I have been trading for over a decade. I have had streaks where I won for many straight years in a row with minimum draw downs, it was as if I completely understood the markets and just could not lose. But I have also had years where nothing I did seemed to work, I lost for many straight trades in a row and felt like I had no clue what was going on. I have made enough money in my active trading to pay off my house but along the way lost enough money to have bought a few cars with. I have looked like a genius in both bull and bear markets and at other times like an idiot in both. I have read and reviewed over 200 trading books on Amazon.com and even had a few of my own published. However the market does not care about the past, all that matters is what price the current buyer will buy for and the current seller will sell for on any given equity.
Through all my years with all my great wins, painful losses, and searching for how best to trade. I understand 7 truths that I think have stood the test of time and apply to anyone who truly wants to survive and thrive trading the markets.
- NEVER risk more than 1% of your total account equity on any one trade. You must use stop losses to get out when you have lost that much. If you do risk more than 1% on one trade enough times you will eventually have a huge draw down that will mentally break you and cause you to quit trading or will blow up your account with a few huge losses. If you want to be a trader risk no more than 1% of your trading account on each trade. Have no more than six of these trades open at any one time. If your account is $25,000 than you can risk $250 on each trade. Trade a small enough size so the stop can set meaningfully and account for volatility.
- Trade a method that you believe in completely, trade your beliefs. You must have faith in your method to continue trading it after ten losses in a row. If you are a long term trend follower you must keep fishing for that trend until you catch it. You can’t quit and start day trading suddenly and miss the trend when it emerges. If you believe in break outs keep taking them until you get the big score, don’t suddenly start swing trading. Understand how the market really works and trade a proven system you completely believe in.
- Your system must have a historical edge. It must be a winning system and be robust. If you trade the CAN SLIM system it has been proven through years of real time research and trading to out perform other strategies, you do not have to back test this one you just have to trade it. However you trade you must see the historical edge through back testing or chart studies. If it is not a winning method then you will still lose regardless of your risk management and trading psychology. It is not about your opinions it is about proven trading systems.
- You must have the discipline to stick with your plan during trading. It does no good to have a great system, a great plan, and risk management if you abandon them during live trading with real money on the table. Lack of faith in your system and trading to big for your risk tolerance can really hurt your ability to stay in control when you start losing big or winning big. If you can’t take losses when it is time or let profits run then you can’t trade.
- Do not get arrogant, do not get broken. You must be confident enough to believe in yourself and your trading system to make the entries when it is time but not so arrogant that you start believing that you can pick entries and exits on your own with no regard to signals or charts. You also have to be humble enough to sell when your stop loss or trailing stop is hit but not devastated so much by consecutive losing trades that you stop trading. You have to realize the market gives profits and takes them based on whether it is conducive to your system it has nothing to do with you. You are a good trader if you follow your trading system rules.
- Equity curves do not go straight up. Trading it is not just one big get rich quick scheme. Even the best traders win some and lose some, many times 60% winners is an excellent win rate. Money is made with big winners and small losers. As a trader you may start with $25,000 go down to $21,000 then back up to $27,000 then back down to $26,000 then suddenly have a great run to $30,000 over a year. The key is that in the long term you end up with much more than you started with. You just have to stay in the game so when the really great bull market or monster stock emerges you are able to ride it for all its worth for out sized profits. This is real trading a slow grind upwards with burst of huge gains.
- You have to love the challenge of the markets. You have to enjoy the game and the chances for big profits. You can not trade strictly for the money. The learning curve at first is just too tough and too difficult. But if you love to trade, then you will persevere and win in the long term and your losses will simply be tuition that you will win back and go on to earn big profits in the long term.