DISCIPLINE: The trader must have the ability to control themselves and follow a plan. Discipline is a required skill in trading without it there is no edge, you are either a gambler or simply trading off fear and greed. You will not be successful, instead you will be gamed by those in control of their emotions.
RISK MANAGEMENT: Risk management must be a top skill for a trader to even survive in the markets. You must structure your risk per trade to be no more than risking 1% or 2% of your trading capital. You have to be able to survive 10 losses in a row. These strings of losses come around more often than a new trader would suspect. If you lose just 5% of your trading capital in each of ten trades you will be down almost 50% and need a 100% return just to get back to even. At this point you are ruined.
PASSION: A trader must love to trade, without a passion for the markets and trading the new trader will not survive the learning process because anyone with common sense would believe that it was not worth the struggle. Passion will be needed to bring a trader through the learning curve and later the losing streak.
Archives of “trading capital” tag
rssOvertrading
Most new traders overtrade.
Overtrading is when you (hoping to receive the maximum possible profit) opens a huge position consisting of multiple lots.
Considering the typical market activity, it’s easy to lose half or even all your trading capital.
This problem is sometimes directly connected to insufficient trading capital.
But it’s more likely due to the trader lacking knowledge of money management principles, which means lack of competence to control their trading capital properly.
Your trading capital is used to earn money. You should treat each rupee is like a newborn baby.
Your first and foremost responsibility is to protect it. If you lose it, you have less to help you earn money.
Successful Traders Must Have Discipline
Discipline is paramount for success over the LONG term. Every trader has a limited amount of capital (money) available to trade. The trader without discipline will make trades, be quick take the profit when he is right, and call his trade an investment when he is wrong.
This action of cutting winners and letting losers run will almost certainly eventually lead to trading capital being wiped out. The natural tendency in humans is to take profits. Learning to cut losing positions and let winners run is a skill that must be developed.
Have you ever caught yourself saying any of the following statements to justify inaction on cutting a losing position?
- I am holding on to this trade and hoping it recovers
- If I didn’t own it already I would be buying it here
- I just want to get back to break even and then I will get out
- The market is wrong
Everyone has said these things at some point in their trading lives, but let me tell you, any time your position requires HOPE it is likely HOPELESS!
If you say I would buy it here and you don’t want to buy more – you may be better off selling what you have!
The market doesn’t know or care what price you bought a position. The market price of a stock is the value of that stock right here, right now! Even though the market presents opportunities, market pricing is not WRONG.
While I am not giving buy sell or hold advice, I would strongly recommend that when you find yourself staring at a losing position consider selling it! If you close it out completely, you can really make an honest determination when you ask yourself, “Do I REALLY want to own it here?”
Too often I see traders let their existing positions do the talking for them. Don’t fall into that trap!
Three Main Areas of Trading You Must Master
- Psychology: Trading is a miserable experience if your very self worth hangs on your every trade. You must separate your ego from your trading, you do not want wins to make you too happy or losses too make you depressed. In trading you are a business man, you are using capital to create more capital. When you lose money on a trade it has nothing to do with you if you followed your trading plan, the market was simply not conducive to a profit with your system, nothing more, it isn’t personal. Separate your ego from your trading.
- Risk Management: If you want to be successful in trading you have to avoid the risk of ruin. If you risk 2% of your trading capital per trade and you lose ten times in a row then you are down 20%, you need a 25% return to get back to even, you can do that. If you risk 10% of your capital per trade and lose ten times in a row you are at $0 and ruined. If you trade long enough you will have ten losses in a row, plan to stay in business after this happens. Carefully control what you lose.
- Method: You need to trade a method that fits your personality and is proven to win over the long term. Some people love to trade growth stocks, they need to find a method that is a proven winner and trade it. They will need to quantify what can be on their watch list, position size of each trade, and define entries and exits along with initial stop losses. Most importantly stick with the system so they will be trading it when it wins big. Each trader has to find the market they want to specialize in and become an expert. Before trading a system they need to look at the systems historical performance with some form of back testing. Find a winning method that fits your personality and trade it and it alone.
Discipline-Risk Managment-Passion for Traders
- DISCIPLINE: The trader must have the ability to control themselves and follow a plan. Discipline is a required skill in trading without it there is no edge, you are either a gambler or simply trading off fear and greed. You will not be successful, instead you will be gamed by those in control of their emotions.
- RISK MANAGEMENT: Risk management must be a top skill for a trader to even survive in the markets. You must structure your risk per trade to be no more than risking 1% or 2% of your trading capital. You have to be able to survive 10 losses in a row. These strings of losses come around more often than a new trader would suspect. If you lose just 5% of your trading capital in each of ten trades you will be down almost 50% and need a 100% return just to get back to even. At this point you are ruined.
- PASSION: A trader must love to trade, without a passion for the markets and trading the new trader will not survive the learning process because anyone with common sense would believe that it was not worth the struggle. Passion will be needed to bring a trader through the learning curve and later the losing streak.
A Traders number 1 JOB is…..
A trader’s number one job is NOT:
- Stock Picking
- Chart Reading
- Trend Following
- Entries
- Exits
- Understanding the market environment
- Managing Emotions
- Managing Ego
- A Robust Method
- Or even Discipline
A traders #1 job is to be a great risk manager. (more…)