I’ve been actively trading the financial markets for around 15 years. Like most new traders I read as much as possible, attended training courses, and spent hours studying charts. Even with 15 years experience, I still learn new things every day.

There are a few things I’ve had to learn the hard way, and certainly if I knew about them at the start, they could have saved me a lot of money. I can’t guarantee they will work for anyone else, but with my trading style, they are certainly valuable lessons for myself.

Trade with a small position size

The smaller you trade the more likely you are to be successful. This is just a rule I have learnt through practice.

When you increase your trading size, along with that comes an increase in stress. Every movement the market makes, positive or negative, stronger emotions are attached to it, which in turn makes for poorer decision making. Some affects include :

  • Panicking and closing a losing trade too early, which just needed a little more room to move. If you were trading smaller size, it’s likely you would have given the trade the space it needed.
  • Taking profits too early. Even a small movement in the right direction now creates larger profits. So it is tempting to take that profit. However, you then will end up with lots of relatively small profits, which don’t outweigh the loses
  • Changing your mind too often. One of the biggest mistakes is when traders constantly change a trade from buy/sell with every market move. This usually happens because there is too much pressure on the trade, and you should be trading smaller.
  • Letting a trade get out of control. If losses become large, many traders will begin trading on ‘hope’, and rather than just closing the trade, they will let it run until they have no money left, just avoid the pain of taking a large loss. If you trade smaller, you can avoid this.

I have found it best to trade a size that is comfortable, by which I mean whether it’s in profit or loss, it won’t be a major deal to you. Then gradually over time, if you can build your trading account size up, gradually increase your position size with it. Similarly, if your trading account is shrinking, then decrease your position sizing appropriately.

Trade the price action, not the news or an idea

There is a huge amount of news available, almost instantly now. Gone are the days when traders in the pits, or brokers, had a big advantage over news streams. Most news that influence the markets is available for free, immediately.

There are many traders that will trade news announcements, especially data releases such as oil inventories, NFP, interest rate decisions. There can be good profits made this way, but it requires a lot of research and planning before each announcement for all eventualities, combined with a good squawk, and reliable hardware. Even with all this, the markets may not react the way you expect. It’s a highly specialised skill, requiring a very professional environment.

I have found it is better to let price action take the lead, and tell you what it thinks about any relevant news. This means allowing 15 minutes or more for the markets to settle after some significant news, then see how price reacted to it. In just pure risk/reward terms, I have found this works better for me.

For example, last week there was a large draw in oil inventories, much more than expected. A similar figure put the crude oil markets into a 5 day rally just a month or so before. However, this time, the market sold off hard, and for the rest of the week. So two opposite reactions to the same type of data. Circumstances were different this time, and the different reactions are understandable. However, it does show that it’s not the figures that are important, it is the price action.

Find the right mind set

This is a tough one, and certainly not always achievable.

As with any performance based activity, your mind set will often determine your overall results. Clearly if you are in the right mind set will you make better decisions, which in turn will produce better results. This can be improved by having a good framework and structure to your trading methodology.

There is a wealth of research on how to perform at your peak in trading, sports, and other similar pursuits. Many traders will use yoga, meditation, or sport, others will just avoid trading on a bad day. Whatever your method, just ensure that you give yourself the best chance of success, by trading when you are at peak performance.

It’s also important to recognise when you are just not performing well and take a break. It will be clear in your trading account, and your trading diary, whether you are on track, or need to take some time out to refocus.

Have a strong form of money (risk) management

If you are trading for a company, or within a proprietary trading firm, it is likely you will have some form of risk management. This often means a daily loss allowance, and maximum position size, which is set in stone.

If you are trading independently it is harder to have independent risk management, and maybe worthwhile researching companies that can help manage your risk for you.

One method I use when trading independently, is to have my daily loss allowance in my trading account, and nothing else. This is clearly not full proof, as it is always possible to add your balance by transferring money from other sources. However, by removing any profit each day, or topping up a loss, so that I start each day with the same figure (my loss limit for the day), it helps create some form of risk frame work. Each day for me is a fresh start, regardless of what happened yesterday. I always have the same figure available in my account each day, and it is never more than I am prepared to lose.

My position sizing is based on a longer term profit/loss spreadsheet. In times when my account is increasing in size, I will trade with a larger position size. If I begin to lose trades, and my trading account shrinks, I will also reduce the position size of my trades. It’s a way to protect capital, and avoid the temptation of ‘martingale style trading’ (increasing risk to try and recover previous losses, a big no no !)

Know your market

I have seen many traders who learn technical analysis, and then apply that to as many markets as possible, looking for the ‘best opportunity’ that matches their style. This is fine, and seems reasonable in concept, but it has never really worked for me.

It’s OK to learn inside out how a moving average or RSI works, and then apply it to all markets, but I’ve never found much success with that. I much prefer to focus on and study the characteristics of one (or a few) markets, and really understand it’s movements and patterns. Then I will apply some technical analysis to it.

My analogy would be fishing. You could study how to use the best fishing rod in the world, and just start fishing for anything that’s in the water. Alternatively you could study your chosen fish, it’s characteristics, what it is likely to do, and where it’s likely to be, then use your fishing rod in the right place at the right time. I find the second method to have a better risk/reward ratio

About the author

Trading and Investment

Traded the markets for over 15 years, including Commodities, Bonds, Currencies, Equities, and Indices. I have also worked as a Chartered Financial Planner.
CeMAP, CeFA, DipFA, AdvDipFA, Ba(Hons) Economics, Chartered ALIBF

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