Is There A HOLY GRAIL To Make Consistent Profits?

In this enlightening post, i would like to honor my past senior in my SIM investment club. He is a very knowledgeable FX investor and has won many prestigious competitions before. He is humble and affable too. Most importantly, i think this article will benefit many people greatly. So here goes: 

“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”

- Jesse Livermore (legendary stock trader)

These days when you browse through our local newspaper you will find a lot of advertisement for a ‘free preview’ to a three day financial trading course. The advertisements often cite how their graduates using their strategies make an income of thousands of dollars consistently every month from trading, sometimes even more than ten thousand dollars in a single month. When you attend these free previews, the advertisers will show you historical charts and try to convince you how easy it is to make profits using their system, a key part of their system consistent of technical analysis. You often have to pay S$3000 or more to attend a three day course to learn their system.

Many people will wonder if these advertisements are real. If you were to pay for the three day course, can you duplicate the results of what they claimed on the advertisement, making thousands of dollars consistently every month just from trading? Is there a ‘Holy Grail” to make consistent profits?

Personally, after two years of trading in the foreign exchange market primarily using technical analysis, I believe that even if these systems were to have an edge over the market and is able to produce consistent profits over a certain sample size of trades, a substantial portion of the people who attended the course will not be able to duplicate the same positive results. This is because trading with real money involves very intense emotions like fear, hope and greed. To make consistent profits every month requires a strong emotional/psychological control and a very high level of discipline to maintain a very strict risk and money management rules. Even though the three day advertised courses do teach the psychology of trading, discipline and risk management, the majority of people who are new to trading may not be able to condition their minds with the required discipline and psychology needed to become a consistently profitable trader.

It is very widely quoted that 95% of all Forex traders are losing money, I find the statement to be very true due to the reasons mentioned in the previous paragraph. Jack Schwager, who wrote the “Market Wizards: Interviews with Top Traders” series, interviewed many top performing investors, traders and fund managers. Most of the top traders interviewed said that discipline is the most important tool that they possessed; they did not give much credit in their trading system. Whereas in the case of the advertiser trying to sell their three day courses for thousands of dollars, the highlight is often on their trading system.

I believe that there is no holy grail to making consistent profits. To become a consistently profitable trader, much effort must be exerted to develop the metal conditioning, correct trading psychology and a very high level of discipline in risk/money management. A trading system would be secondary if you already have the attributes mentioned above.

Characteristics of an Unprofitable Trader:

1. Wants to make big money fast
2. Are not bothered to develop a proper trading plan or rules.
3. Keeps changing systems or technical indicators hoping to find a holy grail
4. Addicted to the thrills and excitement of trading
5. Does not have the discipline to follow a risk management plan.
6. Does not adhere to any money management rule.
7. Makes trading decision based on emotions.
8. Believes that high frequency trading equal a higher change of winning
9. Do not try to develop the correct trading psychology
10. Abuse the use of high leverage

A Trader Who Has Good Chance at Success Has the Following Characteristics:

1. Is properly capitalized
2. Treats trading like a business
3. Has a low tolerance for risk
4. Trades only when the market provides an opportunity
5. Can control emotions
6. Has a trading plan
7. Has a risk management plan
8. Is incredibly disciplined
9. Is focused
10. Has backtested his trading methodology

Written by:

Liu Weimin

SIM’s Investment & Networking Club

I.T. & Research Director (Academic Year 2009/2010)