Is Trading Skill, Or Luck?

The answer that I’m sure most new traders will hope to hear is that successful trading lies in being skilled, and that the skills required are learnable, but in my opinion it’s a little of both, each in fair measure.

Speak to any experienced trader and they’ll more than likely be able to share a handful of stories that relate to luck, or a lack thereof.

For me, luck played a huge part in my beginning as a trader.

If you haven’t already read the ‘About Me’ section of my website, when I began trading I initially turned a small £500.00 account into around the +£6,000.00 mark in a short few weeks with no strategy, certainly no edge and nothing but sheer luck.

I bought strong markets with huge, huge stop-losses and if trades went against me I simply held them until they eventually came back into profit where I’d close them.

…far from a profitable edge. My strategy was, well, luck. Pure and simple.

No rules, no structure, and absolutely no edge whatsoever.

As ever though, my lucky run soon came to an end when one day, a losing trade didn’t turn back around. It crawled against me, and against me, further down, and further, until I snapped and took a fairly sizeable loss of around the -£750.00 mark.

This certainly put me in my place, and this resulted in me firstly realising how dangerous trading can be, and secondly making one of the most mature, sensible decisions I’ve ever made;

I withdrew most of the profits I’d made, and I invested the money in myself – In proper education via professional traders – leaving a modest amount of money in my trading account to trade sensibly with going forward, with the proven strategies I’d learned via the education in-place.

…this changed my trading, and I never looked back.

Returning then to the question at-hand; Is trading skill, or luck?

Again, I’d say it’s mainly skill, strategy and process, along with of course sources of edge and the discipline to let these sources of edge play out whilst managing risk to keep you in the game long enough for this to take place. But luck in my opinion certainly does play a large part in ones success.

As traders, we never know where or when those huge winning trades, those real year-makers, are going to occur and it’s for this reason that luck begins to creep into the equation.

A good example of this, and the inspiration behind this article in fact, was shared by Linda Raschke within her brilliant ‘Super Trader Summit’ lecture recently [Which you can watch here].

She expands on luck, and a particular lack thereof within her own trading over the years, sharing some fascinating stories. One in particular really stood out to me, this being the story of a set of German traders who traded a mechanical strategy that offered consistent black and white signals, removing the need to predict or guess or use discretion, but meaning that they had to trade every viable signal that was presented by their system, much like the strategies I trade myself.

The traders in question traded what I believe was a momentum strategy that didn’t utilise profit targets, meaning that they never knew when the next huge winning trade would appear, so although they essentially didn’t rely on luck but on a statistical edge, luck would of course invariably prove to enter the equation, as it did when they decided to take one single day off to watch a major German football game.

…what happened?

You guessed it, it was the biggest move within one of the markets they traded of the year, and they failed to capture this. The one, single day they took away from the screens.

Unlucky?

You see, anyone who’s been trading a single approach for into the years will most likely be able to tell you something.

80% of profits often come from 20% of trades.

Being around for those trades really can be make or break.

I’ve certainly experienced this myself, and one particular case of luck – Good luck for some, bad for others – came via my DAX strategy when it presented us with a rare +16.6R winning trade last December and, if missed, although missing the trade wouldn’t have seriously damaged the year’s return as we ended the year with +108.5R in the bank, at 2% risk per trade, taking that particular trade was the difference between an additional +32.8% account gain on that one position alone

…or missing out on this.

And of course, I do know a trader who trades my DAX strategy alongside me – One of the most consistent and focused traders I know personally, in fact – Who did miss that trade, for being away on holiday that week. You can imagine his disappointment and frustration when he returned to see that the move had taken place and that he’d missed out on the win. On the other side of the coin, I also had a trader begin trading my DAX strategy on that very trade …to say he was pleased is one hell of an understatement.

So there you go;

A first-hand example of luck, or lack thereof, playing out for some, and not for others.

Another example of bad luck came via a friend of mine who at one point began trading a shorter-term momentum strategy on a – Get ready for this – 14 trade losing run. Thankfully he was managing his risk at 1% per trade and he knew that the strategy provided edge, so the drawdown wasn’t career-ending like it could very well have been, and he did come away profitable as probability played out in his favour, but, not easy to handle.

Would you have been able to manage risk well enough and have enough belief in your edge so as to see a 14-trade losing run out until probability began to play out in your favour and the losing run passed?

There are so many more examples and stories I could share, some of traders very much on the right side of luck, some unfortunately on the other, but fundamentally my point is this;

Know that luck will most likely play a part in your trading, for better or for worse, and respect this possibility. Make sure that you manage risk so that you can make it through the inevitable bad days, and to keep you there for the good days, because the good days always come around in the end.

Remember; In the majority of cases, 80% of profits come from just 20% of your trades.

Trading is up, then down, then up, then down, until one of those home-runs presents itself …just make sure you’re there when that year-making trade does finally come around.

Food for thought.

– William.

p.s. I initially wrote this article on Wednesday March 6th, but I’ve just revisited to add the below in;

If you follow me on Twitter you’ll have read the tweets I posted earlier today. A first-hand example of bad luck on my part happening in real-time.

…it happens. I can’t dwell on it. As I always say; Next trade.

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Recommended Reading 📚

In an effort to help you carry on learning and growing as a trader, I wanted to recommend a few books that I’ve read that have hugely impacted my trading career.

The below books changed my trading irreversibly, increasing awareness, skill-set, and in turn, my profitability.

I’ve listed them in order of helpfulness, how much value each book has added for me, and how much each has impacted my trading and profitability.

Let’s begin with two of the most important trading books I’ve ever read, hands down, the first written by Edwin Lefèvre and the second by Jesse Livermore;

Reminiscences Of A Stock Operator

How To Trade in Stocks

Regarded as one of the most influential traders to have ever lived, Jesse Livermore is both storied [in the first book] and stories [in the second book] his Wall Street experiences both ups and downs, from making millions to blown accounts and back again.

The crucial lessons, the nail-biting real-life stories, it’s all in here. Again, if you haven’t read both of these yet, I highly recommend that  you waste no more time.

Next, two books by professional trader and manager of New York’s proprietary trading firm SMB Capital, Mike Bellafiore;

The PlayBook: An Inside Look At How To Think Like A Professional Trader

One Good Trade: Inside The Highly Competitive World Of Proprietary Trading

The titles say it all; Both books expand on what it takes to trade like a professional trader, from how to approach the markets from a psychological perspective right through to building data on your most profitable setups and building a ‘PlayBook’ that consists of these, along with much, much more.

If your aim is to trade professionally then simply put, you can’t afford to have these books missing from your library.

They will change your trading irreversibly.

Next, two books by without a doubt one of the most grounded, honest, successful and influential traders on earth today, Yvan Byeajee;

The Essence Of Trading Psychology

Zero To Hero: How I Went From Being A Losing Trader To A Consistently Profitable One

Two truly groundbreaking books from Yvan here, one of which focuses on the all-important psychological-side of trading, and the second which outlines his own journey from losing trader to consistently profitable trader in-detail.

Honestly, I genuinely might not be where I am today without the above two books.

Next, a book that every single trader out there needs to read, as soon as possible, written by Michael Covel;

Trend Following

Whether you trade trends within markets or not, having an understanding of how they develop, form, unfold, conclude and are traded by professionals, along with an in-detail look at the statistics behind them will transform your trading, not to mention increasing your skill-set which will hugely contribute to your overall growth as a trader.

Next, a book by Jack Schwager that needs little introduction;

Market Wizards

This book is packed full of in-depth stories, conversations and discussions with the worlds’ top traders, covering everything from essential risk- management principles, strategies outlined in-detail, performance-enhancing advice, key psychological guidance and so much more.

As the saying goes;

“Only a fool learns from his own mistakes. The wise man learns from the mistakes of others“. The above book will enable you to do just that.

Next, if you’re a trader that has a strategy in-place but has struggled with psychology, execution, trade management and the likes, this book by Harvey Walsh might just change everything for you;

Brain Hacks For Traders

Honestly, since reading this I put the tips, techniques and guidance that Harvey outlines within the book into practice and genuinely saw an increase in profitability grip my trading straight away. I really mean that.

It’s a short but sweet book that only took me just a handful of hours to read cover-to-cover, so it’s perfect for those with busy lives who struggle to find the time to read larger books.

And finally, a book by Steve Peters that’s less focused on trading per-se, but if read and understood will impact your profitability ten-fold;

The Chimp Paradox

If you’ve traded real money even just once, you’ll know how important it is to be able to manage your emotions and be indifferent towards money. Simply put, without this skill, you’re toast.

This book by Steve Peters will help you to understand how your mind responds in trading situations, why you’re mind is tricking you into making these emotion-driven mistakes and more importantly, when you understand this, you can stop making the mistakes, changing your trading for the better, instantly.

Again, all of the above books have hugely impacted my trading, and I hope they’ll do the same for you.

– William.

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If I Would’ve Acted On Emotion, I’d Have Missed Today’s +6.1R $DAX Trade

…thankfully, I didn’t.

Here’s the story, here’s what happened;

This morning, following the open, I was looking at this;

The market was, in my opinion, screaming “get short”. We’d failed to make a new high, we were in a consistent down-trend following yesterday’s huge down-day, we’d retraced slightly overnight which usually signals a continuation, and so on, and so on, and so on.

All the signs, from a ‘guessing’ perspective, from a discretionary perspective, from a ‘trying to read and predict the market’ perspective were shouting “get short”.

…but the problem I had?

My statistically proven $DAX edge triggered a buy signal, when this happened;

At this point, my mechanical rules said “Get long”.

“Wait” I said to myself, anxiously, “I’m buying into this monumental down-move?”. Every ounce of my being was saying; “No, skip this one today, Will. Stand aside. Look at the market for God’s sakes. Do not buy this market, look at it!”.

But my edge –

My statistically proven edge, that’s backed up by rigorous black and white data that proves beyond a shadow of a doubt that this very setup provides wins that’ve been as high as +16.2R

– Said to buy the market.

…and what’s more, the stop-distance given to us was a tiny 7 points, with a target of almost +60 points away.

Again, I thought to myself, am I really buying into a market that yesterday fell by hundreds of points, and is in every single area that I can identify saying get short?

I took a breath…

…and I reminded myself of what’s got me to where I am today, and is the reason I now trade full-time, and that’s this;

I have a statistically proven source of edge, and a set of crystal clear, black and white rules in place that allow me to capitalise on this edge.

All I need to do is follow the rules.

…so that’s exactly what I did. I executed and got long.

What happened next?

We shot to target, banking a monumental +6.1R win in a single hour, growing our account by +6.1%

This is why I trade mechanically.

This is why I remove all of the guessing, the predicting, the worrying and the emotion from trading, because acting on this noise, this nonsense, rarely delivers profits, and hell, it’s even rarer that it delivers trades the size of +6.1R without any ‘work’ whatsoever, not to mention the +7.2R we had just five sessions ago.

We’re now five weeks into the year and are just under +20R up by doing nothing but following a simple set of rules.

My point is this;

No-one can predict the market, and yet this is exactly what the vast majority attempt to do, and they wonder why they consistently lose money.

Why struggle? Why waste the time and the energy that comes with getting caught up in the worrying and the anxiety that attempting to predict without a clear process or framework brings, when a mechanical edge delivers astoundingly better results with literally none of the trouble?

A mechanical edge frees you from the worry, the stress, the anxiety and the panic that trading with discretion forces on you.

I’m sure many traders had losing days today as they tried to ‘read’ and ‘feel’ where the DAX would head. We did none of that.

We waited for our entry signal, executed, and profited.

…and that’s all that we ever need to do.

What impact would an edge that could finally free you from all of the roadblocks that’ve held you back so far –

The guessing, the predicting, the worrying, the stress, the anxiety, and all of the other hurdles that discretionary strategies leave blocking your path

– have on your trading?

If you’d like to completely remove all of the above, all of the things that hold back the consistently losing majority, and you feel you’d benefit from trading a statistically proven strategy using a clear set of rules;

I can help.

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Trading Is Just Like… Going To The Gym?

Think about it…

So many people go to the gym, yet very few ever see significant, lasting results. They might lose a little weight, but it’s all soon put back on. They might gain a little muscle, but it’s all soon gone again.

The problem is, they have unrealistic expectations of what’s possible.

…and no plan or process in place, which is strange because, much like in trading, that is all you need to succeed;

Realistic expectations, a plan, and a tried, tested, proven process to follow.

We know, from a simple, logical perspective that if we follow a meal-plan and exercise regularly that, over time, we’ll lose weight, build muscle and achieve our dream body.

We also know, from a simple, logical perspective, that if we follow a trading plan with consistency, along with trading a statistically proven strategy, we’ll trade successfully over the long-term and finally achieve our dream of trading profitably.

At the gym though, much like in a new traders’ trading account, it takes time for the results to appear and become tangible…

After a month… nothing.

Two months? …nothing.

Three months? …still nothing, and then it happens;

“I quit, I can’t do this. I can’t keep this up. I’m not seeing any results and I’ve sweated it out for three months?! Four months?!”

…and you give in, when results were only a meal-plan and another month or two of hard work away. It’s all over. Yet again, another dream falls by the wayside.

How much more of your valuable time are you going to have to waste, and how much more of your hard-earned money are you going to have to lose to the markets before you say enough is enough and put a trading plan and a proven strategy in-place?

…simply put, it’s all you need.

The freedom from the rat-race, the ability to make money on your own terms, to live life without having someone controlling the days and the hours that you work, the luxuries that you’re missing out on; It’s all waiting.

It’s interesting because, deep down in side of us all, we know for an absolute matter of fact that trading profitably is possible. But again, only with realistic expectations, a plan, and tried, tested, proven strategies to follow.

In the gym or in your trading;

You know success is possible, you know the dream can become a reality, so ask yourself those crucial, all-important questions, because these answers will tell you exactly whether you’re headed for success and dreams achieved, or failure, yet again;

  • Do I have realistic expectations?
  • Do I have a trading plan in place *that I follow, win or lose* on a daily basis?
  • Do I have a statistically proven strategy in place that provides edge, and *that I follow, win or lose* on a daily basis?

If the answers to the above questions are yes;

Congratulations. You’re either trading profitably now, or you’re very much headed towards profitability. Keep up the focus and the consistency.

If the answers to the above questions are no; 

Admit it to yourself, you know the reason you aren’t achieving success. You know the reason you aren’t moving towards your dream of trading profitably, and it’s because you don’t have the above in place.

…whether you do anything about it or not, well, that’s on you.

Don’t be the person who goes to the gym for a month, doesn’t see results and quits…

Be the person who decides, this is it. Don’t allow your dreams to remain dreams any longer. Do what you know you have to;

  • Learn a statistically proven strategy that provides edge.
  • Put a plan in place, and follow this plan no matter what.
  • Gain consistency and remain focused, stay the course, and achieve the dream of trading profitably.

…it really is as simple as that.

Food for thought – William.

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Is Trading A Scam?

I was approached by a trader a couple of days ago distraught with the losses he’d incurred over the last few months and years. He came to me after finding me via Twitter and reading my blog, seeking guidance on process and most importantly removing emotion from trading.

We jumped on Skype together and his first question was, as the title of this Email would suggest, “Is trading a scam?”. He told me that every time he seemed to either execute a trade, close a trade or re-open a trade the market would go against him. He’d convinced himself that brokers were all a scam, all setup simply to take his money. He believed that whatever position he opened, long or short, the trade would be a loss no matter what.

And if a trade moved in his favour? He was so frightened of then losing the very small profit he was finally looking at, he’d close the trade before his target was reached. Emotional decision after emotional decision, destroying his trading results and slowly blowing up his second trading account.

A quote from his Email to me; “Honestly Will, is it all a fix or do people really make money trading?”.

To assure him it is possible, I showed him a few real Emails and Twitter messages from traders I’ve worked with [Some of which are here on my blog] including a trader I taught my GBPUSD strategy to recently who make +6R in 4 consecutive days trading with a +1.5R target each session, telling me how well he was doing and how pleased he was. A real person, a real Email. Black and white proof that yes, you can make money trading. Anyone can if they manage emotion and trade a strategy that is proven to produce results.

“So what’s the answer?” He went on to ask …well, for me and every single one of the traders I’ve worked with so far in either mentoring or sharing one of my strategies/processes, the answer has been the following;

Applying rules. Trading mechanically, completely removing emotion from the equation.

See, when you have a black and white, statistically proven process with trackable, testable data that backs up each action and outcome, you know exactly when you’re doing the right thing and more importantly when you’re doing the wrong thing. There’s no question. Did you execute [effectively, with precision] in line with your strategy? Yes or no, it’s as simple as that. If the answer is yes, across a large enough amount of trades you will profit. And if the answer is no, you know exactly why you aren’t seeing results, and the best part is, because we have rules you can zero in on exactly where you’re going wrong.

Discretionary trading is fun and watching a flurry of traders make predictions online is exciting, but it’s completely unreliable and as the statistics show, a vast amount of these traders fail. If not quickly, eventually. Whereas mechanical traders don’t make predictions, we simply trade recurrences that we have discovered within markets, utilising data and statistics to aid our execution and our results are proven, black and white, and can be applied by anyone.

As soon as I began trading mechanical strategies, those being my GBPUSD, DAX and D1 Swing strategies, my trading completely changed for the better. There was no more guessing, no more predicting and no more worrying…

After all the days, weeks and months of stress, disappointment and constant hard work that I’ve put into my trading business [If you follow me on Twitter you’ve seen how many spreadsheets and data sheets I’ve laboured over], honestly, trading has never been this easy, consistent and stress-free.

So if you find yourself in the same position as the trader I was approached by, or hell, you’re currently where we’ve all been and you’re working hard but emotion is holding you back, I’d implore you to either research mechanical approaches to trading or take on a mechanical strategy because it might just change your trading the way it changed mine, finally resulting in a structured, black and white view of the market/s you trade and the confidence to follow a proven strategy and process.

If you’re interested in learning more about my strategies, click here, or if you’d like to know more about how mechanical strategies work, or maybe you have questions you’d like to ask, feel free to Email me.

I’m always here and happy to help and/or answer any questions.

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