Most traders are liars. We lie about our methods, we lie about our results, and we lie about what we’re trying to achieve.
I’m talking about the lies we tell ourselves …
“Yes, I have clear rules and always stick to them.”
“I won’t count that losing trade, because I probably shouldn’t have taken it anyway, and without it I’d be profitable.”
“I don’t expect to make a fortune overnight.”
I’ve fallen into these traps too … I’ve fudged my rules, I’ve had unrealistic expectations.
In fact, the one thing that really cured my self-deceit was when I began sharing my systems with other traders. If other traders know my rules, they’ll quickly pick me up if I start deviating from them – I’ll always have to keep a clear record of every trade.
And I have to be 100% confident in how robust a system is before I’ll put my money (and my name) to it.
Over the years, I’ve learned that the cardinal sins of trading aren’t things like ‘closing trades too early’ or ‘failing to read price action right’ … they are much more basic than that. And – the good news is – they are much easier to put right.
1. Are you system hopping?
No, I don’t still trade the first method I started out with – my trading methods have changed and evolved over time, I’ve learned more, I have deeper funds, and I have different expectations.
But I don’t consider myself a system-hopper.
A system hopper can NEVER make money long term, because their results will always been filled with drawdowns. A system hopper is looking for the best trading system on the market, so will be drawn to one that’s showing great performance ‘right now’.
However, as we know, profit curves don’t move in straight lines, and even the best systems will be due a drawdown, and a system hopper has a much higher chance of joining a system at those profit peaks … just ahead of drawdown.
Here’s a chart showing what happens if we switch from one system to another, four times, following a drawdown of £500 …
The results for a method like this will have been closer to a £2,000 drawdown – and that’s from trading 4 different methods ALL OF WHICH ARE ACTUALLY PROFITABLE!
None of us can afford to give money away like this. There are plenty of ways we’ve covered in Trader’s Bulletin to protect your funds during a drawdown – use those rather than having your head turned by the next best thing.
2. What’s your staking strategy?
I know really smart people – people who have traded for a long time – who STILL don’t calculate their stakes properly. Some trades take on two or three-times the risk they should, some trades aren’t making the profits they should – just because they don’t bother to spend 20 seconds calculating the right stake for that trade.
Before you set out, there are three things you need to know …
- What’s the size of your trading fund? This isn’t necessarily the amount of money you have in your trading account – if you have a large fund, I’d positively discourage you giving it to your broker for ‘safe keeping’! But consider how much you’re prepared to risk on your trading.
- What degree of risk are you prepared to take with that money? Will you risk 1% per trade? 2%?
- Are you going to compound your winnings as you go? Or do you want to take your profits off the table and keep your trading fund a fixed size? If you are compounding, how often will you compound? Every trade? Every day? Every month?
Once you have this information, you can calculate the risk you’re prepared to place per trade.
For example, if you have a fund of £2,000, and are prepared to risk 2% per trade, then your risk on a trade will be £40.
If you have a fund of £10,000 and are prepared to risk 1% per trade, then your risk on a trade will be £100.
And the final piece of the jigsaw is to match this to each individual trade.
If your stop distance on a trade is 20 points, and your risk-per-trade is £40, then your stake on that trade should be £2. (I.e. £2 x 20 points = a maximum potential loss of £40.)
This calculation is the work on seconds, so there’s no reason not to be doing this on each trade – it means your risk and rewards will always be in line, and that the power of compounding is working properly for you.
3. How do your records look?
As I said earlier, one of the things that keeps me really disciplined in my record keeping is the knowledge that other traders using my methods expect that of me – and would quickly pull me up if I wasn’t being 100% honest in my results.
I know that I can’t twist my rules or fudge any results – and actively posting results keeps me on track.
Publishing my trading systems has – without doubt – made me a better, more disciplined trader.
Trading as part of a community can have a powerful effect on your profits, so I’d always encourage traders to share their results.
(If you’re not following them already, I do post all my results for strategies I’m using in the comments on the website every week or so, including screenshots of my account.)
(I’ll assume that as a good Trader’s Bulletin member, you’re already using my Trading Journal to track your results.
3. Are you serious about doing this, or just mucking about?
If you find yourself doubting the importance of points 1–3 above, I recommend that you ask yourself if trading is really for you.
If you just want to gamble a bit of money on the markets, without a clear plan – that’s up to you.
But if you really want to build a financial future from the markets, then you must give yourself a chance to make money. And if you’re failing in any of these points, then you’ve sabotaged your success before you’ve even placed your first trade.
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