How long does it take to learn how to trade?

Well, it really depends on who you ask:

The Snake Oil Salesmen – These guys will tell you that after installing their magic indicators or taking their course, you will instantly be making $1000 a day with 5 minutes work a week. There are some variations of course but the theme is the same; they have a secret, it’s a shortcut, it generally absolves you of having to make a trading decision and it’s easy. You just pay them a few thousand dollars and they’ll let you in on the secret.

The Internet Trading Forum ‘Guru’ – will tell you that you need to spend 10,000 hours in front of a screen to trade. At 220 trading days a year, 8 hours a day, that’s roughly 5 and a half years full-time. They’ll also tell you that you just need to stare at charts for that amount of time and it’ll all become clear.

The Proprietary Trading Shop aka Prop Shop – Just to be clear, I’m talking about a real prop shop here that trains you at their expense and then lets you trade their money. These outfits will put you on a course and expect you to be trading 1 or 2 lots on their account within 12 weeks. Some trainees do it in less time. This is for someone that has never traded before. Of course, it is someone that has also passed their rigorous selection process.

12 weeks to learn how to trade! Really?

We appreciate that there will be people reading this that have been looking at trading for years and still don’t feel any closer to ‘getting it’. So what is the big secret that the prop shops know that you don’t?

It’s very simple. Prop shops such as these have their traders focus on reading the Order Flow from the Order Book. In fact, most will not allow traders to use charts until they can trade solely off the Order Book. The trainees at a prop shop have to follow the program. They might get a frustrated at times but what they cannot do is try one technique for a few days, decide it doesn’t work and then go surfing the web looking for something else. They focus on developing the skill their mentor is passing on to them.

They focus on the Order Book and they stay committed to it. This does not mean that they will never look at price charts again. What it does mean is that they have a set of basic skills to learn first and until they have become proficient, they are not allowed to look at anything else.

They don’t learn any secrets in the prop shops. They don’t learn any shortcuts, there aren’t any. They don’t look at green light “buy”/red light “sell” systems, they don’t work. They get in at the ‘dirty end’ of trading and do it the old-fashioned way.

So why do professional Day Traders trade like this?

Let’s say for a second that you have a hundred million dollars in your trading account. You know that a lot of traders will sell a resistance level on the S&P500 e-mini. When they do that selling, you buy from them. You keep buying from them as they keep selling. The price doesn’t move down because you are absorbing all of their selling. When you’ve had your fill, you start aggressively buying. The traders that sold to you earlier suddenly feel sick as price moves up against them. Their stops get hit; they exit their positions (by buying) and price moves up some more. When they exit their losing short positions, you exit your winning long positions. You are now done for the day. You exit the market and it now continues down confirming the initial analysis of all those traders you just took out.

You’ve just used your considerable buying power to push a number of smaller traders out of their positions and made a couple of hundred thousand dollars in the process. Not bad for a mornings work.

Of course, you wouldn’t do that, right? If you had all those millions of dollars, you wouldn’t take the other side of people’s trades and then push the market against them to make money, would you? That would be unfair, not really sporting, not the sort of thing a gentleman or gentlewoman would do?

How do you think Goldman Sachs would feel about doing it?

Don’t think these people are bad people. If you have that much money to trade, it is necessary to build your positions discretely. You can’t just buy 100 million dollars’ worth of contracts in one shot, you will move the market too much, you’ll get bad prices. You have to finesse your way in. You have to make the market look weak so that people will sell to you. It’s something most of us won’t have to worry about doing but it is something we should be very aware of.

The only place you will see the footprints of this sort of activity is in the Order Flow. By utilizing the Order Flow, you can see when this manipulation is occurring. You can piggy back this position building or you can get out of the way when you think it is being done against your current position.

So what about Price Charts and Price Action ?

Many of the traders that contact us are very close to being profitable. Just 2 weeks prior to writing this, a Crude Futures trader that had passed a number of “Combines” at TopstepTrader got in touch with us because he still felt something was missing. He was taking good trades but they were running against him too often. He had spent a considerable amount of time getting to know how Crude moves and he decided that he would see how using the Order Flow would help. When we spoke, he mentioned he was considering changing to a much less volatile instrument as this is where most Prop Traders start with Order Flow. This would have been the wrong thing to do. Our advice was to initially stick with Crude and look to confirm his trade locations with the Order Flow. That is what he is now doing and just a few weeks in he is seeing the light.

There is nothing wrong with analyzing charts to form an opinion on where you think a market is headed or where it might turn. Of course, your analysis of the charts needs to be done with an understanding of how the markets operate and why you think buyers or sellers will be dominant at any point in time. The charts give you a trade location, an area where you believe something specific will happen. The Order Flow tells you if this IS happening. This isn’t just about entering a trade either. Order Flow may confirm a trade, tell you to reject a trade or wait for a better price. It can also be used after you enter a position to confirm that the trading activity is as you expected in terms of buyers or sellers being dominant after you get in.

Successful Day Traders have an understanding of the way the markets operate. That is not an understanding of mathematics or ‘secret insider price points’ to trade off. They understand liquidity. They understand price discovery. They understand price action. They understand that the financial markets auctions made up of people just like you. They know what makes you and your fellow traders tick.

For most of us the prospect of losing money is a much more compelling motivator than the chance of gaining some cash. It’s so powerful, in fact, that it can mean that, we don’t act rationally.

Professor, Daniel Freemen – Use Your Head – A Guided Tour Of The Human Mind

The foundation concepts of liquidity, price movement mechanics and herd behavior are essential for any trader to understand both price charts and the order book. That information is given to you on this site – for free.

Armed with this understanding of what the market actually is, you can use any of a number of techniques to analyze the market – be it candlesticks, chart patterns, support and resistance, market profile, volume profiles etc. You will understand that these are just tools. These methods of analysis, combined with your understanding of the markets will give you an expectation of what you think the market is going to do.

After that it is the Order Flow that tells you if right here, right now that is actually happening.

You might think that at a certain point, price hit resistance and the market will then move down. When you are looking at the Order Flow, you can see if that is actually happening. It’s fairly straightforward.

Order Flow is not just about entry, either. It’s a great tool to help you decide if you should stay in a trade or not. If the Order Flow really turns against you, there is no reason to stay in the trade until your stop gets hit. You can get out and save yourself a few ticks.

The bottom line is this: A change in Order Flow will appear before a change in price.

 If you are ready to start learning about Order Flow – check out our free lessons.