By: Daniel Karadi
At every stage of our evolution as traders, just as in our personal lives, we come across meaningful signs that make us look back at the journey we’ve taken. At these points in time, we notice changes which we simply can’t ignore. We look back on our mistakes and milestones, and forward to our goals and destinations.
We might say “what was I thinking back then?” or “if I only knew this earlier,” and we might feel a bit embarrassed. Nonetheless, we’re thankful for this change in our way of thinking.
Here are the five tips that every pro trader knows, and which every novice trader needs to hear. I think that by internalizing these tips, traders can avoid recurrent battles with themselves and shorten their learning process, not to mention save a few dollars.
Focus on your learning process
We learn very little from success. Most of our significant lessons in life come from mistakes and failures. The more mistakes we make, the more we learn. It’s not for nothing that they say, “a man’s experience is the sum of all his mistakes.”
But that doesn’t necessarily mean that the bigger the mistake, the more important the lesson. That’s a key point. One big mistake that causes us to lose a large amount of our trading account doesn’t have the same value as five mistakes and five lessons which amount to the same total loss. The learning process is long and difficult as it is. Traders can choose to make it easier for themselves by “learning more lessons,” and losing the same amount of money. This kind of thinking will help us understand our next trades and keep us in the game for much longer.
Always take a free trade
Managing your position is probably the most important technique in trading. It helps us keep our money, and adhering to strict rules prevents us from acting on emotion. It also helps us work in a systematic and rational manner, and minimize our risk in times of great uncertainty.
One of the strategies that many novice traders hear of, but ignore, is making a “free” trade. Ignoring this can lead them to losing money and turning a profitable trade into a losing one.
A “free” trade is a trade in which you don’t risk even a single dollar, and even if you exit at your original stop, you’ll be balanced out, and not end with a loss.
Let’s say you’re willing to risk $10 on a trade, and your stop price is $0.10 away from your entry point. This means that you can buy a hundred shares. If the trade goes against you, you’ll lose $10. Your first target price for profit is on a 1:1 ratio, so if the trade will give you $0.10, you’ll make $10. Once the trade reaches its first target price, you can realize half of your position and take the profit. This means $5 is already yours. Now you’re left with fifty shares. If the trade goes against you and reaches your stop price, you lose $0.10 on fifty shares, which totals at a loss of $5. Now you’re balanced, and you’ve earned a “free” trade and some “free” lessons.
More experienced traders will realize half their position at higher target prices, so they’ll always stay in position where they can’t lose and thereby have a mental advantage.
Focus on making good trades instead of money
It’s the World Cup. A long game of two hours is ending with a duel of penalty kicks, and you’re the final penalty-taker. You approach the ball, full of confidence, thinking about celebrating with your teammates and holding the cup. You kick… and miss. You already saw your victory, but you forgot to look at the ball that’s in front of you right now. And so you lost the game.
This happens often to traders in the financial markets, when they forget about the pathway and look forward to the results. An archer in a shooting contest won’t hit the target if he’s thinking of the prize.
Can’t see the forest for the trees
Avoid using too many indicators and other technical tools that will block your view of the graph. There are hundreds of indicators and they are mostly useless. You can use them for making decisions, but they’re not reliable enough to use in a strategy that will make money over time. Build yourself a simple analysis method that’ll help you understand the graph in the most efficient way possible.
Don’t predict the movement – react to it, flow with it
As traders, our eyes can be our biggest adversaries, and they can often fool us. We see an uptrend in a graph and automatically think of buying the stock. But one candlestick can change the whole picture, and our opinion of the trade.
The best example is the green candlestick that’s performing a breakout of a resistance, but closes below it, and forms a shooting star. We can see this in Apple’s weekly graph.
In conclusion
Choosing our trades should be a result of understanding and reacting to the price action, and not of an attempt to predict the movement. Profitability is available only when we identify a long-term trend and join it. We will never be profitable if we keep trying to predict what the price will do.
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