“Sometimes people are so attached to the way things are that they would rather keep things the same and continue to fail rather than make those changes.” - Adrienne Toghraie
We tend to think of harvesting our gains and smoothing open trades; something that is easier said than done. Big institutions have very high stakes that would have impact on the markets if they were to be smoothed at once. This is often in the favor of those institutions. At the end, you’ll need to choose a trading system that fits you.
It’s sad that misinformed souls and even highly educated people feel that one can’t be triumphant in the market for the long-term. This is far from the truth. It’s true that only a small percentage of speculators would enjoy lasting success in the markets, for we’re competing against highly intelligent traders who have a great deal of knowledge of how the markets work. Then why should it be strange that the percentage of successful traders is usually small? This is also a fact in other areas of human endeavors – not only in trading. I’m confident that if you can adopt the essential trading principles discussed here in your trading, you’ll be a winning trader.
I incorporate 4 essential trading principles into my trading rules:
- There must be an exit target for each trade: For each trade I open, there is always a predetermined exit target, and a maximum trading duration. Any negativity shown by my open trade is never a surprise to me for it may be presumptuous to conclude that an order is hopeless while it’s still open. Usually my trade is smoothed after it hits the stop, or the breakeven stop or the trailing stop or the target or the maximum trading duration (in terms of weeks) has expired. I don’t use discretionary exit.
- Positive expectancy must be part and parcel of your trading system: What makes sense is a situation in which you aim to gain more than what you’re risking. It makes sense to risk $1 in trying to gain $2, but it doesn’t make sense to risk $2 in order to gain $1. Some risk $100 to make $1, or even risk their whole account to realize 5% profit. Doesn’t it matter if you make $200 today and lose $2000 tomorrow? This attitude isn’t OK, since it’s negative expectancy which ensures that you end up losing in the long run. It’s far better to risk $10 to gain $30 (or $50). This means your reward must be greater than your risk. This is what we call positive expectancy and it ensures that you end up winning in the long run.
- Abort your losers and ride your winners: This is an excellent golden rule which makes peerless rational/logical sense. If you cut you winners and ride your losers, you’re like the gardener who uproots the flowers and waters the weeds. If you cut you losers, and let your winners run, you’re like the gardener who removes the weeds and waters the flowers. Isn’t that logical? I cut my losses with the aid of my hard, physical stops, and I ride my winners until they possibly reach their targets.
- Use small lot sizes: I’m yet to see the guru who lasts very long in the markets by betting too big. In my trades, I use very small position, which may limit my profits, but also limits my losses. This ensures that I trade with peace of mind and remain indifferent to the outcome of an individual trades. Some think this is cowardly. Yes, coward people tend to remain safe as they point to the ruins created to overconfident traders. My sizes gradually increase with my gains and decrease with my losses. With this, I’ve found it easier to accept losses that don’t affect my accumulated profits, let alone my initial capital. I’ve also found it easier to recover my negativity. I’ve found it’s usually better to be a happy chicken than a sick tiger.
No matter the kind of trend confirmation patterns you’re using, no matter the trading methodology or chart analysis us use, you need to know that strategies don’t fail; only traders do. Systems are only strategies. They’re not traders. They don’t open trades. They are only a means to help you make trading decisions. If anyone using a trading strategy sustains a drawdown, then the drawdown belongs to her/him. I’m not saying loss is completely avoidable. Top traders lose sometimes, but not always. The inability to abort your losers is the real risk, not the strategy you use. There is no business under heaven that is immune from occasional loss. All enterprises have negativity as part of them.
What I mentioned above are far more important than any trading strategies. If you incorporate them into your trading management rules, you’ll be a permanent victor in the market. These principles are ignored at your own peril.
I’d like to end this article with the quote below:
“However, you are the most important part of your system. So, if you are not working properly, it is just as though your computer, or software, or any one of the trading tools you use is not working. In this case, the thing that is not working is you, not your system, which is doing just fine.” - Adrienne Toghraie (Source: http://www.tradingontarget.com)
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