Table of Contents
1. Understand the Truth
2. Plan Your Trades, Then Trade Your Plan
3. If You Don’t Spend Much, You Can’t Lose Much
4. Don’t Think Money, Think Points
5. What the Mind Can Conceive
6. Be Your Own Boss
7. Mind Your Language
8. Less Is Definitely More
9. Get a Life
10. The Essential Real-Time Trading Tool
Take two traders for example.
Give them the same starting capital, the same trading platform, the same market, and the same trading system with precise rules for entry and exit. Come back a month later and what will you find? One trader will be up 20%. The other will be down 40%.
It’s fascinating, isn’t it, how two people can have the same opportunities in life, and yet get very different results. We at Futures Trading firmly believe that the answer to success lies within each of us; and that we are each completely responsible for our own results in the market. The following list was compiled from discussions that took place between our traders. Some of it you’ll already know... some of it will be new.
Hopefully you’ll find it useful.
Trading is a game of probabilities.
Imagine we’re flipping a coin. Heads I win one dollar - tails you win one dollar. Simple. Heads and tails will each come up half the time, and we’ll both neither win nor lose.
However, unknown to me, you have a loaded coin. For every 100 throws, heads comes up 49 times, and tails comes up 51 times.
You now have a license to print money. Let’s call it the “Tails Trading System.”
All you have to do is sit back and bet on tails forever. Eventually, you’d win all my money (and anyone else’s who took you on). All any trading system gives you is an “edge”. A favorable bias. Something that is more likely to happen than not.
Whatever trading system you use... pattern breakouts, trend-following, fibonacci, moving averages, channel following, oscillator signals, bollinger bands, swing trading, opening gaps... you are relying on a positive bias. Essentially, the trading system is saying “when ‘x‘ happens... ‘y’ usually follows.”
Sometimes it doesn’t. Most of the time it does.
All your trading system does is help you identify high probability trades. Some trading systems are better than others. But don’t get caught up on the search for the perfect system! You know, the trader’s Nirvana... the elusive “Holy Grail”... the system that delivers profits on demand and never, ever gets it wrong!
Find a trading system that you like. One you feel comfortable with. One you understand.
Then stick with it. Be consistent.
A cool, disciplined, trader will take an average system and make money with it.
A nervous, arbitrary trader will take a brilliant system and wreck it.
All traders have “good” days and “bad” days. Some days you’ll make small profits. Other days you’ll make small losses. And once or twice a month, on average, you’ll make big profits. That’s how we make money as traders. It’s not a 9 to 5 gig.
Problem is, you never know when the big trades are due to arrive. Like our “Tails Trading System” above, the one time you don’t take the trade is exactly the time the market takes off and never looks back. You MUST see the big picture. Realize that the current trade is only one of many. On that basis, the current trade hardly matters. It’s like a piece of plankton in a very large ocean. Trading is all about managing risk and then surrendering yourself to the oldest law in the Universe: The ancient law of probability.
Your job as a trader is to follow a trading plan.
And who’s going to write this trading plan? You are.
Notice the word “write.” It needs to be written down, on your trading desk, in front of you. Your trading system will give you the rules to follow. All you do is translate these rules into your plan.
A trading plan must have three parts: Setup, Entry and Exit.
(Obviously it’s beyond the scope of this document to provide details on a specific trading system) The point is that a trading plan covers every eventuality. You know what to look for in the market, when to get in a trade, and when to get out.
Keep it simple.
Then follow it… Religiously.
One of the biggest mistakes you can make as a trader is to have too much money riding on a trade.
The more money you use, the more emotional fuel you are pouring onto the fire.
Eventually, you are likely to be burned... badly. And the post-traumatic stress may be irreparable.
Most beginning traders stake too much in the hope of a quick win. Experienced traders know better. In day trading, where the trades can come thick and fast, a few big losers can eat you alive very quickly. Good day traders who survive will risk only a tiny amount of their trading capital on any one trade.
If you’re “under capitalized,” then consider using a trading system which offers a tight stop loss. Alternatively, you may trade a shorter time-frame, like tick charts, where losses can be minimized.
Overconfidence is the other cause of excessive risk.
“Hey... heads has come up 10 times in a row... let’s put half the trading capital on tails (which is sure to come up next) and clean up.”
The problem with sure-thing trades is that:
a) The market hardly ever obliges;
b) Everyone else sees them as sure-things and jumps on board. So when they go wrong, they go wrong big-time.
Risk a tiny amount on each trade. You’ll be more relaxed, and more able to execute the trade properly.
Following up on minimizing your exposure, we come to your relationship with money. Whether we like it or not, money is highly prized in our society. It’s important and we attach a lot of feeling to it.
How then will you feel when you see hundreds of dollars (perhaps thousands, depending on your account size) go up in smoke in front of you?
The problem is, “expenses” are part of the game. You have to lose some to win some more. There is no holy grail.
If you can’t change your relationship with money, then just don’t think about it. Focus instead on numbers.
Think “percentage of trading account”. Think “average risk-to-reward ratio.” Think “potential profit points versus maximum points risked.”
Concentrate on getting the numbers right and the money will take care of itself.