Being a profitable trader is an achievement so many aspire for and yet so few are able to realise. Even with a profitable strategy, a few bad habits can destroy any chances of success. When I first started I made every mistake in the book, which I am very open about when I discuss my story. What separates me from most others is that I learnt from my mistakes and persevered through.
Here I discuss what I believe are the 3 key hurdles to avoid, not only in trading, but in life.
1. Poor risk management
Everyone has their own risk tolerances – some people love skydiving, others prefer their feet firmly on the ground, or if you’re like me, you’re somewhere in-between… (although probably nearer the ground)
Wherever you sit on the scale, to be a successful trader you must understand that managing risk is the most crucial element to trading. No matter how good your system is, if your position sizing is too big then you will eventually blow your account and this is where so many new traders go wrong.
There is a horrible catch-22 scenario when you first start trading, where you aren’t confident enough to put a large sum of money in to your account yet (And rightly so), but also its hard to think about money management when you have a tiny $500 account. If I said never risk more than 2-3% of your account on a trade that’s only $10-$15 – and you might feel like you’re going nowhere when you when make profit.
Nonetheless, I can tell you, it is possible. I started with $400 less than 2 years ago, and now have over $30,000 . Focus on trading well, not making money. If you blow your account, you will remain a loser, so manage your risk.
2. Not controlling your emotions
We’ve all been there – whether it is through trading or another aspect of life – sometimes you allow your emotions to cloud your judgement. Being a good trader requires the highest level of discipline. You can’t release your road-raging alter-ego every time you get stopped out early, or the market moves against you. And similarly, you can’t let hope dictate when you enter or exit your positions. I see so many people who ‘hope’ the next trade will go their way, or they ‘hope’ that the market will stop going against them.
Do you wonder why algorithms make good traders? And why so many hedge funds trade rule based strategies? Emotions are the enemy of good traders.
The solution to this is very simple – have a plan. Have a plan for entry, have a plan for exits, and know what your risk is. (You can find guides on each of these steps here) If you know what you’re letting yourself in for, it takes away any surprised. When you get stopped out, you’ll know that was the risk. When the market goes your way, you’ll have no reason you get greedy and close out prematurely. A very basic solution, to a very complex problem.
Inconsistency comes in many forms, all of which are a cause for concern. The main two are inconsistency in applying a plan, and inconsistency in position sizing. I mentioned before that a plan is the solution to overcoming your emotions and that your risk needs to be managed with small position sizing. Well, that only works if you do it consistently.
If you have a plan, but then decide ‘Oh, I’ll just extend my stop loss and let this run a little longer’, or ‘oh, well this position is a SURE THING, I’ll put half my account on it’, then you are back to square one.
The Two Traders