The Golden Rule

I would be considered by many to be a loser at trading. This is on the basis that I have far more losing trades than winners. And, if that metric alone determined whether someone is profitable or not, then they would be right.

But fortunately, they are not. Because I use what Van Tharp calls 'The Golden Rule'. It has been around for more than 200 years. Trend followers swear by it. If you can use it, you can make money. What is it?

The concept of acceptance

A critical part of developing the correct mindset in trading is grasping the concept of acceptance.

I first came across this from reading the books of Bob Rotella, a sports psychologist famous for his work with a lot of top class golfers. His first and best well known book in this area is Golf is Not a Game of Perfect.

Some thoughts on volatility

Below is a chart of the Dow where I have zoomed out to show a longer-term view going back more than a decade. This shows that the current levels of volatility (as expressed by the 2ATR measurement) have only been reached three times in the last 8 years:

• August 2015 - when there was a short, sharp movement downwards which got quickly repelled;
• August 2011 - ditto
• 2008 through to early 2009 - when we were in the throes of the financial crisis and the big market downtrend.

Don't just work on your method

Studies have been carried out proving that, even with a completely random entry, traders can make money by adhering to good risk control and cutting losing trades quickly. In his book Super Trader, Van Tharp talks about one such experiment with Market Wizard Tom Basso.

Yet, when you talk to inexperienced traders, nearly all of them continuously focus on some form of 'holy grail' to get them in right at the start of a price move - be it based on fundamentals, technicals or some thermo-nuclear indicator they have developed.

For 99% of traders, concentrating on the twin pillars of good risk and emotional control will help far more than continually fussing over how to get in a trade.

The mathematical side of trading

When most people talk about how they approach the market, they refer solely to their style of trading.

In my own case, I follow price trends - I wait for a potential new trend to be signalled, and I will then 'hop on' for the ride.

However, there is another important factor you should consider, which is all to do with the mathematical side of trading.

A visual version of tracking trading efficiency

In the Chris Sayce podcast on Chat with Traders, he talks about keeping two portfolios and equity curves - one relating to his actual trading, the other being what he calls his 'Discipline' portfolio, where he is able to track the theoretical performance had he followed his own trading rules to the letter. As he mused, the returns of the theoretical portfolio far outperformed reality. The closer his equity curve can mirror that of his Discipline portfolio, the better his ultimate performance.

This is a visual version of tracking what Van Tharp calls trading efficiency. He advises keeping a log to track your mistakes and quantify them in terms of R. I talked about this here.

Dale Carnegie and thinking about losses

These days I am a voracious reader, not so much of books directly related to trading, but to those dealing with the mind, attitudes or psychology. 

Interviews with, or autobiographies of top sportsmen or women are a good resource as well. When reading these, my mind automatically thinks about whatever is being discussed, and whether it can be applied to trading, and my own approach in particular. In that regard, I am always open to new or different ways of thinking.

Trading, life, NLP and mindfulness

This is a post that is highly personal to me. Some readers might find it useful. Some might find it total poppycock. Hopefully it will be thought provoking.

One of the more interesting interviews in the first Market Wizards book is that with Dr Van K Tharp. For many, his interview was their first exposure to concepts such as modelling, anchoring and other aspects of trading psychology. This area is now receiving far more attention than say 20 or 30 years ago thanks to practitioners like Van Tharp, Ari Kiev, Brett Steenbarger etc., but it is still not given as much coverage as entries and exits, or even risk management.

What are your beliefs?

Part of your success as a trader will depends on what you believe to be important. As Van Tharp says "You trade your beliefs about the markets".

If you look at this list below, then I do not follow or use many commonly held beliefs out there:

• I don't study the fundamentals on a company - half the time I don't even know what these companies do;
• These days I don't even let the price action in the indices influence my trading decisions or market exposure;
• I don't track volume;
• Apparently trend following on stocks doesn't work;
• I take entry signals regardless of the time of day - whether it is in the first minute after the markets open or the last minute before they close;
• I take intra-day exit signals.

Beyond these beliefs, you can also look at the basic approaches or trading/investing concepts taken by successful traders. Go and read the Market Wizards series as an example and see the differing methods used by some of the most successful traders ever.

If it works - do it!

If you have found a trading methodology that generates positive returns, suits your personality and risk profile, then you have found your own trading holy grail.