Last week in trading blog-world I stumbled across something truly frightening. I know that sounds very dramatic, and you may think there is nothing all that frightening about trading – it’s just trading after all – but let me explain.

One of my recent followers on Twitter has a neat little trading strategy up his sleeve. To quote him - “I’m dedicated to sharing the technique of selling puts for income in the stock market. It’s fast, easy, and profitable!”

Hey, fabulous!  Let’s do it! I might get my grandparents in on this fast, easy and profitable action and we will all get rich together!

Understanding the Reality About Trading Strategy

The problem here is that trading is not fast, it’s not easy and until you understand those two things it’s highly unlikely that it will be profitable.

Trading as a whole involves so much more than knowing a strategy – in fact the strategy is only the starting point, and quite possibly the least important part of the trading equation.

So what else is there to trading?  Surely all you need is a profitable strategy?

A profitable strategy is certainly a great starting point, but it’s the foundation that the strategy sits on that will determine how successful the process is going to be.

Building a Firm Foundation

• You have to understand that trading is a big picture venture. Focusing on strategy alone is incredibly one-dimensional. By thinking it’s all about strategy, a trader can get way to involved with each individual trades outcome, whereas in reality the success of the strategy relies on the edge provided over a large number of trades. This is the precise reason why no strategy is ‘fast’. The whole process takes time – time for trades to develop, time for accounts to grow, and time to allow the strategy’s edge to work. The whole process is long, and at times very slow.

• Adequate capital.  You gotta have money. I know it sounds obvious, but most people have wildly unrealistic ideas about how much capital is required to make a living from trading. I had a guy email me once, telling me he only had a couple of grand and was hoping to build that up to $25k so he could trade full-time.  I suggested that while he could certainly trade full-time with $25k, he might need to move in with his mother. Think of this – the best fund managers in the world average about 30 – 40% a year.  Even if you were an actual market wizard, could you live comfortably off $10k a year?

• Trading mindset – This area is way too huge for a bullet point, but involves things like embracing losers, not getting obsessed with the markets, and being able to cut losses and let profits run which seems easy but in reality is completely the opposite of what we’re wired to do. Establishing a healthy trading mindset also involves huge amounts of time spend on self-evaluation and reflection – which is primarily what you’ll find when you explore my blog.

• You need a healthy understanding risk. If you don’t know how much you stand to lose, how much you stand to gain, and the probability of either of those things happening, you’d be better off with your money in the bank.

• Get pessimistic. I’m not talking about turning yourself into a negative, sad little person here – I’m talking about fostering the ability to see the worst in every strategy/trade/idea you come across that involves putting your money on the line. So often traders focus on the best and happily ignore the worst which is entirely to their detriment as it inevitably results in disaster. So if you can pick holes in everything, you will avoid nasty surprises and be sure that it’s worth risking the worst case scenario to achieve the best case scenario.

So, back to my frightening discovery. Not only is this guy totally strategy-focused, his strategy sucks. Selling puts for income is the worst strategy ever – you get a pittance every month, and take massive risk to do so.  Added to that, the only way to effectively manage that risk is to spend some of that pittance on protection which makes it a reward of maybe 10 cents to every dollar risked. Awesome.

(It was this darling strategy that first seduced me into the markets. I know – I was an idiot and a floozy.  I value myself much more highly these days :) )