In this new weekly segment I will share a couple of key trading principles. These principles have been developed over the past ten years of living and breathing markets.
Having traded through a variety of market conditions, witnessing the doldrums and wild swings in markets (and my P&L) I will seek to share some of my key takeaways from the past, predominantly profitable years.
Avoid The Urgency To Trade
This isnt by any means the most important of my mantras, but over the years I have come to really appreciate this principle as a cornerstone to building a successful trading career.
We have all had the experience of spending the weekend pawing through our charts, checking and rechecking our set ups. Come the Asian open Sunday we are pumped, confident of our thorough chart work, chomping at the bit to get the trading ball rolling. Alas none of our sets ups come to fruition, a little frustrated we head to bed looking forward to trading the London open.
Monday morning, still no set ups to play, but we see a big drop in Euro, wires are alive with ‘euro testing monthly lows’ etc. Before we know it we are long, no plan and no play in mind apart form the fact the Euro ‘looks’ cheap.
Here’s how it normally plays out, Euro continues to drop we now frantically skim different time frames looking for a place to put our stops. Now we have to use a larger stop than normal to accommodate what can only be best described as an impulse trade. By the Monday close our stop has been hit and we end the first day of the week in the hole. Berating our broker for targeting our stops before the inevitable self loathing begins as we begin to accept responsibility for our ill conceived actions.
This scenario is not uncommon to any seasoned trader, the urgency to act out weighs the discipline of adhering to our plan. We now spend the rest of the week trying to dig ourselves out of the loss. The trick is to accept the true nature of trading before we sit down at our trading desk (unless of course you are trading from your poolside lounger sipping a martini as the get rich quick crowd would have you believe).
So in the real world before each trading session I like to remind myself that trading is a marathon not a sprint, it is about building success, session by session. I remind myself that my trading plan is my protection against my less successful impulsive self.
Made a mistake? Correct it, Don’t wait in hope
Hope is not a profitable trading strategy. The age old traders prayer of ‘please God just get me back to scratch I will get out and never make that mistake again’ is the last solace of a trader in a position that they have no plan to support and no business holding.
In the Euro impulse trade example discussed above, the smart move is as soon as you recognize a mistake in your execution, to correct it as quickly as possible. Do not sit staring at the screen hoping for the trading Gods to smile down upon you and for today to be your lucky day. I have terminally damaged several accounts by sitting staring at the screen as one of my impulse trades moves rapidly south against me, hurtling towards a stop that has been moved more than once, while crossing everything and praying to get back to even.
You will be amazed at the difference it makes to your P&L at the end of the year if instead of watching the impulse trades play out (more often than not as a deficit to your trading account) you cut them as soon as you recognize them.
This one simple action has multiple benefits, it allows you to reset mentally, you can actually congratulate yourself on realizing and rectifying your error, resulting in a positive mental take away and a small but easily recoverable dent in your P&L. You don’t have to spend a prolonged period of time digging yourself out of an unnecessary and unplanned hole, instead you can spend some additional time with your trading journal noting the thought processes (or lack thereof) leading into the trade and taking the time to understand and adjust for the next trading session.
Sit back, time is on your side
There are 120 trading hours in week, that’s 480 in one month, one thing you will never be short of in the markets is time. If you can grasp this principle from the get go you will really help to remove the impulse urges to trade.
The majority of mistakes are actually made out of boredom, sitting watching the charts the inexperienced trader becomes hypnotized by the screen like the slot machine junkie in Vegas pressing buttons and losing chips. Patience and the discipline to stick to your plan is the key to ramping your returns.
Once you accept the notion that the market is an endless stream of opportunity and that not every zig and zag in the markets is necessarily a profit making move for you, you can start to understand the true mature of trading.
The fact is that first and foremost your goal is to conquer yourself and then the markets!
Next week we shall address the indomitable but difficult to sustain ‘trading tight’ truth. Once we have accepted the reality of the trading environment, the next step is to implement our plans with rigor and discipline. Until then keep the impulses in check and strap in for the long haul!