I often hear of traders that have a great run for a period of time and begin to think that they can do no wrong, only to take one or two trades that claim all of their profits and often some of their starting capital.
Here are some principles to keep in mind that will go a long way towards helping you generate a steadily growing equity curve. There may seem to be a contradiction between some of the items below, however, to be a successful trader must be able to look at yourself and the market from all sides, flexibility is a great asset.
1. Trading with discipline is essential not only to put money in your pocket but to keep it there. You must be disciplined 100% of the time. If you are not disciplined in every trade every day then you cannot kid yourself that you are a disciplined trader. In the early days of my trading I had a screensaver that said “Pay now with discipline or pay later with regret”. It is just not possible to become a profitable for the long term without discipline… period.
2. Lowering your risk when you are not trading well is another great way of preserving your profits and capital.
If you have ever watched professional tennis championships you often see a player choke after a few unsuccessful serves. If this happens to top professional sports men and women then don’t presume that it can’t happen to you in your trading. A couple of losers can prompt a trader to increase the amount they are trading with to try and get back the money they have lost. This only adds extra pressure and increases the likelihood of further and larger losses because of the extra emotional and financial load. So, I strongly recommend that if you have two losing trades in a row, reduce the percentage you are trading with get comfortable and increase it again after two successful trades.
3. Never let a winner become a loser. This is something that we have all done but it is also something that you should work hard to avoid. Sometimes the market will give you a little. Sometimes the market will give you a lot. Market conditions are constantly changing and a good way of judging your trades as they progress (or regress) is to ask yourself “would I take this trade now if I was not already in the market”. If the answer is no, take your profit and bank it. Hanging onto a trade in the hope of a few more pips only to see it turn into a loser is both emotionally and financially damaging, and can start off a string poorly judged trades.
4. The largest losers must not exceed the largest winner. Keeping a trading journal is essential. Go through it regularly you must know the value of your largest winner and your average winner. This sets the benchmark for you to judge the maximum loss that is acceptable. The largest losers must not exceed the largest winner, and preferably your average loser should not exceed your average winner. This gives you a very rational exit point for any trades that are going against you.
5. Capital preservation is your first and main consideration when you are trading so do not put yourself in the position of losing more money than you can afford lose. There are endless trading opportunities, to risk too much of your capital on any one trade or in any one day can quickly take you out of the game. You can’t win, you can’t play.
6. Don’t limit or pressure yourself with rigid targets. Setting targets can sometimes see us closing trades that would have continued just because we had reached the target for the day or for the trade. At other times it may have us running the risk of turning a winner into a loser by hanging on and hoping that it reaches our target. Greed and fear are your greatest enemies when trading. Fortunately the Pinpoint system and Trade-Runner help you avoid them. You don’t have to hit home runs to make a lot of money, it is surprising how quickly your account can build by earning a small amount every day. However, Trade-Runner is also designed to take profits along the way but stay with good trades long as the market will allow. So don’t short change yourself by closing out trades that could have gone on to provide you with many more pips.
7. Take your losses quickly. Losing trades are an inevitability in the business of trading. To run any business you have overheads. Losing trades are the overhead of your trading business. Losses do not make you a loser, and they do not make you wrong when you can take this to heart and not be concerned with being wrong then you will be surprised how quickly you can become “in tune” the market and recognise the trade is no good and close it. When you realise that trade is not working close it immediately. In that time that you spend agonising over a bad trade you could have taken a new winner. Be happy to take a small loss and move on. Your question of right or wrong should only be, did I follow my system 100%. It is all about making money not about being right or wrong.
8. The market needs momentum for you to make money. There is no point in staying in a trade that is going nowhere, so only trade when the market is moving purposefully and has some momentum. Consider having time stops, for instance, if you have taken a position on the trade has gone nowhere after five candles for a certain period of time then close the trade and open yourself to further opportunities.
9. Be methodical. A great trader once likened his success to being a bricklayer and not a commando. A bricklayer turns up to work and lays bricks one on top of the other in the same way they are today. Your aim to become like the bricklayer executing every trade in a methodical manner every day you trade. The aim in trading is to make money is not about excitement. The excitement is, the income you are earning will allow you to do all the exciting things you desire.
10. Consistency, consistency, consistency. Consistency is the key to successful trading. To be able to sit down at your computer every day and know that when you follow the rules and trade in a consistent manner that you have a high probability of having a successful day is a very nice feeling. To gain the confidence to feel this way it is imperative that you are consistent in everything you do in your trading business. One of the reasons that McDonald’s and other franchises have been so successful is that every aspect of their business is planned and executed the same way everywhere every day. If you have Pinpoint and Trade-Runner you have your business in your computer. You want consistently profitable results you must run your trading business in a consistent manner by following all of the rules.