Think Like A Trader Blog

Monday, 27 July 2015

Be the Tortoise and not the Hare when trading Forex and Indices

Remember the story of the tortoise and the hare? One was fast but careless, the other slow and consistent; One was exciting to watch, the other boring; One was cocky, the other quietly determined. And who won the race in the end? The slower, boring tortoise.

So have I changed tact and resorted to telling Children’s Tales? Or how does this relate to trading?

Well, it’s a very important lesson to understand when it comes to trading. Like the saying goes – ‘small daily improvements are the key to staggering long-term results.’  Little by little, baby-step by baby-step and before you know it you’re standing at the top of your mountain looking back and wondering how the hell you got there.

A lot of people come to trading driven by the wrong emotion – greed. They see fast money, millions by the minute, a few clicks here and a few moving averages there and you’re living in a penthouse with your Bugatti in the underground car-park.

This is a dangerous way to approach the markets. You will end up attracting disaster and wipe out your account – the exact opposite of what you wanted. You’ll be pulled into thinking that every trade you take will be ‘the big one,’ and you’ll be disappointed when it isn’t. Worse than that, you’ll begin to chase the market, hold positions for too long and let them run against you, become enraged when you take a losing position and revenge trade. Yes, all that good stuff is based around the little monster of greed.

You don’t need the home runs. Yes, they happen on occasion, but they will never be your bread and butter. It’s the consistency that does it, the ability to use your edge in the market perfectly, without getting dragged into it emotionally.

Quick note here – I, along with everyone else trying to help you with your trading admonish emotional trading. However, unlike everyone else, I’ll tell you a secret…it never goes away. Never. We are all emotional creatures. Even the best traders I know have confided in me that they get nervous when they enter a trade, their mind chirps up with uncertainty and they think it will be a loser. As soon as the position moves against them a little bit they lean forward, annoyed that they have gotten it wrong even before the trade has completed!

So you’re not alone. We all get nervous and emotional. But the key is to learn to ignore the emotion, to feel the fear and do it anyway. As long as you can see the raw data of the charts and not become influenced by the annoying little voices of the mind, then you’re on the right path.

And aim to be consistent, not a superstar. Let’s take an average position size of 1% per trade. And let’s say you can become consistent enough to end each day up 1% (this would be exceptional). Now let’s say you work 50 weeks of the year at trading. That’s 250% in one year!

Note that there was no need for a trade making you 10% in one day. But by aiming to be consistent and following your plan, trades like that WILL happen as well. Because when the market makes a move like that, probabilities are on your side that you will be in a position to catch such a move.

I have a rule whereby if I have two successful trades before lunch, I’m done for the day. I brought this in because I noticed that if I had a successful morning, I became almost cocky. I would take imperfect trades, telling myself it was ok because I had a cushion of profit to work with. After a loss I’d get frustrated and chase the market. After another loss I’d be furious that all my hard work had been for nothing. After another loss…you get the picture.

So now I aim to be consistent. Two successful trades and I’m done. It’s currently 8:40 am. I’ve had a pre-market FTSE trade and a trade at the 8am open, both of which were successful. I want to keep trading – I love trading, it’s my passion as well as my job – but I wont. Because I know how big those baby steps are when you add them all together.

I hope you all have a great trading week!

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