After every trade and trading day one thing is quite common among traders.We do not forget to pen down the thoughts based on outcome of the trade or day.We list down the reasons and also highlight it, bold it to make sure we follow it in future.This becomes our trading rules.
Unfortunately list repeats or grows day by day. month by month and we circle down same list or repeate same mistakes.Few years spent in markets whether helps you to make good money or not but certainly helps you to make diary full of impressive to "dos and don'ts" rules.
Me also not a exception and got pages and pages written all over in note books and diaries ever since started trading.But in recent years stopped taking a list as I have finally squared down my rules into just 5 points and in my personal experience everything falls under this. I skipped rest of the notes taken and kept away. Let me try to break down them here as what I felt important,good for me and started working / still working not to cross the limit on these rules.
1.Right mindset :
As a trader, its always a pressure job as market keeps us in guess work and in doubt.Unlike any other profession,you cannot say you are settled in well based on your experience.One weird day in span of months is easily enough to shatter all your discipline and learning. To avoid this and keep things under control " right mindset" should be top in rules list.
This is foundation to make sure all other rules are followed rightly and you dont end up in mess often. Mindset can be disturbed by many factors and one should figure out the causes and look for ways to amend them. Few factors which often challenge mindset are,
a) Mental and physical fatigueness
b) Restlessness due to other factors from personal life
c) Personal traits like anger, indiscipline, impatience etc,
d) Not proper enviornment for trading
e) Too much impact from social media or other peer pressure
f) Wavering mind not allowing to focus.
Best thing happened to me as trader is change in my personality. I was short tempered and high pitch yelling person when I was working. Even a small thing can trigger me easily and affect my decision making.And, I was always not looking at things with some long term vision.Short sighted to take care of things only at hand and wanted to sort them out at any cost without thinking of larger picture consequences. Impulsive and impatient to get things done. All thanks to target based work pressure.
When entered into full time trading, have realised the impact of these traits in my trading and then started working them out slowly.Now, am not able to recollect when was the last time I got my high temper since 4-5 years.Trading changed me as much balanced person. I still get anger but I know very well which one is genuine and where I have to express it.My patience level has gone to other extreme and I would say personally that is remarkable change.I stated thinking slow and can visually think about long term.And, moreover I have made it possible to have lot of inner talk than getting immersed in external noise which was totally missing when I was working. All this,I can sense that making difference in my trading world.
How to get this things addressed to get right mindset?
Physical workout - Regulary
Food habits
Sleeping habits - This is very very important and I have emphasied enough times on this.
Meditation or any other form of work like art to keep your mind focussed for some time every day.
and, whatever you feel helping to get your mindset right..
Once you get above things done, you can certainly see a change in your approach in trading.
2. Awareness of market environemnt :
We have seen about personal mindset.Now this is about kind of mindset about market. Some times market also get into the mode of doing nothing but we expect always market to make some move. To understand this, one need to learn little bit about auction theory or price action or market cycle or whatever the name you can give but basically one should learn the context behind auction and function of market. Reading about indicators,systems, setups etc is fine but to ensure smooth functioning of them, little bit of context behind price action is better.
Here by context I mean rationality. Let me narrate some examples to understand context of auction.
Let us say, if market has moved 300 points for the day and average day is 250 then looking for breakout trade after 300 points is one of lesser odd positive outcome. Inventory is too long is the context here.
Another example like knowing about one time framing and not fading such market is another context. Price can lure but having one time frame context saves you from getting trapped in price advertisement.
Understanding balanced market and imbalance market another context.Balanced market you can look for both long and short trades and imbalanced market you can wait and enter only on imbalance side.
Smaller time frame could be quite bullish but larger time frame can be large balance in sideways.So, one should not get panic about spikes and gaps against smaller time frame bullish view and should be able to switch quick.
Alignment of all time frame = solid bets and can trail the trades ; conflict in time frame as said in previous point = book part and be flexible to switch bias quick..
When first session is easy to make money then second session goes choppy to give up whatever is earned in first session and vice versa..Context here is whoever wanted to make good use of inventory lets say smart money has done the job in first session and now left the market to retails.
Post a solid trend day comes quite a choppy day.Same context as above as smart money done the job on trend day and next day lays low.
These are some of nuances about market environment and one can make huge list about them to position self rightly.
One of the most important factor on knowing market environment is
" What is market actually doing against what you are expecting?" i.e, " Reality Vs your belief/bias"
Before coming to desk, some scenario might be playing on your mind for the day where you some how have very high conviction may be from past history..And, you start monitoring auction with this preconceived bias.Up to this points its absolutely ok.Without bias one cannot bet.But,when market is not behaving as per your expected scenario then you should understand that environment is changing and you need to ditch your preconceived bias here and get into open mind state.
Let us say, we had spike close in previous session and your expectation coming to market is follow through from spike. And, market opens with getting follow through from spike via clean drive and you are elated now that your dream scenario now working.But once drive fails and spike is being negated you should convince yourself that market changing course and should not stick to same old view.
Always ask this question.. "what am thinking and expecting from auction and what is actually market doing?". This one question alone can drastically reduce many poor trades.
3. Execution :
If you have read Market wizards then one of the highly repeated word in that entire series is "Execution". This is the one factor standing between thinkers and doers.
Why most renowned economists and think tanks stop only at level of teaching and not becoming successful traders?.
Why many people who got so many knowledge and teaches well cannot become traders?.
Why many well top selling business book authors not able to run business successfully?
Execution is what all it takes to be a successful doer/trader. Its all about right decision at right time and stick to it by process. I would say this execution is pivotal rule.
Whatever you learn, practice, understand, spend hours and hours to decode and create on your own, all this turns into better outcome only when you execute well. Execution here means not only just hitting buy and sell.Its all about when to wait and when to enter quick and when to trail and when to part book etc.. The famous words of "sitting tight" doesnt only mean about after entry. Its about sitting tight on hands for better opportunity without doing any mess up and then again sitting tight once entered.
So, few things to get this execution facor right are not having any fear, not having fear of missing out, not having too much greed to make all in one bet or one day, not relying on borrowed conviction (learn and make your own rules).
In my personal opinion things that affects execution are two important factors
a) Not understanding market environment well -which we have seen in above point.
b) Trade size - will cover in next point..
4. Size of the bet :
If you want me to pin point only one reason why most traders fail often then that would be this point.Not having right size or going for higher sized bets often.
Its like earn with right size consistently then go for one or few rogue bets with large size to give up all.Well, it was the case for me if not for you.Most of my accounts got busted solely only for this reason.I had to really work very hard to overcome of this issue. Problem with poor size is, most of the times its
"operation success but patient dead" situation. Your analysis is right and price meets objective as per plan but due to improper trade size, you chicken out for a small whip move only to watch the price meeting destination later without you..
So,make solid plan with capital and work out size and play with it consistently whatsoever happens. Whatever the high conviction from auction, setup you get, dont get over sized and just play with regular size. And, whatver the numbder of successful trades, dont change the gears. Think about compounding and all after some months or years and not in a random way. As long as you play with affordable size, you have the tendency to stick to your plan and execute well and you have a better chance for getting steady growth.
Automation can be good solution for above said execution and size issues to some extent.
5. Trade location :
Nothing much to explain than simply saying
"Enter into a trade as much as close to negotiation point and much away from objective zone"
Try to think in terms of "what are the odds for price to negate my trade if I enter here?". If you have even a slightest doubt, try to defer that trade. And, also think in terms of "what are the odds of price getting my objective zone after what has happened sofar in the day?".
Even few points you save in entry that makes lot of positive impact by end of month. Looks simple but very tough in practical live market.One should have good patience and grit to practice this. But, this one factor of trade location alone can take care of all your risk management.
For me personally, momentum chase is loser game.If I want to join the strong trend, I prefer to see some good rejection in strong trend to join or good pullback to enter the momentum rather than entering when its making extension from one level. Thats poor trade location for me. You can have some such rules to filter bad trade location issues.
So, this is summary of truth seeking from all old sins recorded in my trading journals :).
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