Secret 1: Cut your losses
The first function that the new trader must accomplish is to learn the business (instruct the core). Whilst doing so the key is to minimize your tuition fees, so cut those losses, because they are your tuition fees. The money spent on software, newsletters, books, seminars etc. is often trivial in comparison. As we learn the business we find that we tend to churn away without getting very far. We learn to cut losses, but find that we make plenty of good trades but not only are we cutting losses, we are also cutting our profits. No surprise there. The ego, desperate for anything positive, takes any profit it sees. But this is also no good because if you are going tomake money you have got to take those big profits. To do so you need:
Secret 2: Run your profits
OK, now you are starting to make progress. You should be making consistent profits on a one contract basis. But you have not cracked it yet. When you make it, now you can start to implement the final secret:
Secret 3: Trade selectivity
You have got to learn how to pick only the best opportunities. This takes time. You have got to find the right trading approach for yourself. You have got to narrow your focus on the market. There is far too much information out there to absorb. So decide on your methodology, concentrate on what you need, and become an expert in its application. When you do this you will know which are the best opportunities and which are not. At the same time you will need to develop the mental discipline and patience to wait forjust those opportunities.
Actually I will give you an added bonus:
Secret 4: Trade with the trend
That way you will have many more winners.
Using stops
Having got to that point novice traders are forced to use market stops because they rarely have the skill to use one of the many alternatives. But immediately trading becomes more complex, because you keep on getting stopped out! Unfortunately that is just one of the things traders have to get used to. Particularly so when the market triggers your stop and then goes off in the direction you intended. That will happen a lot as well!
Now to the practical problems of using stops. These come in a whole range of shapes and forms. Let’s start with the most simple human urge, as expressed in everyday life. When we see something we want, we grab it; when we see something we dislike, we often drive it from our minds – let’s forget about it, it will probably go away. In the real world this may not hurt too much, but in the markets, losses that are treated this way tend to get bigger. It is a basic human urge to ignore bad things, thus we are pre-programed not to take losses, but we are also pre-programedto take profits as soon as we see them. Think about your life so far and the way you live it. How easy do you think it would be to change some of your basic behavioral characteristics? Pretty tough? Well that is what you have to do to follow the first two simple rules.
Losses
Then there is the dear old ego. Guess what? Most of us do not like being wrong. Most of us associate losing money with being wrong. Guess what? We would rather avoid taking a loss, which will then probably get worse, than admit we might be wrong. Some traders talk about how much a novice trader is prepared to pay before admitting he is wrong. What is your price, $1000, $2000, $5000, or are you in the $100 000 category along with some others I know? Before starting to trade make sure you are happy being wrong a lot of the time – it might save you a fortune.
Most traders learn their lessons the hard way and learning to cut losses is usually the hardest of all because it is the most painful. Most traders admit to that one trade that went horribly wrong, and I suspect those that don’t admit it also experienced it. They just prefer to hide it away, maybe even from themselves. Far better to be open, especially with yourself.
Running profits
The second problem is the one mentioned above about wanting to grab nice things when we see them, when we want them. We have done that all our lives, now we have to change the habits of a lifetime. It is not easy, although some methodologies overcome these difficulties.
Another factor is relaxation. Humility and relaxation are as important in trading as are Money Management, Risk Control and the rest. If you are not relaxed then you will always be tempted to take action, taking action is the enemy of running profits.
Trading selectively
The third simple rule “Trade Selectivity” is simpler in concept but is the culmination of all the work you do as a trader. You are only going to become good at this once you have served your apprenticeship and become an expert.
Trading with the trend
Nor do I intend to say too much about trading with the trend. Indeed this is something of a truism. Trends tend to continue, that is what they do. Thus if you trade with it you are going to have much better odds in your favor. Of course there are different trends within every timescale. So first you must decide on your timescale. Then you must devise methods of entering trades. These must be low risk. Once positioned youshould stay with it until that trend changes, again according to your timescale. It’s really very simple, it’s just doing it that causes problems!
It is important to be aware of the practical and psychological problemsin following these rules, and to learn to overcome them.
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