retail traders are food for professional and institutional traders everywhere. Eager traders enter the markets in large numbers, hoping to find the “Holy Grail” of trading. They take various paths, but in the end a staggering percentage of retail traders are left with heavy losses and broken spirits.

In the course of my ten years in the trading education field, one of my primary tasks has been to disengage my clients’ ingrained thought patterns. Here is a tongue-in-cheek list of “rules” followed by retail traders:

1. Do everything you possibly can to lose as much money as possible, in as little time as possible, and then blame someone else for your losses.

2. Since all analysts are completely clueless, avoid any and all information they may divulge. Ignore government reports and market research. The chart will tell you everything.

3. Pay as little as possible in commissions. Who needs little things like advice, market insight, risk management strategies, and a higher probability of profit from working with top brokers who make a living overcharging you? After all, if they could make a living from trading, why would they be brokers?

4. Technicals are the only way to trade; therefore search continually for the perfect mix of technical indicators. Ignore the fact that 90% of traders exclusively using technical indicators fail.

5. Trading success depends solely on the trading platform. It makes perfect sense to spend week upon week looking for the perfect trading platform.

6. Ignore in-depth strategy completely. If a market is going up, it will likely keep going up forever. After all, “the trend is your friend.” The chart is all that matters.

7. Trading education is for suckers. You’ll learn everything you need to know by losing tens of thousands of dollars in your trading account. The fact that educated traders tend to have a higher probability of success is meaningless. If you do decide to take a course, make sure its sole focus is on technical indicators, the answer to all successful trading.

8. If you only trade in one direction, you eliminate 50% of the risk of loss. What better way to protect yourself? Short selling is too complicated to be useful, so why bother?

9. Free information available on the Internet is pure gold! Why squander money working with a trading mentor who complicates your life with risk management strategies, trade strategy, not to mention silly goals like consistent profits?

10. Gamble freely with your profits. It’s house money; if you lose it, big deal.

This list is actually based on common misconceptions I hear from retail traders on a regular basis. I hope it shocks you into thinking “how many of those attitudes am I applying to my trading?” It should be obvious that thinking like a retail trader is not the best path for long-term trading success! Since how you perceive the market and your place in it is vital to your success over time, your primary task is to look at the market in the manner of professional and institutional traders.

From the outset, I always encourage all our clients to shift their mindsets from the retail mode to the mentality of a successful professional money manager. This simple shift in thought pattern can have a huge impact on your likelihood of success. Let’s compare the retail trader mindset to the professional money manager mindset to see which makes more sense for you.

Retail rule # 1: Do everything you possibly can to lose as much money as possible, in as little time possible, and then blame someone else for your losses.

Professional and institutional rule # 1: Capital preservation is the key to longevity. A trader cannot make money if he’s losing his shirt in the market. To be successful over the long term, a trader needs to be in the market for the long-term. Also, the trader striving to be successful must take full responsibility for all trading-related actions and decisions.

Professional and institutional traders understand that burning through an account, excessive trading, and chasing markets aren’t conducive to long-term success. Top traders consider a wide range of variables before entering any trade, and when they do enter, their trading structures focus on minimizing risk. By taking responsibility for their trading decisions, they are increasing their probability of profit. The equation for the successful professional is simple:

Thought → Plan → Action → Execution → Monitoring → Exit → Assessment

Retail rule #2: Since all analysts are completely clueless, avoid any and all information they may divulge. Ignore government reports and market research. The chart will tell you everything.

Professional and institutional rule #2: In any profession there are people at the top —usually with good reason. Then there are those who will never make it past midpoint or even the basement level. Your obligation to yourself as a professional trader is to search out the best analysts and work as closely as possible with them. Your job as a trader involves execution and risk management. These are the only activities that bring money into your account on a regular basis. Be informed about the markets you trade, but know that you may never be as informed as the top analysts you employ.

Retail traders tend to dismiss all analysts and news events as useless. Nothing could be further from the truth! Every field has a group of top performers, and trading is no exception. All top performing mutual fund, hedge fund, professional, and institutional traders employ analysts whose job is to provide a deeper understanding of the markets being traded.

Interview analysts to see if there is any potential for building a long-term, profitable working relationship.

Retail rule #3: Pay as little as possible in commissions. Who needs little things like advice, market insight, risk management strategies, and a higher probability of profit from top brokers who make their living overcharging you? After all, if they could make a living from trading, why would they be brokers?

Professional and institutional rule #3: Trading is a business, and like any other business, the total cost must be assessed before making any decision. If you’re after deep discounts from vendors going out of business, try going to a flea market. It’s pointless to spend time jumping over $100 bills to pick up pennies. If a broker is able to add significantly to your bottom line at the end of the year, then he is worth the added expense. Top brokers are often some of the best traders, analysts, and strategists in the industry. Hedge, pension, and private equity fund managers consult them; so should you.

Deep discount firms, who generate their revenue based on the level of activity in your account, have limited services and offer no value-added features. Another little-known fact is that these firms often promote discount trading to eliminate liability. They are interested in your trading volume, not your trading success. Think seriously of employing a leading broker/analyst to watch your account on a daily basis. Paying an experienced professional a fair price is a worthwhile expense as you accumulate more of those $100 bills.

Retail rule #4: Technicals are the only way to trade; therefore search continually for the perfect mix of technical indicators. Ignore the fact that 90% of traders who exclusively use technical indicators fail.

Professional and institutional rule #4: Although technical analysis is a valuable tool, decisions based exclusively on technicals are not often wise trading decisions. Novice traders spend huge blocks of time looking for the magic technical indicator formula that will unlock the secrets of trading. Professional and institutional traders know profitable trading involves assessing a market which includes technicals, developing a strategy, execution, and finally, exiting. The cycle is never-ending. Cutting corners by solely using indicators or chart formations leads to BIG LOSSES! You need a systematic approach if you intend to be trading for any length of time.

Here is a fact that marketers of trading systems and indicators do not want you to know: no system, indicator or groups of indicators have been proven to possess the ability to predict market direction with any degree of accuracy.

All professional and institutional traders know that trading success comes the old-fashion way — from hard work, training, dedication, and education.

Retail rule #5: Trading success depends entirely on the trading platform. It makes perfect sense to spend week upon week looking for the perfect trading platform.

Professional and institutional rule #5: Even though platforms are great tools, life was fine before they became prominent. Profits were still being made before computers were in wide spread use. Like the case with technical indicators, too many novice traders think a platform will help make them better traders. It won’t. You either know what you’re doing or you don’t. Spend your time becoming a better trader.

Platforms are fantastic and make some trading decisions easier, but the answer to the question of success will not be found on a computer screen. Instead, try looking in the mirror to begin your search.

Retail rule #6: Ignore in-depth strategy completely. If a market’s going up, it will likely keep going up forever. After all, “the trend is your friend.” The chart is all that matters.

Professional and institutional rule #6: Traders who don’t use well-planned strategies are a god-send for professional traders. Such traders clearly have too much money and enjoy making donations to the winner’s club. Avoiding strategy is death to any intelligent trader. Setting a stop loss 2% below entry isn’t a strategy, it’s an invitation for professional and institutional traders to slowly erode your trading capital. Markets are evolving at such a rapid pace that the old cliché “the trend is your friend” can’t be relied on anymore. Don’t act like a horse with blinders on. What if the market makes a violent move against you? How have you protected yourself from catastrophic losses? What steps have you taken to make sure your account doesn’t slowly bleed down to zero?

To paraphrase Kenny Rogers, “if you’re going to play the game, you’ve got to learn to play it right.” In trading, this means having multiple strategies you can call on in different market conditions and developments.

Retail rule #7: Trading education is for suckers. You’ll learn everything you need to know by losing tens of thousands of dollars in your trading account. The fact that educated traders tend to have a higher probability of success is meaningless. If you do decide to take a course, make sure it only teaches you how to properly use all the technical indicators, because that’s the answer to all successful trading.

Professional and institutional rule #7: The saying “a wise man learns from a fool, but a fool never learns” comes to mind. Quality education is the single best thing a trader can do for himself. How do you define “quality”? The best way to assess any education is to ask yourself the simple question “how much time will this education save me?” Quality education should save you time that would otherwise be spent floundering around in the market, losing money, and trying to figure out how things work. Quality education firms don’t try to push weekend “solutions” which don’t work.

Trading is an incredibly complex arena. A good educator offers some kind of long-term education which will be to your advantage.

Retail rule #8: If you only trade in one direction, you eliminate 50% of the risk of loss. What better way to protect yourself? The fact that markets go up and down easily and you can get whipsawed is meaningless. Short selling is too complicated, so why bother?

Professional and institutional rule #8: Trading with any bias is a recipe for disaster. Professional traders understand that markets can move sharply in either direction and stop loss orders can’t always save you. The fact is that markets do go up and down easily, and you can get whipsawed and have your account drained. You can’t eliminate risk, but if you know how to position yourself properly, you can certainly minimize it.

Many traders fall into a directional bias. We are conditioned to believe that money can only be made if prices rise, so a lot of people have a natural long bias. To be successful you need to be able to trade from either a long or short bias. If you’re not comfortable or don’t fully understand short selling, talk to a top quality broker immediately.

Retail rule #9: Free information available on the Internet is pure gold! Why squander money working with a trading mentor who focuses on risk management, trade strategy, and trading consistency?

Professional and institutional rule #9: Anyone who can type can post information online. If you decide to rely exclusively on free information, save yourself the aggravation. Get the correct spelling of your broker’s name and send your money directly to him. At least he might send you pictures of him and his family enjoying your cash. The vultures who post information online will be right some of the time, but nobody knows when or for how long.

In late 2004, bloggers were posting predictions that the Euro would breech the 1.4000 level against the US dollar by June 2005. “Sell your car and go long the Euro at 1.3600,” they said. “The US dollar will NEVER regain ground.” By June 2005, the Euro was trading as low as 1.1661. The free information published had caused traders to lose millions of dollars.

The best rule for advice is “you get what you pay for.” Experienced trading mentors are one of the most valuable tools a trader will ever use. These individuals can literally shave years off your learning curve and place you on the path to profitability. A good mentor should be willing to work with you for at least 6 months.

Retail rule #10: Gamble freely with your profits. It’s found house money, so if you lose it, big deal.

Professional and institutional rule #10: Protect your profits at all costs. Professional traders know how difficult it is to consistently harvest profits from the markets. No trader who has seen any kind of return wants to watch profits evaporate right before his or her eyes. Profits are your payment for all the hard work, analysis, assessment, long nights, and early mornings. Anyone who tells you that it doesn’t matter because it’s “house money” has never been successful as a trader.

Top traders can generate profits and incomes well into the six figure range. To reach that level of success takes a lot of work and a lot of planning. One key step to your success lies in how you perceive the market and your place within it. The retail trader mindset is something that you should avoid at all costs. It is full of pitfalls and dead-end schemes. If you’re serious about your long-term success, you need to think and act like a professional or institutional trader. Once you master that, I look forward to seeing you at the top.

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