Most small traders (i.e. the home-based independent speculators) end up losing money when they trade the financial markets. Statistics say that 95% of these traders lose over time – which is why the investment professionals refer to them as the “dumb money”.
We’ve all been there at some time in our trading careers. Some initial successes which hook you and then a run of losing trade after trade and not knowing why, or what you need to do to break the cycle…it doesn’t take long until your funds have expired and you feel stupid!
1 - Know your market
Do your research. Decide what you are going to trade and stick with it. Learn everything you can about it in as much detail as possible. Even if you are going to be a purist technical trader, you still need to understand how the different macro-economic events impact your chosen market so that you don't get caught out.
We are gold traders and have been for many years. We don’t trade anything else. We have previously traded the forex and equity markets, but our passion is gold. We know an awful lot about the gold trading market, but there are always new things to learn. Our days are spent, alongside watching the market for trading opportunities, making sure we continue to learn more.
You have to plan where you are going to buy or sell, where to place your stop loss and most importantly where to exit the trade. Then, once the trade is planned and executed, you must show discipline – you made the trade for a good reason with solid justification, so any changes need equally solid justification.
3 - Keep losses small and maximise winners
This sound obvious, of course, but it’s often traders doing exactly the opposite of this that accelerates them along the path to financial ruin.
If it’s clear that the trade is going against you, get out quickly. In many cases a trade will go the wrong way at some point – it’s not always possible to pick the perfect entry point and so you need to allow room for the trade to breath as it confirms a bottom/ top or performs a natural retrace after a big move. But if it’s clear that market conditions have changed it’s best to cut your losses and move on to the next trade. Never widen your stop-loss position in the hope that things will turn around.
Conversely, when the trade is running the right way don’t panic and take your profits at the first sign of it stalling. Sometimes this makes sense when the market is clearly turning or if your initial pre-trade assessment wasn’t accurate and so you are lucky not to have lost; but generally it’s wise to keep the trade open and just keep trailing your stop-loss position in behind the trade to stay in the game as long as possible.
If you look at our trading history, you’ll notice that (as of 27th Jan 2013) our average winning trade is $37 (or 370 points) and our average losing trade is $19 (or 190 points) – this, coupled with having more winners than losers, is why we are successful gold traders.
4 - Remove emotion
To be able to make the key decisions which keep losses small and maximise winning trades, you need to remove the emotion from your decision making. There is a tendency to become too emotionally involved with a trade once it has been placed, and to want the trade to succeed too much.
Therefore, novice traders tend to let losses run too long, by either widening stops or ignoring signals that the trade is going wrong, in a desperate attempt not to lose money. All that happens is when you do eventually lose, the loss is a huge one.
That means that when the next trade is opened there is even more pressure to succeed or it may be the last one…and so on.
Removing emotion from trading decisions is a very hard discipline to master, but it gets easier as you become successful. Following a method over the long-term which has paid dividends gives you confidence - when short-term setbacks occur they no longer affect your judgment.
Our own money-management strategy could be seen by some as quite aggressive, but it works for us as we’re so confident in our trading strategy after so many successful years. It is also geared in such a way that we will never lose more than we can stand on any single trade.
You need to find the right level that suits your funds, risk appetite, style and frequency of trading.
6 - Don't overtrade
Whilst trading could, and should, be enjoyable you need to be careful that you’re not getting caught up in the excitement of “the gamble”. All too often we see people placing numerous trades each day on multiple markets – placing too many trades that haven’t been planned just for the buzz of being in the game.
We usually make just 2-4 carefully planned trades a month (and some months we sit it out completely if there isn’t an obvious set-up) as overtrading means more money is lost on commissions and spreads and the likelihood of losing is higher as trades are more frequent.
7 - Never chase a loss
When you do suffer the inevitable losses never jump straight back in to the market in an attempt to put things right – it rarely works and, if it does, it’s usually more luck than judgement.
Accept that losses are just as much a part of trading as winning. You need to be able to deal with them without it clouding your judgement – we know this is sometimes hard, especially after a run of heavy losses. If you’ve followed the other tips in this article, you shouldn’t be getting too many big losses in the future anyway!
Always step away from the market after a loss and reassess. Regroup, plan your next trade and re-enter only when there is a setup on the table which fits your trading strategy.
7 Keys to Successful Financial Trading
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