- Stay in the game
Remember – the most important rule is to stay in the game. The easiest way to do that is to avoid the big loss. The big loss is risking too much capital on any one trade which immediately puts your capital reserve under threat.
- Consistency of returns
Trading is scalable, and once you can prove that you can consistently generate a certain return on capital, then it’s time to increase the face value of your trade size.
At some point you will become more comfortable trading larger sizes and that will continue until you reach your limit of capital or until you become uneasy with the amount of risk you are taking.
During this period of time you find out a lot about yourself personally. It can be a rollercoaster of emotions, but generally during this phase you look to see how people deal with losses more so than profits. Anyone can take another trade after having a good win. Sometimes you think you’re the king and you’ve got the market figured out. Generally, I find that’s when the market hits you the hardest.
Not many can get straight back up on the horse after a hard loss though. This is the mark of a great trader.
Getting back on the horse involves understanding why you lost money. Sometimes you can genuinely get unlucky. Being stopped out at the highs or lows only to see it go back in the money is tough to watch but you can take some solace out of the fact you had the general direction right. Maybe it’s time to chip down and take smaller risk and widen stops? The answer will be different for different situations, and whilst you may have lost money, the thing you want to take away from that experience is that “on the whole” your process was working, and you were in touch with the market.
- Don’t trade angry
It’s essential to keep a cool head and not to trade angry. If the market has beaten you up and you want revenge, it’s not that simple. If you’re composed enough to see where you’ve got things wrong and you’re ready to get back in immediately, then fine. Some people can do this, but many can’t. Most need a bit of time to get their heads around what’s just happened – and there’s nothing wrong with that.
- Conviction in the trade
In life – just like in trading – sometimes the stars align to make an easy decision. But mostly it’s you seeking out the trade.
In trading you need to constantly ask yourself how much you believe in your trade. Just create a simple scale of 1-10 and how you feel about a trade. Then apply your risk to it. If your maximum risk per trade is $10, and you have a conviction level of 7, then risk $7.
Traders get into trouble when they’re not very sure on a trade, yet they risk the same amount on it as they would on a trade that they like a lot.
Conversely, when you’re at your highest conviction you should be allocating your maximum amount to it. Too often you don’t have enough on the good trade ideas you’ve generated and too much on the one’s you’re not sure of.
- Listen to your gut
It’s not very scientific, but when you get a bad feeling about a trade it’s generally a bad trade. There’s something in the back of your mind telling you something’s just not right. One of the more obvious signals you’ll get is when you’ve been trading well and sleeping well for a while and then all of a sudden you just can’t sleep. Something inside of your conscience is telling you there’s something up with that particular trade you have on.
So, take another look at the trade. Go over why you have it and what reasons you gave yourself for putting it on in the first place. Sometimes you decide you’re still happy with the trade, but often there’s a factor you’ve neglected and it’s eating away at you.
- Don’t cut good after bad
Likewise, don’t cut a good trade after a bad one.
If you’re like me, you might have 2 or 3 trades on at any one time and you’re keeping an eye on them all. Often you get distracted by one that might be heading south fast, while the other two are just ticking away slowly.
Essentially, you’ve decided to risk a certain amount on these three trades so let them run until completion. All too often traders have a bad trade and then decide to pay for it with their other good trades when you reach scratch, only to see the good trades move well into the money as you thought they would.
This can be costly and make you feel like you’ve worked so hard for nothing, when really all you needed was to stick to your trading plan and remain patient. And it depends on the correlation of the trades you have on. If they’re all similar in risk sentiment or asset class, then this rule won’t apply to that situation.
- Don’t think you’re going to get it right every time
Because no one ever does.
I’ve worked with four or five people who would be considered in the top 10-20 traders in Australia, probably Asia, and I can tell you that they got plenty wrong over the years.
Not so much in the sense that they didn’t know where the market was going. They had the general direction of the market spot on most of the time. Sometimes you just get thrown out of a trade at the high or low because of a flow or a spike.
But you develop a feel for the market over time. It forms part of your gut feeling.
- Don’t try to pick tops or bottoms
When you do it’s a great story to tell down the pub. But it happens so rarely that if you try to pick the high or low you end up spending most of your time gazing at levels and you wind up missing the trade entirely.