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 The odds say you do not.
Don’t feel bad about it, but do something about it. If you are
pursuing profits with consistent returns, you need a written plan
that you can execute with confidence and without hesitation.
“If you fail to plan – you plan to fail”
A trading plan consists of several things. We can break it down
into 3 components:
1. Money
2. Method
3. Mind
Money
Your primary objective is to preserve your capital. Without
capital you can’t trade. So the first item to consider is how much
money is on the account? We all trade to earn money, but our
ultimate goal is to preserve the money we have. How do you do that?
You protect your capital by sizing your position according to your
account size. You protect your positions against losses by placing
stop-losses. If you lose your money, you won’t be able to make
money.
We can break this down into sub-components:
- The primary goal is to protect what you have on the
account.
- You need to decide how much money you have on the account to
ensure you use proper position sizing.
- Before you enter the trade, you need to decide how much you
will accept to lose on the position.
- If the position is showing a loss you need to cut it or let the
stop-loss take care of it.
- Finally you need to learn to sit on your hands and let the
market do what it wants to do. This is another way of stating that
you need to let your profits run
Even the best traders in the world will experience losing
trades. New traders often find it hard to accept losses. This is
often the case when too much attention is placed on one individual
trade. Anything can happen to one single trade. There is randomness
in an individual trade, but when you place hundreds and hundreds of
trades, there will a pattern. Your job is to accept the uncertain
outcome of one individual trade, and look at the big picture. We
will look at this in more detail under the section of the Mind.
Method
What kind of trader do you wish to be? This is an important
issue to address although it may take some trial and error before
you decide what suits you best.
Here are some of the options:
- Day-trader – taking many positions during the day in one or
many markets, trading with leverage and rarely holding positions
overnight.
- Swing-trader – focusing on capturing bigger moves with fewer
trades and bigger stop-losses.
- Trend-follower – trading many markets aiming to capture the big
moves – stopped out frequently, but catching fewer very big
moves.
- Investor – trading without the use of leverage – holding
positions for longer and diversifying risk through asset
allocation.
These are some of the options that are available to you.
Once you know what it is you are trying to achieve in the
markets, the next thing is to decide how you wish to trade it. I
will assume that you want to trade using spread betting or CFDs.
However, there are also futures and options to consider as well as
DMA (Direct Market Access) when you are trading stocks.
Next you need to decide on the decision-making process you want
to use. You can use technical analysis or fundamental analysis in
your decision making process, or a combination of both. Either way
you need to know your field, and that requires practice.
Once you have clarity about what you want to do, you are ready
to go to work. It may be that you decide on one path, only to
discover early on that it is not working for you. Listen to
yourself. Trading is meant to be fun and you need to find a
methodology that resonates with who you are. The only way to do
that is to do what comes naturally to you. Some people have the
patience to wait for positions to build up gains over long periods
of time, while others prefer to trade the market on a
minute-by-minute basis.
The ideal way to start your trading career is to research and
practice trade with patience and diligence. You need to find a
source of data, either a charting package or free data sources such
as Yahoo Finance, then start to try out some different trading
strategies. The important thing to bear in mind is that you only
see on a chart what you have trained your mind to see. Therefore
you need to get some experience under your belt. It helps to keep
the following in mind:
There is no one in the market who will help you. Everyone is out
for themselves. There is one friend though, that you can rely on
most of the time. It is your friendly trend. Markets tend to trend
up or down, interrupted by periods of consolidating. Your
job may be made easier if you follow the trend. Once you have
learned to follow the trend, your job of making money in the
markets will be infinitely easier.
Mind
Trading is an alluring business, full of hope and promise of
untold riches. It is a modern-day Gold Rush with all the trimmings
and stories of fortunes being made. Like the Gold Rush
unfortunately there are also the inevitable shipwrecks, with people
losing money, maybe more money than they intended to.
The difference between the Gold Rush and trading is that you can
at least prepare yourself for trading. The basics of trading
are really rather simple: you either buy, or you sell, or you do
nothing. The reason the trading is hard is because factors like our
fears and our egos will interfere with our decision making
process.
There are many great books on trading systems and indicators,
but there are very few books that deal with the psychology of
trading. I do however have some suggestions that will help you deal
with the obstacles that lie ahead of you:
- Develop and test a trading plan. Keep it simple. It does not
have to be an elaborate methodology with many indicators. It can be
as simple as a trend following system. Once you have tested it, you
should learn to follow the system. This is best achieved by
starting slowly with trading stakes that are small. Remember our
primary objective is to keep our capital and learn. There will be
plenty of time to scale up your stake size in due course. For now
we are looking for longevity.
- Keep a diary. Be accountable for your actions and review your
decision making process. You will find that you are probably more
emotional in the moment of taking the trade than you suspect. By
writing down your trades you will anchor the correct decision
making process and recognise and acknowledge your mistakes
sooner.
- Finally – have patience. Have patience with yourself and the
results and have patience with your winning positions. The only
place not to have patience in the market is with your losers.
Good luck and happy trading
Tom Hougaard
Please remember spread betting is leveraged
and can result in losses quickly exceeding an initial outlay. It’s
not suitable for everyone and you should make sure you fully
understand the risks involved. If you have any doubt, please seek
independent advice.
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