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In order for you to get better at anything you need to learn from your mistakes and cut them out of your life. If you are a serial procrastinator, the only way to improve that is by getting things done instead of putting them off until tomorrow. Easier said than done but small incremental improvements every day will make a massive difference a year from now.
Not using a trading journal is like trying to track your fitness without a heart rate monitor or something to monitor your steps. You may feel a little better, but you will never really know how much you have improved over time.
Trading journals provide a level of discipline that all successful traders employ when taking decisions and then reviewing the trades during and after the trade is closed out. It can be a simple notebook or excel spreadsheet that details the trade, expected outcome, result and very importantly the reason for taking the trade. Some traders also like to document their metal state when they opened the trade. It gives you an opportunity to see where you are making mistakes and what you are doing well.
Perhaps you are taking trades too close to important economic announcements, or you had an impulse trade which caused you to lose and cutting out these poor decisions will make a massive difference to your profitability.
It is vitally important to employ stop losses when trading. Too many people enter trades with an outcome in mind but fail to consider the downside. Unless you are very fortunate, most trades go against you for a period before they move as you expected. However, when they keep going against you it is very difficult to cut the position and move on. By employing stop losses and STICKING to them, you can take some of the emotion out of when to take the pain.
There are a lot of different ways to calculate your stop loss but the easiest is to work on a percentage of your trading account. 2 – 5% is a rational place to start depending on your win / loss ratio which can be determined by referencing your journal.
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Emotion plays such a pivotal role when trading that if you can eliminate this facet then you will be well on your way to achieving success.
Capital preservation is the most important aspect of building wealth – much in line with Warren Buffett’s famous two rules of investing: “Rule no. 1: Don’t lose money. Rule no. 2: Never forget rule no. 1.”
Cutting profits and running losses
It is a staggering fact that upwards of 65% of trades that clients have are profitable. Once in the black, the temptation to close a winner is enormous. In reverse, it is very difficult to close a losing trade because the hope that it will turn around, is a powerful emotion. No one likes to lose money but the need to protect capital is very important and if you have timed a trade wrong, then cut it early and reassess. Pride causes the majority of traders to lose capital because you are convinced you are right. You stick with losing positions that can eventually wipe you out.
When reading the book Market Wizards, by Jack Schwager, it is very apparent that the best traders in the world do not win on every trade. When they are wrong, they take a small loss but when they are right, they ride their winners which make up for all the small losses that they suffered and a lot more!
Common sense – not so common
The trading industry has created an illusion that with a little bit of money and a strategy that you can make a lot of money easily. While you can get lucky for a period of time, that luck may run out and you end up losing a bundle. Try to approach trading as you would a business. Testing different ideas, calculating and analysing data, tweaking, continuous self-improvement, preparation, journaling and discipline are all the things the regular trader does not want to hear about which is why they lose money.
Your responsibility as a trader is to find a method that has a positive expectancy. Apply it religiously and constantly monitor every little aspect of your performance. Do not try to force winning trades, the markets can stay solvent much longer than you can.
The key to becoming more profitable is developing your plan and sticking to it. Cut out the silly mistakes or at the very least learn from them and try and not repeat. Continuous improvement will yield massive benefits and as Henry Ford put it, “If you always do what you’ve always done, you’ll always get what you’ve always got.”
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.