Can trading be taught? Part II: the trading guidebook for success

In my last article, I wrote about how trading can be taught. One major area which needs to be understood is the core understanding of the mechanics and creating one’s own content. The other area was more like soft skills, which talks about “discipline”. I have received quite a few queries which wanted me to elaborate on the discipline part. So, this time I would like to share my views on those concepts of the discipline. These are the conclusions or observations that I have deduced from my experiences over a period of time. Please treat them as a reference point only:

The market pays you to be disciplined

Trading with discipline will put more money in your pocket and take less money out. The one constant truth concerning the markets is that discipline=increased profits.

Be honest – if you are not fully disciplined, don’t claim to be

Being disciplined is of the utmost importance, but it’s not a sometimes-only thing, like claiming you quit a bad habit such as smoking. If you claim to quit smoking but you sneak a cigarette every once in a while, then you clearly have not quit smoking. If you trade with discipline in nine out of 10 trades, then you can’t claim to be a disciplined trader. It is the one undisciplined trade that will really hurt your overall performance for the day. Discipline must be practiced on every trade.

Lower your trade size when you are trading poorly

All good traders follow this rule. If you have two losing trades in a row, always lower your trade size down to one lot. If the next two trades are profitable, then move your trade size back up to your original lot size.

Never turn a winner into a loser

We have all violated this rule. However, it should be our goal to try harder not to violate it in the future. What we are really talking about here is the greed factor. The market has rewarded you by moving in the direction of your position; however, you are not satisfied with a small winner. Thus you hold onto the trade in the hopes of a larger gain, only to watch the market turn and move against you. Remember – no one trade should make or break your performance.

Your biggest loser can’t exceed your biggest winner

Keep a trade log of all your trades throughout the session. If, for example, you know that, so far, your biggest winner on the day is 5 percent, than do not allow a losing trade to exceed those 5 percent. If you do allow a loss to exceed your biggest gain then, effectively, what you have when you net out the biggest winner and biggest loss is a net loss on the two trades. Not good.

Develop a methodology and stick to it – don’t change it day to day

It is important to actually write down the specific market prerequisites (setups) that must take place in order for them to make a trade. A trade generally has three layers to it – build-up (derivatives/cash), set-up (technically), and trigger (reason/news).

Be yourself – don’t try to be someone else

We tend to hear anecdotes of what other traders have been doing and try to replicate that. But that can just make things further worse for us. Their strengths are not yours, and vice versa. Learn to accept your comfort zone as it relates to trade size. You are who you are.

You always want to be able to come back and play the next day

Never put yourself in the precarious position of losing more money than you can afford. The worst feeling in the world is wanting to trade and not being able to do so because the equity in your account is too low and your brokerage firm will not allow you to continue unless you submit more funds. Do place daily downside limits on your trading. Once you reach the limit, you must turn your PC off and call it a day. You can always come back tomorrow.

Earn the right to trade bigger

A typical institutional prop trader would typically start with some arbitrage trades when he/she initiates his prop book. Slowly, they would do small high-probable, low-risk return trades. Eventually, they start trading big. Similarly, have a trading profit over the course of 10 consecutive trades, trading with the same size rather than increase it. Remember – if you are trading poorly with a higher size, you must lower your trade size.

Get out of your losers

You are not a loser because you have a losing trade on. You are, however, a loser if you do not get out of the losing trade once you recognize that the trade is no good. Every trader has losing trades. A typical trade book can consist of 33 percent losing trades, 33 percent scratches, and 33 percent winners. Exit losers very quickly. So, although you have either lost or scratched over two-thirds of trades for the day, you still go home a winner. Once you come to the realization that your trade is no good, it’s best to exit immediately.

Don’t hope and pray

When I was a new and undisciplined trader, I can’t tell you how many times I prayed to God. My prayers were a plea to help me out of a less-than-pleasant trade position. I would pray for some sort of divine intervention that, by the way, never materialized.

Don’t worry about the news – it’s history

The fact is that the reporting that we hear on the business programmes is old news. The story has already been dissected and consumed by the professional market participants long before the news has been disseminated. Do not trade off of the reporting. It’s too late.

Don’t speculate

It is impossible to speculate and consistently print large winners. Don’t be a speculator, be a trader. Don’t go around just punting in the market without a reasoning for it.

Love to lose money

Accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly. It will save you a lot of trading capital and will make you a much better trader.

If your trade is not going anywhere in a given timeframe, exit

This rule relates to the theory of capital flow. It is trading capital that pushes a market one way or another. An oversupply or imbalance of buy orders will push the market up. An oversupply of sell orders will push the market lower. When price stagnation is present, you don’t want to be in the market at these times. It is a waste of time, capital, and emotional energy. It’s much better to wait for the market to heat up a little and then place your trade.

Never take a big loss

Big losses prevent you from having a winning day. They wipe out too many small winners that you have worked so hard to achieve. Big losses also hurt you from a psychological and emotional standpoint. It takes a long time to get your confidence back after taking a big loss on a trade.

Make a bit each day

Keep picking small profits each day. The ROI should be good, even though the absolute gains may be smaller. These small gains over a period of time create very good capital because the ROI has always been good.

Hit singles, not necessarily boundaries

You should never approach a trade with the idea that it’s going to be a huge winner. Sometimes they turn out that way, but attribute that to luck, not skill. The intent on the trade was to produce a small winner but, because I had the trade on at the right time (as luck would have it), I unwittingly had a huge winner.

Consistency builds confidence and control

How nice is it to be able to turn on your PC in the morning knowing that if you play by the rules, trade with discipline, and stick to your methodology, the probability of a successful day is high. Making a little bit everyday will allow you to trade throughout the trading session with confidence and control. If you make a little bit every day, then you have earned the right to trade bigger.

Sweat out your winners

The net effect of scaling out of your winners will be an increased average win per trade while keeping your losses to your pre-defined risk parameters. You should never scale out of your losers. If your trade size is more than one lot and your trade is a loser, you must exit the entire position. If your trade size is more than one lot and your trade is a winner, it is best to exit one-half of your position at your first price target. If you trade with protective stop-loss orders, you should amend the stop price, depending on whether it’s a long or short position. You now are essentially playing with the house’s money. You can’t lose on the remaining position.

Make the same type of trades over and over again

A bricklayer shows up for work every day of his working life and executes with the same methodology, brick by brick by brick. The same consistency applies to traders as well.

Don’t overanalyze, don’t procrastinate, don’t hesitate

There are times when you know the market is going one way or another; however, you failed to put a position on. You were waiting to be filled at the absolute best possible price, or only two out of three market indicators were present, and you were waiting for the third. The net result of all this procrastination and hesitation is the trader was correct in deducing market direction, but his profit on the trade was zero. We don’t get paid in this business unless we put the trade on.

All traders are created equal in the eyes of the market

We all start out the day the same. We all start out at zero. Once the bell rings and trading begins, it’s how we conduct ourselves from a behavioural standpoint that will dictate whether or not we will make money on the day.

Market is always right

The market moves wherever it wants to go. It does not care about you or me. It does not play favorites. It does not discriminate. It does not intentionally harm any one individual. The market is always right. You must learn to respect the market.

Happy trading. Cheers!

Manish Sharma is Education Director and Chief Trader at Derivative Trading Academy.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)