One offshoot of the COVID-19 restrictions is a lot more free time. A while back I decided this was a good time to catch up on the list of trading books I’ve been meaning to read. Just like most people, I tend to underline or highlight thoughts that strike me as important.
I thought this might me a good place to also share some of these. I am not saying that are right or wrong, just that they might be things worth thinking about. At least they were for me.
Here is one:
“Some people are too caught up in the excitement of trading rather than focusing on working to make themselves better traders. Only when a person starts treating trading like a real business, and not just a means of entertainment, can he begin to be more objective.”
“Fundamentals should be believed only as long as the technical signals agree. Too many times a trader will stick with a news story and not let go no matter what the market ends up doing. Opinions mean nothing to the market; the market goes where it wants to, not where you think it should go.”
Absolutely and totally agree! We often hear that one should only trade with money one can afford to lose ( and that is, of course, 100% correct). But our trading mindset should work the other way round. I.e. my capital is money I cannot afford to lose, otherwise I cannot trade.
Here are some thoughts on this from my current book by Marcel Link, “High Probabiity Trading”:
“A winning trader is one who knows how to lose”
“When a trader first starts out, he needs to remember that it’s not how much you make but how little you lose that keeps you in the game. Preserving capital should be a bigger priority then making money.”
“One of your goals should be to not lose your money. You want to be around in a few years, so do what you can to make sure you will have money then. The best way to do this is to concentrate on not losing money. Forget about making money; your goal should be not to lose it. If you can achieve this, you will be in a good financial position when you become a good trader.”
And that’s why I cut trades very quickly if they head for a loss. Mindset is, I hate losing as we all do, but I hate losing big, more. And I can use the savings made to finance another better trade. There’s always one awaiting.
Here’s a very useful guide on entering trades:
It nosedives into a loss from the beginning. Cut it quick.
It takes its time to slowly lose its way to the S/L. Cut it.
It just sits there, does nothing. Cut it.
It’s mildly profitable as it edges upwards, but never threatens to meet a T/P.
Scalp a few dollars and close it.
It jumps off the winning page and never looks back. First hurdle - move the S/L to reach a breakeven position where you can’t lose. Secondly treat this profitable darling with the greatest respect - if you fear losing out on your profits, use a trailing T/P to ensure a welcome win.
This is interesting. Most of the talk about SL and TP concerns distance and pips, but there is another important dimension: TIME.
My trading is primarily off daily/4H combos, but if the 1H chart shows price is dawdling, doing nothing, then after maybe 6-8 hours I will cut it, whether in profit or loss, and wait for another set up. I am not saying 6-8 hrs is any kind of yardstick but time is definitely something to consider when the price is not doing what you anticipated in the initial trade evaluation.
Money management might be a boring part of trading, but think about this:
“If you read Market Wizards or hear any top trader speak, you will notice that each trader may have a different approach to the market. One looks for trends, one looks for reversals, one scalps, one holds for years, one trades options, and another just spreads, but what they all have in common is that they employ a strict money management program and agree that it is the secret to their success.”
" A trend is in place for a reason: The market participants as a whole believe that the market should be headed in that direction. When this is the case, it is wise to be on the side of the momentum, not against it."
I think this is good advice particularly for newcomers. But even more advanced traders, who will sometimes trade in the opposite direction, are wise to at least know where the main trend is going.
But how to define what is the trend, that is another question. In my opinion, whatever timeframe one is trading, the main trend is identified on a suitable higher timeframe. E.g. if you trade a 4 hour or 1 hour chart then the main trend is most obvious from a daily chart. If one trades a 5-min chart then the main trend is probably found on a 1 hour chart.
I don’t know which is worse, getting stopped out or closing a winning position too soon and missing the ride. At least the latter can be corrected. So today’s quote is a simple one. But maybe a game changer for some:
“unless the reasons for being in the trade have changed, let your profits ride.”
In the early stages it is important for beginners to work systematically in observing what works and what doesn’t whilst developing their strategies and risk/money management. There is little chance of moving forward if one jumps from one idea to another and without giving each change the chance to prove its worth or otherwise. As our current writer states:
" Becoming a better trader means using some sort of system in your trading. Whether it’s computerized or done visually on a chart, or is simplistic or elaborate, a trader should have a solid set of rules that have been proven to work. Unless a trader can start making the same smart trades over and over, he not only will probably lose, he will not know the specific reason he is doing so.… The problem when you don’t have a system is that you may have no idea why you are losing, as your trades may be made randomly."
There are gamblers and then there are traders. In many ways they are different…or are they? Does the professional gambler follow the same rules of patience, discipline and money management as the consistent trader:
“Successful gamblers also know they don’t have to be in every hand. A good poker player is disciplined enough to fold hand after hand until the right one comes along. He may get bored out of his mind, but he’s the one who has the mountain of chips in front of him. Bad players bet every hand all the way through, just as a bad trader is always in the market even when the trades are marginal.”
Day trading does not mean trading every day. But it is a killer to sit, and watch, and stay attentive, and do nothing… just waiting for the right set up. But that is high probability trading.
Forex trading is not just about making money. It is about not losing your money. The longer you can save your money, the better you become at trading. Try out as many strategies and techniques that you can, to become capable of not losing your money. Think about making money later.
I haven’t been reading much lately to quote here, but I thought this reply from another thread by @Trade.Ninja was worthy as a quote here.
It is understandably tempting to try and get the most out of every move, but that is not necessarily a very good approach and can often lead to worse results than focusing instead on quality set-ups, risk and money management and the psychological factors.
And, as @Trade.Ninja says, it can make trading much more rewarding than just pip-chasing.
Straight from the first page by Mark Douglas. Maybe we all need to think about this: are we really focusing on what is the critical aspect of trading? Our systems? Or our selves?:
“I sincerely feel that success in trading is 80 percent psychological and 20 percent one’s methodology, be it fundamental or technical. For example, you can have a mediocre knowledge of fundamental and technical information, and if you are in psychological control, you can make money. Conversely, you may have a great system, one that you have tested and has performed well for a long period of time, yet if the psychological control is not there, you will be the loser.”
One very important psychological factor is not often talked about, and that is building confidence in one’s trading. It is important to reach a point where one has confidence in one’s trading methodology i.e. the combination of the actual trading strategy, risk control and equity management.
This confidence could be termed the positive expectancy and refers to a belief in a state of profitable consistency over a period of time. Not just this, or the next, trade but the overall results over time.
If one does not have this deep confidence then it can distort one’s attitude to trades in the way described by Mark Douglas:
“your perception of market activity will eventually become heavily weighted towards avoiding pain instead of seeking opportunity. Your fear of losing money, being wrong, or missing an opportunity will become your primary motivation to act or not act.”
Which, as we may conclude, leads to winning opportunities being cut short and a reluctance to prune out the losers. Not a good combination for profits and will stifle the potential of an otherwise good strategy.
