Keep your tuition fee as small as possible

The recent market action so far in 2014 will have been educational for the majority of traders who are relatively new to the markets.

This period should have told you that:

• risk control is everything - not only in terms of what you risk per trade, but also in terms of overall portfolio risk;
• you need to be cautious when the general market direction is unclear;
• you need patience and discipline to succeed in the markets.

Unfortunately, a lot of inexperienced traders will have found this period educational via the process of losing money, so there has been a tuition fee attached. In some extreme cases, this could have been expensive as they may have blown up their trading account.

Fortunately, the traders who I have been mentoring have seen my thought processes and have sidestepped the tuition fee by going through this period with very little exposure. They are learning - quickly - the art of patience and discipline. Trading for long-term success is a marathon, not a sprint. We've kept our capital intact. In the words of Paul Tudor Jones, we've played great defence.

On my chosen timeframe, the general markets have lacked direction or conviction. We have seen how, earlier this week, some of the indices I track moved up to new highs, yet these have been swiftly rejected. The reason behind the price moves does not matter to me, in the same way as to whether any move has occurred on high or low volume. Price is the only metric I track, as its movements solely determine whether I make a profit or loss.

I wrote several weeks ago here about the need to scale into any new market move. If you had simply reacted to the new highs hit on Monday and bought into a whole bunch of stocks, I guess the majority of those would have resulted in losing trades, and a lot of frustration.

You need to accept that failed moves can and do occur. There is no such thing as a 'can't lose' trade. That is why I suggest being cautious and gradually increasing your exposure when a potential new market trend is signalled, combined with the risk management you need to exhibit.

It is a fact that, a trader can have the greatest system out there, but if they use poor risk control, they will suffer big losses and possibly blow up their account. Unfortunately it is periods like these where people learn that risk control and having the correct psychology are far more important to achieve long-term success than working on some some indicator to determine new entry or exit signals.

On the other hand, those who have quickly learned and understood the need for patience, discipline, good risk control and are developing the required mindset will be keeping their tuition fee as small as possible. And ultimately, this period will stand them in good stead going forward.