You all have probably heard the statistic that 95% of traders fail, right? The bad news is that the actual number is way higher and broker research suggests that the failure rate is more around 99%, which isn’t totally surprising though; believing that 5 out of every 100 people who start trading end up making consistent profits seems rather unrealistic looking at general retail trading. The good news, is that the failure rate is so high not because trading is extremely difficult (although it is certainly challenging), but because people do not know what it takes to become a professional trader and, for the most part, they do the exact opposite of what they should be doing.
Where contrarianism starts – think outside the box
“Don’t just think out of the box, stand on the box to see new possibilities and opportunities in becoming distinguished.” – Onyi Anyado
All traders read the same books, they follow the same principles of technical analysis, they adhere to the same old rules for stop and risk management and they all fall for the typical trading myths. At the same time, they all experience very similar results: failure. But instead of connecting the dots, most fail to see the bigger picture and just keep doing what they have been doing before.
“Insanity: doing the same thing over and over again and expecting different results.” – Einstein
Technical analysis fallacy – common knowledge is seldom right
If you have been a regular reader of our articles about technical analysis, you will have noticed that we often highlight and criticize the retail approach of chart analysis. Multiple touches on a support level are not strengthening the level, price action patterns are retail patterns and stop runs occur frequently, swing highs and lows are retail clusters, anticipating a bounce off a level is just too obvious, let alone trading blindly off of indicators or patterns, believing that your broker hunts stops, or moving your stop loss to break even. And the list goes on.
The contrarian trader, on the other hand, knows all that too. He has a profound knowledge of how retail traders view the markets; however, his approach is in sharp contrast to what qualifies as common knowledge in trading.
You have been hard-wired to screw up
Retail entries are hard to withstand and they lull traders into premature entries. After having listened to the “common knowledge of technical analysis” you have internalized the belief that after a pin bar, a reversal is likely; a bounce off a strong level is what usually happens; when the Stochastic turns, price will turn too; when markets hit a multi-week high, a reversal is likely; after a 50% Fib retracement, price will turn; you should trade without a stop loss and so on.
The first step when it comes to technical analysis and looking at charts, thus, has to be unlearning what has led to your failure up until this point. You have to view charts with the eyes of an amateur, but trade like a professional contrarian.
[bctt tweet=”You have to view charts with the eyes of an amateur, but trade like a professional contrarian.”]
The contrarian trader’s work ethic
What feels good is seldom right – not only in trading; the things that set apart high performers in any field is that they do the things they don’t feel like doing, but which will have the greatest impact on their performance. Instant vs. delayed gratification is a well-researched phenomenon that describes the thinking and mindset differences between losers and top performers.
I have worked with dozens of traders and after the initial conversation, it usually becomes very obvious why they haven’t achieved the level of success they are after. The following points show how most losing traders approach trading; if you find yourself among those points, don’t feel discouraged, but use it as an opportunity to fix your trading.
- You look at charts most of the time. Flipping through time frames, randomly going through different instruments, applying different indicators and charting methods, while hoping to find a trade. You still believe the myth of screen time.
- You don’t have a detailed trading plan before you start your trading sessions. If you don’t have a detailed trading plan for every instrument, mapping out potential trade ideas, you act in a reactionary mindset.
- You don’t have a trading journal. Yes, effective journaling is a labor intense and often tedious task, but I have never met a successful trader who does not keep detailed records.
- Wrong allocation of your resources. People often say that they don’t have enough time, which is a lie – you just use your time in a very inefficient way. Checking emails too frequently, being on your phone all the time, watching mindless TV, browsing through forums or social networks are big time-wasters. If you are like most, you have probably invested hundreds or thousands of hours trying to make trading work. However, you usually spend your time on things that don’t make a difference.
- You have changed your system recently. This topic often leads to intense arguments where (losing) traders claim that their previous system didn’t work and they had to change it. The truth is, your last system was just as good as your current one and it will be as effective as your next one. Successful traders never change systems; they adapt and make tweaks, but they never ever change their whole approach. You probably shake your head right now, but just take a look at your equity graph and you will see that I am right.
Thus, the opposite approach to the one of the losing trader would look something like this. Mind you, this just scratches the surface:
You spend a few hours every night writing detailed trading plans and journal your past trades. You don’t browse forums or engage in any other time-wasting activities, this has to do with self-respect and professionalism. Ask yourself: how serious are you about trading really? You stop watching charts all day long, but instead use price alerts and close your platform for most of the time to work on your skills. You immediately stop changing systems – you understand that as long as the premises of your trading strategy are in place (risk management, money management and capital protection rules), it is up to you to make your strategy work. There is no one approach that is superior over the other; every single strategy has the potential to make money if you have the skills to turn it into a profitable one. You live by the concept of deliberate practice to achieve mastery and continuous self-improvement.
Retail trading often reminds me of the Lemmings where people mindlessly walk into the same direction without looking ahead and questioning where their next step might take them. And even in the face of constant failure, most are unwilling to change or look for alternative approaches; no, just buying a new system does not count here.
The true contrarian trader, who is an independent thinker and a self-made trading professional, has long stopped listening to the chatter of average retail talk. But besides his “thinking outside the box” mindset, he is also a hard worker who adheres to the principles of deliberate practice, he doesn’t shy away from doing the uncomfortable things and he is willing to go the extra mile. In the end, it’s the one and only way that will allow you to achieve any form of success in trading.
This article will sound weird and wrong if you are not ready to receive the message yet. But for traders who have been around for a while and who have gone through all the hardship, this article will ring a lot of bells.