My trading hero is Mark Douglas (aside from Phil of course), he of the “Trading in the Zone” fame.

It is not because he is a great trader (he may well be) rather it is because he made me see trading from a completely different perspective, which for me was the first step towards being able to seriously consider becoming a trader full-time.  To explain why I say this, consider for a moment when you first got into trading (and in my case for a long time after) and think about what you first tried to do – was it:

1.  Look for an analysis technique (technical, fundamental, signal service, etc.) to highlight trading opportunities?
2. Understand what comprises a successful trading system (by system I don’t just mean the technical or fundamental analysis component)?

I’d guess it would be point 1 and, to be frank, I spent way too long on point 1 looking and trying to create the killer system that won time after time, which, of course, I didn’t manage to achieve.

My interpretation of what Mark Douglas says is that the analysis component is not really that important in order for you to be a consistently successful trader - providing of course your analysis either gives you more winners than losers, or when there are more losers than winners the winners outweigh the losers.  Douglas suggests that a trader should think of themselves as being like a casino in that the casino has an edge over its customers, and although from time to time some will walk away big winners, over the long term the casino will make a big profit.  Also the casino doesn’t pick and choose what bets it takes, if a customer wants to play the bet is taken.

From a trading perspective to set yourself up as a casino simply means that you:

1. Fully accept you are going to have winners and losers.
2. Pick an analysis technique that gives you some sort of “edge,” and which is underpinned by some a money management system.
3. Merrily place your trades with the same free and easy attitude you would when putting a pound into a slot machine, then sit back and watch the profits roll in.

Of course in practice it isn’t that easy to do, and for me the reasons were always mental, and so that was why I joined the LTR – I wanted to hear how a professional trader reacted to a string of losses.  The message I got was Phil simply shrugs his shoulders and moves on to the next setup (although he did seem to have a lot of “mouse” problems so I’m not sure if he turns the microphone off and hurls it at his parrot!!!).  In hindsight some of the reasons why I failed prior to my LTR experience were:

1. If there were a couple of losses in a row I would tweak something so I never had a good run of trades for any analysis element I was testing.
2. The analysis was overly complex and I’d never get into trades.
3. I’d hesitate and miss trades.
4. I’d worry about the potential monetary losses.
5. I never actually fully documented the rules of the system.

During my recuperation from illness I thought long and hard about fixing this problem and decided that I needed a simple analysis technique that would enable me to get into low cost trades over and over again.  If I could do this I should then develop the carefree attitude needed to trade, so I put together a simple scalping system that:

1. Used only 1 chart (the 1 minute), which kept things simple.
2. Used a fixed stop loss of 20 pips per trade.
3. I used 1 mini-lot per trade, which, over 50 trades, if all lost would result in a maximum monetary loss of about £750.

Perfect, except for one small flaw, which is when I then tried to move on to the “serious money making” analysis technique involving risks of, say, £250 per trade all the old mental fears crept back, and it was back to square 1.  I guess the analogy is learning to fly a single seater plane and then moving straight to a jumbo once you’ve got your license – it isn’t going to be a happy ending.

Then the obvious struck me!  I needed to use the same system for developing the mental framework (placing trades in a carefree manner) as I did for income generation.  So this is what I did, I firmed up my analysis technique and developed a corresponding money management strategy that starts from 1 mini-lot/20 pip risk, and which increases in lot size (stop is fixed) when consistency at each stage is proven.

I had intended to put the analysis technique in this post, however I realise I’ve gone on a bit but I felt it important that I put the rationale for why I use the system into perspective first, before launching into that.  So my next post will detail my day-to-day analysis element that I use for getting into and out of trades.  I'll post that over the weekend and use today's GBPUSD chart as an example.

Cheers and consistent trading – Dave Search.