Risk control
Ideally you want to keep your losses as small as possible. Losses should be expected. Every method has losing trades, and therefore you need to factor those into your trading plan.
The simplest way to keep losses small is to risk only a small element of your trading equity on each trade. If you trade multiple positions at any one time, you should also consider your overall risk or portfolio heat.
You have to accept you will have a number of losing trades. I lose more than 60% of the time, so I am used to it. Therefore, keeping my losses as small as possible is in my interests. This helps maximise the level of trading capital. Then, when a decent winning trade comes along, it will cover a whole bunch of the small losing trades and leaves some profit left over.
You may have good risk controls in place, but if you override them, or don't heed exit signals when you should, you will lower your trading efficiency and performance. This is how you can turn a winning system into a losing one, or in extreme cases lead to major drawdowns or equity blow ups. This is where the traders' mindset comes into play...
Mind control
Fundamental to developing the correct mindset is accepting responsibility for your trading decisions. You cannot blame anyone else. It's you and you alone.
You need to accept that you have full control for your actions - you decide when to enter or exit a position. You decide how much equity you risk on a trade, through your position sizing method. Once you have placed the trade, however, you have lost almost all control. The market will do what it wants to do. The only thing you can control is when to exit the trade, whether by stop placement of the taking of profits. Sitting there all day watching and fretting over every tick or minor move won't help you.
You need to have confidence in what you are doing, and your method. That may mean taking a long position when everyone else is going short, or vice versa. You need to ensure that other traders, or the financial press or TV, do not influence you. You should avoid the opinions and predictions of others. Learn to have faith in your own decisions and method.
Every system has losing trades - you must accept that. If you can't you shouldn't be trading. Having the discipline not to override your stops, in the hope that a trade will go back in your favour, is all part of having the right mindset.
You need to have the confidence, discipline and commitment to stick to a method that works for you, through winning and losing periods. Overall market conditions may not be favourable to your chosen method. You need to learn to have the patience to wait for the market to come to you. Don't force it.
Review
You need to periodically review your performance as a trader. This is not only from pure monetary or performance metric terms, but also by looking at trading efficiency, and also your trading mindset.
Trading efficiency deals with the number of errors you make, which can make a major dent in your overall profitability. Errors can turn a profitable method into a losing one. Therefore, it makes sense to keep a record and quantify the errors made. This is all part of the evolution and continual self-improvement as a trader.
Some traders I work with keep a diary, noting their emotions when placing new trades, coping with losses, and also the issues keeping their mind under control when they have big winning trades. Keeping a diary like this, and referring back to it can work wonders in developing the required mind control.
You also need to review your actual performance and relevant metrics. After accounting for any trader errors, this can highlight any number of issues with the basic method used.
Finally, once you have identified any issues as part of your review, you need to identify a clear plan of action to eliminate any issues, and then follow your revise plan over a decent sample of trades, before again going through the review process.
The Holy Grail
As far as entries and exits go, there is no one system that will catch all turns in the markets. In that sense, there is no holy grail.
However, the points listed below may be viewed as a traders' holy grail:
- To minimise trading errors or mistakes as far as possible;
- To having the courage to let your profits run, and the discipline to cut your losses short;
- To develop the required mindset which will allow to follow the above;
- To identify any issues as part of your review process, and to implement the necessary changes to eliminate them;
- To accept that you have never 'made it', and stay humble. There are always new lessons to learn, or old ones to re-learn. By practicing the points above, hopefully the 'tuition fees' (i.e. cost of those lessons) will be kept as small as possible.
As part of the mentoring programme, I spend a lot of time focusing on these areas listed above. I've made mistakes (lots of them!) and try to pass on my experience and knowledge, so you don't make those same mistakes, and help accelerate your development as a trader. If you refer to some of the testimonials, you will see how concentrating on the core elements have helped others. Eradicating issues in these areas may help unlock your potential too.
