My trading career within Investment banks, based in London, spanned just over 25 years, including Lehman Brothers and Credit Suisse. Traders do not normally last that long. They either get burnt out or get fired for losing too much money. I survived because I was good and loved winning. Now I am involved in ARQ to help others get better wealth performance but wanted to share with you the lessons I learnt in trading to success.
TIP 1 – NEVER, EVER, EVER ADD TO A LOSING POSITION
Adding to a losing position will lead to ruin. If I have positions going against me then I do not average the bad trades.
TIP 2 – DON’T BE AFRAID TO CUT LOSSES
Losing positions makes traders feel uncomfortable. The solution is so simple. If you don’t feel confident that you have made the original right call then cut the position. You can always get back in. The litmus test is “If I didn’t have a position at all now, would I open up a position to mirror my existing situation?”
Your trading capital comes in two types: ‘Real’ capital losses and ‘Mental’ losses. Holding those losing trades diminishes measurable real capital as well as immeasurable mental capital.
Learning how to cut a wrong position is the most common trading problem. It is more important than learning how to win.
TIP 3 – TRADING RUNS IN CYCLES, SOME GOOD, SOME BAD
In the ‘good times’ even my errors were profitable. I could walk on water. In the inevitable ‘bad times’ even the most well-researched trade would go badly. This is the nature of trading. I recall having a poor 2 month run where everything I touched went wrong. My fellow trader told me something which I have never forgotten: ‘Form is temporary, class is permanent – don’t fret, be patient ‘.
TIP 4 – BE PATIENT WITH WINNING TRADES, BE ENORMOUSLY IMPATIENT WITH LOSERS
If you win less than 50% of the time, winners have to be bigger than losers. Traders tend to take their profits too soon and run their losses. This is the same principal when you play poker. Make sure you maximise your winnings when you have a good hand.
TIP 5 – MANAGE YOUR RISK RELIGIOUSLY
Sleep better at night knowing that you have a predetermined stop loss. Crudely put, know where you are getting out before you get in. It’s vital you determine the position size of your trade by the stop (loss). The stop loss may be your monetary pain threshold or even a technical level.
TIP 6 – UNDERSTANDING MASS PSYCHOLOGY IS ALWAYS MORE IMPORTANT THAN UNDERSTANDING ECONOMICS
I prided myself on this statement and still do. Simply put, ‘when they are crying’ you should be buying and when they are yelling you should be selling’. Imagine excess movements where the final people are being shaken out the tree to cut their position. Or an elastic band being stretched so much that when it can’t be pulled any further it will shoot back in the opposite direction. You need to be participating in this rebound.
TIP 7 – MARKETS CAN REMAIN ILLOGICAL FAR LONGER THAN YOU AND I CAN REMAIN SOLVENT
The illogical can often reign despite what the experts and academics tell us. Often the herd mentality is the clue to do the opposite.
TIP 8 – WE ARE NOT IN THE BUSINESS OF BUYING LOW AND SELLING HIGH
Only the most professional, experienced traders try and adopt this strategy. We are in the business of buying high and selling higher; or of selling low and buying lower. Strength begets strength…weakness only more weakness.
TIP 9 – THINK LIKE AN ECONOMIST & TRADE LIKE A TECHNICIAN
Be bullish when the technical and the economics, as you understand them, run in tandem. Be bearish in the same manner.
TIP 10 – DO MORE OF THAT WHICH IS WORKING AND LESS OF THAT WHICH IS NOT
This works well in life as well as trading. If there is a ‘secret’ to trading this is it.
By Gary Skovron