Baby Steps.....Pip Squeaks.....and your road to Success

When we start out trading, we can make some huge mistakes.  And huge mistakes can sting.....so we not only remember what they feel like.....we will adjust our methods in order to prevent them from happening again.

But it is the small mistakes that really get us.  In fact these small mistakes can actually keep us from ever becoming a successful trader.  The small mistakes just hang out unnoticed and pick away at our account.  Sometimes we even know that we have a problem.....and we are frustrated about it....but we just can't put our finger on the problem.

Well first we have to back track a little and understand some fundamentals.  And I am not talking about fundamentals such as supply, demand and the weather.  I mean a fundamental like.....trading is a business.

Ahhh....well duhhhh Dave!  Seriously, if we look at trading like it is a business.....which it is.....we can immediately see something that is blatantly obvious.  And that is......that most traders will fail......and that most new businesses will fail also.

Well now that I have your attention, why do most businesses fail?

There are two major reasons......and there are many more reasons, but two really are killers.  The first is under capitalization.  That's a fancy way of saying that they didn't have enough money to hang on during the hard times.....or they just blew it when they were calculating how much money they would need to start the business in the first place.

The second reason is that the new business owner just didn't have the experience to do what he or she was doing.  Sometimes they are experts on the product or service that their business is centered around.......but they do not know enough about business administration.....or money management.

Now experience is a funny thing and it reminds me of something that I said in a meeting once.....in front of my client.  We were in the middle of a project that was basically in trouble.  To me it was real clear what the problem was.  But the solution.....well......that was going to be complicated.  Anyway....my infuriated client asked me what was going on......what in the world is wrong with these people.....meaning the workers on the project.

I calmly replied.....without thinking too much about the reply......"well, they don't know what they don't know".

Basically I was just implying that they just didn't have the experience yet, to do what they were doing.  They were unlearned so to speak.

And that phrase became very popular with my client......and I heard him repeat it over and over again for years.  Well, lets face it.....it is true....we don't know what we don't know.  At least not yet anyway!

So now let's look at these two top reasons why new businesses fail and apply that to trading for a comparison.  Well when we start out in trading it is very obvious that we typically do not know what we do not know yet.  So we enter into a business.....that historically has shown that most traders will fail......and we don't know what we don't know yet.....and yet we jump right in.  And we are trading against high speed computers, using high frequency algorithms and don't forget......against some of the brightest people on the planet.  Gee......sounds like a walk in the park doesn't it?

So we need to learn as much as we can and we need to do that as quickly as we can.  The best way to do that is to have a mentor.  You see if we have a mentor, we have someone who is an expert.....has many years of experience.....and he or she already knows what he or she should know.  And the best thing is that they will show us the mistakes, before we make the mistake.

But let's face it......a lot of our experience will need to be earned.  They say that an expert is a person who has done something for at least 10,000 hours.  Okay......for a general worker there are 2,080 hours in a typical work year.  Take 80 hours off of that for a 2 week vacation and the basic work year is 2,000 hours.  That means in order for us to even start to qualify to be an expert, we need at least 5 years of experience.  And......that seems to be about right doesn't it?

So we either have to put in 5 years of making dumb mistakes.....or better yet.....we find someone who is doing what we want to do......and make sure that they have been doing it for at least 5 years.  Because that would sort of qualify the individual as an expert....and that's what we need as our mentor.

But make no mistake about it.....learning how to trade requires screen time and lots of trades.  So be prepared.....mentor or no mentor.

And when discussing a business we also noted that the business owner should understand business administration.....and money management.  This is critical!!!!  But the first step for us as traders.....and especially Christian Traders......is to take trading seriously and to learn how to run it like a business.  And....we need to learn proper money management.  But more on that in a minute!

Basically, that covers the second reason why a new business would fail....and why a new trader will also fail.  We need to learn the business.....we will make mistakes and there is absolutely no way of getting around that.....and we have to put in some time.

The first reason why most businesses fail is under capitalization......and guess what.....that is the biggest reason why a trader will fail also.  Almost all of the new traders that we meet today.....especially with this crazy economy, want to learn how to trade and only have $2,500.00 up to maybe $5,000.00.  And if you do not know what you do not know yet......that can disappear in a heartbeat!

Money to a trader is like inventory is to a business.  To a trader it is all about the equity in our account.  And with out proper money management rules.....something we do not know if we do not know yet.....we will most certainly fail.  It is essential....it is critical.....it is the absolutely most important thing that you can do in order to be successful as a trader.....and that is to PROTECT THE ACCOUNT.....AT ALL COST!!!

You have to be merciless at protecting your account balance.  Again......you have to be MERCILESS at protecting your account balance.

Say that 10 times...out loud!!!  It is that important.....or better yet.....it is the most important thing that you can do as a trader.

Let me put money management into a slightly different perspective than what you are mostly accustomed to and that is....preventing losses is one of the most important rules.....and if you do have to take a loss....make sure that the loss is the absolutely smallest loss that you can take.


And that does not mean that a tighter stop is the be all, end all answer......when in fact an improperly placed stop will actually increase your risk of loss over time, by constantly taking small amounts of money from your account!  It's like having a hundred or a thousand paper cuts......eventually, those small paper cuts can become lethal.  It's the same thing with constantly being tagged with those improperly placed stop loss orders.  Eventually they will deplete your account.

Stops have to be placed above or below the proper support or resistance point.......based on the current volatility.  Now how much the proper stop will cost you.......well that's something to think about as we go further with this discussion.  So think about that as we continue......where should my stop go....and can I afford that stop amount,  the way I am currently trading?


We need to filter our trades to make sure that our entry is not only a good entry at the right spot......it needs to be on time.  If we do that and we enter the market......the market should take off and not even look back at our stop loss.  If how ever it stalls.....and starts to flounder.....maybe we should rethink our entry.  The last thing that a newbie trader should be doing is trading the consolidation ranges.

We want impulse.....we want the market to drag us into profits.  So with this in mind, we want to protect our account from bad timing and bad entries.

To me and those who really understand trading and trading with probabilities, the most important rule would be.......make sure that your winners are larger than your losers.  If you understand trading with probabilities.....you can be a really bad trader.....and yet be a very profitable trader.  But that's a blog entry for another day.

Before you ever enter a trade, it should have a target that is at the absolute very least, a 2:1 reward to risk ratio.  And I say at the very least!!  If you study probabilities you will see that a marginal trader.....or a new trader just starting out, using a 2:1 ratio would end up being a break even trader at best.  We need to focus on swings that based on volatility and past swings, would give us a reward of 4 or 5 times what we are risking.

Think about this.....we get into trading to make money.....not to become a break even trader.  So stretch your self a little and make an effort to seek the trades that give you a decent profit.  If you do not seek.....you will not find!

If we do that and constantly aim for trades with rewards higher than 2:1......we are on our way to becoming successful.

So we want to get into trading and we know that most of us will either fail or give up.....and giving up is also failing when you think about it.  We know that we have a lot to learn.....and we know that it will take time, probably at least 5 years before we can walk the walk.  And we know what the biggest reasons are that will make us fail.....with under capitalization being at the top of the list.  And we also know that trading is a business and like trading, most new businesses fail also.

Okay.....now back to the title of this blog....."Baby Steps.....Pip Squeaks.....and your road to Success".  So we need to approach trading like baby steps.  If you have kids you remember the little ones with their arms out to their sides as they took their first steps.....and them falling down.  Some of them even get road rash on their noses because they even tried to run....before they learned to walk.

So we can just apply that to trading and I think we can relate to that in our journey in trading pretty easily.  Sometimes we can go faster by slowing things down a bit.....and learn how to walk....before we start to run.

Or in our case.....the proper methodology of taking on a trade....and managing that trade.

But what about the pip squeak?  We have all heard of the term.  Usually it comes from adults or parents and is aimed at the babies, toddlers....or someone small.  But what is a pip squeak?  Well we have all heard another similar term and that is a penny pincher.   Well a penny pincher is a stingy person....a cheap person....or maybe even a frugal person on steroids.  A pip squeak is even worse than a penny pincher......and is really, really cheap.  Let me explain that.

And a penny is represented as $.01 or two places out from a dollar....meaning of course that it takes 100 of them to equal a dollar.  Well a pip is even smaller than that.  A pip stands for a Price Interest Point.....which in almost all cases is represented as $.0001.  And the currency traders over in Europe and now in the rest of the world refer to it as a pip, or the smallest price movement of a currency price change.

Now to be technical about it.....in today's economy and with the popularization of currency trading....they now even go beyond 4 decimal places and they call that a pipette....but I think if you called someone a pipette, you may get punched.

So what does this have to do with our success?  Well we have a need to protect....at all cost....and to be merciless about protecting our equity or our account balance.  And that starts with a very sound money management system.  And that means that we have to establish rules of how much we can risk with each trade.....with each day.....with each week and with each month.  And we have to do that down to the penny.....right?

But wait a minute.....a penny is 100 times bigger than a pip!!!!!!  Say what?

If we multiply a pip which is .0001 times 100 it equals .01!!!!  So if we want to protect our account at all cost......we want to be merciless......we want to protect our inventory....our precious account.....and we are only a penny pincher......well we are missing a great opportunity by passing up an chance at being a pip squeak instead.  And by becoming a pip squeak.....especially if we are just getting into trading or.....in almost all cases....we are under capitalized....well then we may just increase our chances of success by 100!!!!

Helloooo........!!!!  Just checking to see if you were paying attention to this!

Now I already know whats going through your mind....and that's because it has already gone through my mind.  You see we all have pet markets.  We believe some where inside our heart or in some dusty crevice of our brain, that if we only trade the mini S&P.....or if we only trade Gold.....or if we only trade the Russell, well then that will make us successful.  Why....because that's what the experienced guy's trade.....right?  And we want to be just like them.

But if we accept the reasons why a business would fail.....and we accept the same reasons why a new trader would fail, we have to do something a little different then those folks if we want to be successful.  If we refuse to do that, well then we are destined to becoming part of the sad statistics.....and that is that most traders will fail!!!!

So what am I suggesting here?  And of course you don't have to listen to me......but I would at least ask you to think about this.

First of all implement a couple of simple rules for your money management.

These rules would be;

1. Do not exceed 2% of risk against your account....per day
2. Do not exceed 10% of risk against your account per week
3. Do not exceed 20% of risk against your account in 30 days and if you do....go back to the simulator for at least 30 days.

Now right off the bat understand that rule 3 does not apply when you talk to experienced traders, because in most cases, they will tell you that if you exceed 20% draw down.....it will be almost impossible to recover from those types of losses.

And if you think that you are so special that you are the one that can prove them wrong......odds are that you will blow up your account.

But instead, I would highly recommend that you stick with rule #1 as if your trading life depended on it.....and if you got to rule #2......get back to the simulator until you know that you have fixed the problem.

But wait there is a big problem here.  The problem is that most new traders are in fact under capitalized and are destined to fail......unless they become a pip squeak.

You see 2% against....lets say a $2,500 account....is only $50 per day!!!!!!  And trading the emini S&P.......well gee.....you can only risk 1 point and then that's it.

If you lose....you are done for the day!

And what about Gold......because you just have to trade Gold right?  Well lets not even go there.....because you can't afford the margin....so you can't even get into a trade there....never mind being able to afford setting a stop loss.

So how in the world is a newbie supposed to get started?  Well what about Forex?

But I don't want to trade Forex!!!  Well the Futures market also has mini and micro sized currency contracts so that is another option that we can consider.  Maybe we should even consider some other Futures type of contracts.....something that can get our risk down and make it more manageable.  Or....we could even quit!

But let's not be so hasty......let's go a little further and see if we can figure this out.

The fact of the matter is that if you have a small account and you are just starting out in trading....or you have been trying for a while and can't push it over the top yet, then you have three choices.  You can trade on a simulator until you can raise enough capital to be properly funded, you can trade something that will fit your money management rules and protect....at all cost.....your account equity.....or you can quit.

Well actually there is a fourth choice and that is to keep doing what you have been doing and expect a different outcome.  But a smart guy that we all heard of states that following that road....is actually the definition of insanity.  So maybe we should think about this a little.

But let's at least look at Forex.  With Forex you can scale down your trade size when ever you want.  AND if you were smart you will already be thinking that it also means that you can scale up any time you want.

So a full sized lot in Forex is worth $100,000 and costs about $1,000 for margin.  Each pip is worth $10.  Okay but if we have a small account that is still not going to work because we said a 2% risk on a $2,500 account is only $50.00.

Okay..........we can adjust our lot size down to a mini sized lot which is worth $10,000 and it will cost about $200 for margin.  And the pip value is now $1.00 per pip.  Okay.....now we are talking!

But lets say that we did that and still got into trouble........well they also have a micro sized lot which is $1,000 in value and is $.10 per pip.  Wow.....this sounds like we could manage our account very easily when we are having good days....and when we are having bad days. 

But wait.....there is also a nano lot size which is worth $100 in value and is $.01 per pip.

So Forex offers an incredibly flexible way of managing our risk......and protecting our precious inventory which is the money or equity in our account.  And remember we need to be merciless about protecting it.

Now let me tell you a little about some of my week this week.  Actually it is only about the last 3 days.....but it was very enlightening to me on a personal level......and it made me think about all of those new traders that are just getting into trading.  And even more so......it made me think of my frustrating years of trying to learn how to trade.

I started to trade an account that my new employer is "watching".  Oh the scrutiny is pretty intense as to what they are watching out for.  So right off the bat, there is a lot of pressure that I normally wouldn't have to deal with.  But its their money so its their rules.

Anyway I started out with the mini lot size.  $1.00 per pip is outstanding when dealing with extra pressure.  And the $.40 for commission makes me smile when ever I think about it.  But anyway the EUR/USD went into a bear flag and while attempting to catch a break out....I took a couple of small losses.  No big deal.....and then the next day....I started to protect that account with a vengeance.  If it even looked like it wasn't going to go....I scratched the trade.  And then finally caught the break out and got back into the black.

Now when I go back to my account and looked at my stats, my draw down for the week was .9%.  There is a decimal point in front of that.....so it is .9%!!!!!  And I went right back up into the black and my winners were more than my losers so that's the way I wanted to end the week.  Next week is a whole new week, but at least my equity curve is heading up again.....and a .9% draw down......well I can certainly live with that.

But it really impressed upon me about how much control that I now have.  I can go up in size when I am doing great.....or better yet....put on some small trades and get some profit cushion in the account....and then raise up the lot size to gain bigger profits as I trade during the day.  In that way I would never even have to  think about the daily 2% limit.

And if I have a bad trade.....I can instantly drop down to a smaller lot size.

And as far as money management goes......well 2% risk is no longer a problem for my account.  Because in Forex I have total control over my risk.......by choosing the right sized lot for the current situation.

So becoming a pip squeak can also become your new road to success.  Lets face it.....there is no shortcut to the 10,000 hour expert rule.  You have to put in the screen time and trade a lot in order to get the experience that is needed in order to become successful.

But if you have ever blown up an account in the past......or are still struggling with just being a break even trader......take a serious look at Forex trading.  You will have the control that you need in order to manage your account properly and your money can still grow.

But you are in total control now.

And lastly.....time is money.  We all know that if we could find a great set up on a 4 hour chart or even a daily chart, we could make a killing on that type of a trade.  But there is no way for us to afford that kind of trade......with a $2.500.00 account.  Well now its different.  Minimize your risk with a good entry, choose a small lot size so that you can use the proper stop that is required......AND add to the position when the profits start climbing on the position.

Huh......all of a sudden you can trade like a pro!  And now by becoming a pip squeak......your road to success is now smoother and has more scenery.  Huh......go figure!

I hope that this gives you some food for thought.....and may God richly bless you for becoming a better steward of His money.........