Friday, February 01, 2013

The road travelled

As you proceed along your trading journey, you will encounter all sorts of obstacles and roadblocks - some out of your control, some all of your own doing.

It is important to remember that you can only control what is controllable - for example, ensuring you use appropriate risk control, do not overtrade, adhere to your initial stop levels, and stick to your rules for entering and exiting positions.

Everything else is outside of your control. You could take 10 trades, all with the same chart set ups or patterns, the same general market environment and sentiment, yet any one of those could be a big winner, and any one of those could potentially blow a big hole in your equity. There could be unexpected annoucements regarding the economy in general, or trading updates or earnings that either exceed expectations or create a collective groan from shareholders.

I've yet to meet or find a trader that has achieved a sustained level of performance without encountering these ups and downs or suffering drawdowns - in some cases, quite severe ones. Yet those traders have several things in common:
  • They found a method that suited their personality, which helped them to keep on an emotional even-keel;
  • The chosen method was robust and had a positive expectancy;
  • They had an underlying belief and confidence in their chosen method to make money;
  • This meant they had the discipline to stick to their chosen method even during periods of poor performance;
  • They had a strong respect for risk.
By having those factors in place, they were able to ride out the poor periods, with the minimum of damage to their equity, which meant they were well placed to profit from those periods where the system performed better. And in those market phases they used the power of compounding to grow their trading equity.

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