Ten Essential Truths on How to Trade Well

July 25, 2014

This week, I haven’t had quite as much time to trade, although I provide up a write-up on Friday’s trading following this post. Consequently, I figured I would take a step back from the technical analysis articles and instead cover some topics and discussional tidbits that I often do not address directly or at any appreciable length. So I decided that I would share some ideas and understanding I have come to realize that have helped me in my trading journey thus far and address them individually in a single post:

1. Trading must first be an enjoyable pursuit that you joyfully place effort toward. In general, regarding anything, if you have an enthusiasm and fascination for the subject, topic, pursuit, or ambition, you are more likely to develop a positive work ethic and continually strive to improve at and reap the rewards from the activity.

2. The importance of a stick-to-it mentality. The steep learning curve in trading can be a very difficult mental hurdle to overcome. The initial frame of losing that accompanies almost all traders can be very psychologically damaging and permanently turn oneself off to pursuing trading any further altogether. Trading is tough and can be very frustrating at times. But without having patience, diligence, and and stick-to-it-iveness, it is impossible to ever reach whatever goals you sought out of the pursuit.

3. Understand that if you are not initially successful or have yet to be successful at achieving your trading goals, that almost all who have traded well in the profession were once in the exact same waters. Really the only traders I’ve heard of who didn’t have initial negative results were equities traders who started their careers in the midst of an uptrending bull market. For binary traders, where you’re making predictions about the price movement in various forms, it’s difficult – if not impractical – to have that initial success that helps to buoy your individual confidence.

4. Focus on trading one asset at a time. Skipping around from asset to asset, tinkering with timeframes, strategies, systems, indicators, is not a great formula for success. You tend to learn about the general “behavior” of an asset from spending a lot of time observing and trading it over a sustained period.

5. You need to find out what kind of preferences you have as a trader first before expecting any type of long-term success. Everyone’s brain processes information differently, and the notion that everyone has a “trading personality” is a very genuine point. This not only encompasses strategy, what assets to trade, how to trade them (e.g., binary options, forex trading, vanilla options) and when to trade them (such as volatility preferences), but money management/risk tolerance as well.

6. The person who is most consistent profit-wise will be the one who is most consistent in applying his strategy, money management, and have an overall consistent mindset to a particular form of trading. The assets available to trade are as vast as the instruments available to trade them. But a trader who is an expert at applying an iron condor vanilla options strategy will not necessarily be an effective trader toward equities or binary options.

You almost need to specialize to an extent – how you trade, what assets you trade, the time you trade, the charting timeframe, your position size, all associated variables. Even having the ability to successfully trade the EUR/USD doesn’t necessarily mean one is going to be as effective trading crude oil. It really is yet another profession predicated on specialty in many, many respects. It is hard to trade well over time by continually skipping around assets, timeframes, trading strategies, and money management plans. This all comes back to the reality that you need to find what works for you personally.

7. The importance of discipline and balance in trading. Please see my previous post for an overview on that topic.

8. Seeking outside help and judgment on whether you should take a trade or not is rarely, if ever, a good idea. There is some thought that if you trade with a buddy, you might have a better shot of getting a favorable outcome given you’re putting multiple heads together. But from those who have tried it – each putting input into whether a trading decision should be made – I’ve heard that collaboration usually isn’t the best tactic. If you’re unsure of whether a trade should be made and seek outside advice, it’s best to stay out of it and study instead. When I am ambivalent about a trade, I take a realistic look at the perceived odds of winning it, considering all the evidence at my disposal. If I’m unsure or have subpar confidence, I stay out.

9. Limit your risk. This is the sure-fire way to limit emotional trading. I always strive to invest no more than 1% of the money I can afford to lose on any given trade set-up. As a result, my emotions are always on an even keel. I never experience nervousness or tension, or have doubts about pulling the trigger. Or the need to recoup past losses by investing larger amounts later on. It’s very important to hold oneself accountable to your willing risk parameters, which should naturally be small relative to the money you have available to use toward trading.

10. My best trading results have come from waiting for the trade to come to me. Never force trades that aren’t there and aren’t planned out ahead of time. It’s a recipe for poor results, which in turn leads to emotional trading, which leads to even worse results, which leads to inevitable damage to one’s self-confidence, which can very likely lead to quitting entirely. I always plan out trades in advance, wait for them to come and set up as I need them to, and get in at my exact desired entry point.