Novemeber 28th, 2024

Simplifying the Mechanics of Trading

How to teach someone to trade

A wonderful aspect of the internet is crossing paths with interesting people.

One of them is Dave (aka ‘DMac Trades’), a full-time trader and a reader, who reached out to me last year. This led to a two-part stack on how to journal your mental state in a quantifiable way.

Another topic Dave brought up in our private conversations was the fact he taught his teenage son to trade.

This struck me as a good topic to pick Dave’s brain on:

How do you teach a child, or people in general, to trade?

In this interview

Dave’s background

Tell us about your background. How did you get into trading?

I fell in love with trading in 1987/1988, when the only ‘real-time’ data available to retail traders were the stock quotes printed in the business section of the daily newspaper.

I could spend hours looking through the quotes, reading articles on publicly traded companies and trying to identify potential opportunities. And I traded actively for ten years — until 1999 — but largely put it aside after deciding to pursue a professional career in the industrial sector.

As I approached my late forties, I decided to pursue my love of the capital markets: I made a career switch and became a day trader. I’ve been trading full time for a little over five years now, with a focus on price structure and volume.

That’s also what I focus on when teaching my son and a few other people.

Trading is hard, but the mechanics can be simple

Has teaching your son given you new insights into trading itself?

Definitely! I think that teaching a child, or a young person, serves as a good reminder that this business needn’t be so complicated. Difficult — yes. Trading isn’t easy, and like any other profession, requires significant time and effort to master.

But you can simplify the mechanics of trading.

When you curate a learning process devoid of all the stuff that confuses people, you can go from zero to profitable relatively quickly. This is what I’ve seen with my son: he benefited from all the mistakes, rabbit holes and wasted time that were part of my own journey.

I suppose that when you teach your process to someone else, you’re inclined to make it as simple as possible.

Right. You need to figure out how to distil your process into a package that can be taught and shared with another person in a logical and easy-to-understand approach.

It forces us to be more concise and to think very clearly about how we’re going to express it — both in terms of our choice of words and what we’re showing on the screen. You need to make your trading style as simple and efficient as possible to pass it on effectively.

The big take-away for me is that the mechanics of trading need not be so complicated. It’s hard enough. Even in its simplest form, trading is hard because we’re always fighting ourselves.

In what way do we fight ourselves?

While no two people are the same, most of us are emotional creatures. And many of the emotions we experience negatively influence our ability to make objective decisions as traders.

Fear, greed, anger and jealousy are all examples of emotions that can be destructive in trading but are fairly benign otherwise. And since trading is a profession where two of the most stressful aspects of life — losing and money — are constantly at the forefront of our minds, traders are prone to emotion.

So, when I say we’re “fighting ourselves”, I’m referring to this place of duality where we must make objective decisions while experiencing feelings at odds with our ability to be objective.

But the cool part of this topic is that anyone can learn to create an environment where trading decisions aren’t unduly influenced by emotions. Self-awareness is an incredibly powerful tool, as are being disciplined and having a very specific trading plan.

4 key elements to successful trading

What sort of programme did you build to teach your son to trade?

I strongly believe successful trading flows around four key elements:

  1. Risk management
  2. Price and volume structure
  3. The maths of trading
  4. Losing like a pro

Those are ordered by importance.

So, my first goal was to teach my son the mechanics of risk management and, most importantly, that capital preservation is critical.

We spent hours doing exercises on how to calculate position sizes with appropriate risk, as a function of overall portfolio size and setup quality.

Discord exercise

Evaluating naked charts

What are other key elements of your programme?

I believe every new trader should first learn to interpret naked charts.

To me, that means having nothing on the chart except candlesticks — or another preferred expression of price — and volume bars. Because price and volume are the only accurate real-time indicators! Everything else is either a lagging indicator, or a calculation based on price.

Naked charts force the trader to become an expert in evaluating price action — which is the job! At the end of the day, a trader must:

  • Evaluate price and volume movements;
  • Develop a thesis as to a specific degree of probability that price will move in a given direction; and
  • Then risk an acceptable level of capital in the market, with the aim of making a positive return on that capital.

How do you teach someone this skill? Did you give your son specific exercises? Or is it all a matter of focused reps?

We start by going over hundreds, if not thousands , of charts. Over the almost 30 years I’ve been looking at the markets, I must have put in thousands of hours just studying charts.

Aspiring traders must look at chart after chart after chart, using their drawing tools to mark ‘pivots’ and highlight notable volume bars. Those are areas where price turned, finding support or resistance. [Examples in screenshots below.] And if price fails through those levels, that’s when you really start paying attention.

Stock chart 1
Stock chart 2

The more you go over charts, the more your eyes become accustomed to identifying those areas in real time. You’re finding those spots that can become a reversal setup, or a setup failure, or another high-probability area.

It’s your starting point to learning how to actually trade.

Losing like a pro

You point about ‘high-probability areas’ seems to link to one of the key elements your teaching programme covers: losing like a pro. Could you elaborate?

The success of a trader lies in their ability to think in probabilities.

Traders who quickly grasp the notion of probabilistic thinking — who quickly understand that certainty doesn’t exist for individual trades, but does for systems as a whole, provided you have a statistical edge and a systematic approach to trading — will progress much faster in their journey.

They need to get into the mindset of accepting the risk and just letting the trade play out.

Why is this so important?

A mindset to avoid losing at all costs is detrimental to trading success.

For example, I have a profitable trade setup with a 36% win rate. That means for every 100 trades I take with that setup, 64 are losers.

Imagine if I became frustrated, angry or fearful every time I had a losing trade. I’d be in a constant state of emotional distress, and never make any money! Or at least, I wouldn’t hang on to my profits.

Tom Hougaard wrote the book “Best Loser Wins”, which I highly recommend. I also highly recommend chapter 11 of Mark Douglas’ book “Trading in the Zone” and Annie Duke’s book “Thinking in Bets”. These all expand on this essential mindset.

The importance of simplicity

What personal benefits have you found from teaching other people to trade?

It’s forced me to reevaluate my own trading system. I needed to be able to explain it as simply and efficiently as possible — that was a big one for me.

I also think teaching keeps us engaged as traders. Full-time trading can be very lonely, and there’s no question that engaging with others engages our own mind — it’s very beneficial to ourselves.

It also forces you to step outside your own mind — your own thought processes and confirmation bias loops. When you’re talking to other people, and they ask you intelligent questions, you’ll find they question your trading systems. They challenge certain aspects of it, which can lead to you improving that system.

Can you share an example?

My son questioned whether certain elements of my trading system were necessary. He thought they might be duplicating what a different element was already achieving.

And guess what? He was right! So, we removed them.

The fewer inputs you’re dealing with, the fewer decisions you need to make, and the less you’ll deal with decision fatigue and confusion. That makes for better trading, as it’s easier to stay away from overtrading, and be patient and disciplined.

The more you strip out the complicated, the easier it is to build confidence and achieve profitability.

base.report is designed to be simple

When I asked Shan (aka ‘e0’), the software’s founder and developer, what problems base.report solves, he replied:

“For one, it massively cuts down scanning time. I think most traders apply their filters to end up with hundreds of charts. They then manually go through those hundreds of ideas to find a handful of actionable ones.

“In base.report, I can sort charts by resemblance to my ideal chart pattern [our walkthrough teaches you how]. I also use the ‘Charts’ layout, which displays multiple charts at a time. Combined, I can find setups I like in just a couple of minutes.”

This makes base.report an ideal candidate for simplifying your trading routine.

Want to give us a go? You can use our screener right away here — no strings attached.

Want to learn more about base.report first? Check out the full Q&A with Shan.

Give us your feedback!

We’re always looking to improve base.report. Many enhancements are a direct result of user feedback. And we incorporate most feedback within weeks, if not days!

Please email us at [email protected] or join us on Discord. Whether you want to share feedback or have a question, we’re always happy to help!