In this article I want to focus on one of the key elements to successful trading, handling your emotions.
"People don't buy for logical reasons, they buy for emotional reasons" Zig Ziglar
Every book I have read on trading makes reference to controlling your emotions through trading discipline. So why then, if everyone talks about it, do most traders still lose money?
Before I explain, first let me point out why I might be considered qualified to talk about this. On average I am up over 16 months on the DUKASCOPY trader contest with a good profit to draw down ratio. I also run an investment company specializing in FOREX that makes people money. I have developed my own Emotional Control System (ECS) which is in essence a set of rules I NEVER deviate from.
I will run through in a timeline some of my rules, which I hope you will adapt to your own trading style to make you even more successful.
#1 Only Fools Rush In.
People open accounts and fund it with money they have for investments with very little experience in trading. You probably know this already but do you know why? The answer is simple, who told you how long to wait or how much you need to study? The desire to manage your own money and make good profits is a strong emotional trait. It's not like a degree where you study for (usually) 3 years, sit some exams, write some papers and wait for the grading. You can do it NOW!
There are no set rules! So you have to make an intelligent guess and GO FOR IT!
TIP 1 - Act on results not emotions!
I followed these 3 simple rules before trading significant amounts of money (for me).
- 4 Profitable months in a row (account less than £1000 but real money)
- Draw down (maximum loss on account) <5% of total account at any time.
- Back tested my rules over 5 years
#2 Never Stop Learning
Constantly keep check on your results and review. For example I know that my worst run of losses is 7, with a maximum draw down on my account of 5%. If I experience a run of 4 or 5 losses in a row I review all trades to confirm I have maintained my discipline.
The same applies to positive trades and my ratios. On a monthly basis I know all my KPI's (key performance indicators).
- 68% of my trades are winners
- I make an average of 0.61% (of account value) per trade
- I lose an average of 0.54% per trade
- The average length of a trade is 3 hours
TIP 2 - The answers lie in Bad results
Every month I review the stats. If you bury your head in the sand and ignore the stats, how can you learn and improve. Who wants to review bad stats! That is exactly the emotional reaction people have. Do not ignore failure and move away from it, stare it straight in the face and learn!
"The computer can't tell you the emotional story. It can give you the exact mathematical design, but what is missing is the eyebrows" Frank Zappa
#3 Rules to suit you
You probably already have a set of trading rules that you try to stick to. So why do people break their own rules? I did because I didn't really believe in all of them.
Here are a few rules I BROKE because they didn't suit me:
- Trades left open overnight must not be closed early
- Let my trades run to Profit or Loss Levels, do not touch
- Make sure my Profit target is more than my Stop Loss Level
- Do Not move levels
(There are many more)
TIP 3 - Breaking rules mean you do not respect or believe them.
So ask yourself why and change the rules to suit you. When ever you do this, go back to Rule #1 and achieve 4 profitable months in a row before gearing up.
THE CYCLE of 3
"Time is your friend, impulse is your enemy" Jack Bogle
Start at #1 - study hard and come up with your own rules.
If you get bad results, analyse them to death.
Re-Write your rules & go back to the start.
My Epiphany and Why you should listen!
Between 2002 and 2005 I repeated this cycle, yes 4 years of not making money but moving closer to my goal of being a successful trader.
Eventually I realised something quite fantastic, something I had missed in my analysis of previous results. During that period, there was a consecutive set of results, stretching for 1 year, where I had a failure rate of 70%!!!
Can you see the answer?
If I did the opposite for that entire period, I would have the opposite results!
.....and that was the first time I really believed I could do this, trade profitably!
Good luck and thank you for reading