For today's guest blog post, I've invited Omar Quraishi from QVirtue.com to help us to understand and ride the wave of trading success. Please enjoy the article and comment below!
A commitment to trading means a commitment to continued effort and education. The road to success can be long and there are often tough times along the way. It is often the case that many people who set out to trade are blown out of the market within a few years, months, or even within a few days.
From my experience, and also many of the traders that I have met, there seems to be a consistent learning path that we all take. As a technical analyst I found a basic picture was the best way to describe the journey.
During a trading career there are often three distinguishing periods:
1. Our early trading experiences
2. Early development: education and risk management
3. Consistent profitability
Many novice traders are fueled by the adrenalin and the rush that trading provides. The excitement of trading is what attracts us, however at this point we often do not understand the risks attached and the discipline required. It is during this initial induction, inexperienced traders begin to focus on how much money they stand to make rather than how much they can afford to lose.
Overconfident traders who were hitting home runs in the early sessions begin to feel the affect of strike outs and at this stage do not have the psychological capacity to deal with losing trades. Traders who were making a loss begin to struggle with how to overcome these losses, often resulting in unnecessary risk. This stage is critical as many will walk away or blow out their accounts.
Traders who are motivated to succeed eventually begin to understand the possibilities that trading brings. Getting through this stage is not easy and there are often setbacks as strategies are tried and tested and we begin to discover what type of trader we are and better understand the markets we trade. Not everyone makes it past this stage and the time to get there can vary from person to person however those that are willing to put in the effort to learn the rules of the game begin to stack the odds of success in their favor.
The end goal is to become consistently profitable, however no matter how good you are, there are sure to be some setbacks throughout your career. Consistently profitable does not mean you don’t make losing trades and remaining in this final wave will become dependent on you staying motivated and consistently applying the rules you have learned along the way. Most trading rules are simple to understand but easily overlooked, let us now examine 3 simple rules that you should never forget.
3 “One Size Fits All” Rules
1. Make a Plan
You need to ask yourself what is your trading strategy; what are your tactics and what conditions need to be fulfilled for you trading to succeed. In simple terms, if you are going to cross a freeway to get to the other side, do you just walk across blindly without looking out for the moving trucks or do you find a crossing or a bridge?
Your choice of technical indicators will depend on your trading strategy and your personal preference. Some indicators are more suitable for trend following rather than breakouts or reversals and some indicators work better together than others. Entry, exit, and risk/reward parameters should also be defined in your plan.
Once you have your trading plan be sure to stick to it. When your plan is working well it is easy to become overconfident and increase the risks that you take, don’t make this mistake. Spend some time in developing something that works for you. A bad plan is better than no plan at all!
2. Cut your losses with a stop-loss
There are not many things that can be guaranteed in life but there is one guarantee we can all be sure of; you along with the best traders in the world will make a losing trade at some point. It’s just part of the game so you better prepare yourself you deal with it.
It is easy to get paranoid about the market trying to stop you out before continuing in the right direction. Long-term success is impossible if you let your reactions trump planning. The solution is simple; don’t chase the losses by moving your stop-loss!
The best way to deal with it is to control your risk. If you risk 10% of your account on one trade then you may find that your account size falls rapidly during a draw-down period. If on the other hand you are risking 3%, you will find yourself in much better shape to continue trading and stay in the game.
3. Understand Your Market
Different markets can and do trade differently so when you pick your market it is important you do your research before you start trading. The research and information you gather will form a basis for your trading tactics.
For example, if you’re trading FX determine which technical indicators work best, which pairs are correlated and which economical announcements are likely to cause spikes in the market. If you are trading stocks, find out exchanges they trade, how liquid are they, are they seasonal and how much can they gap up or down?
The more you understand what you are trading, the more effective you will be able to execute your strategy. This will move the odds in your favor and you will find it easier to time the market and hopefully enter a market closer to the low and exit nearer the high for a long (and vice versa for a short).
In this post I’ve tried to touch briefly on a few of the issues I faced early on in my trading career along with some of my colleagues. If you would like more information on any of the points raised or would like to provide any feedback then please contact me and I will be sure to help.