If you are trading without first assuring your survival, you are just playing a game, a crazy gamble that a drunkard places over the weekend in Las Vegas casino. No real trader who aspires to reach constant profitability will participate in the Market without first assuring their survival.
The above is absolutely essential and goes without saying. It is assumed by default that your risk and money management, as well as psychological well-being, are taken proper care of.
Before anything else, you need the willingness to put in countless hours of work into the Market. Only this will allow you to gain this important subjective feel of the Market as you watch it. The trading ideas will come to you effortlessly and it will only remain for you to execute them. This is how you build your trading system.
Ask yourself: “Why am I not putting enough time into watching the Market? Why am I not willing to take losses, make mistakes and yet continue with my method, learning and improving with each passing day?” Find the answers. Write them in your diary. Propose the solution and implement it.
When you spend enough time on trading and seemingly totally committed to your success in trading, ask yourself this: “Why am I not acting on each and every idea I have? Why am I closing the trades before my targets are reached or my system tells me to close them? What am I afraid of?”
Honestly answering these questions in your daily diary will lead to important improvements to your trading system. Go back to the first step – putting countless hours of work – and repeat the process times and times again, with humble understanding that you will never be good enough to cease improving your method and your execution of it.
Above all else, remember – it is only possible to go through this difficult process when you have absolutely, perfectly ensured your financial and psychological survival! You cannot be worrying about your well-being or losing more than you can afford to lose AND going through the mandatory learning process of taking losses, making mistakes and being clueless.
As I am doing historical Price Action and Strength analysis I am seeing a lot of great opportunities that I was watching live and missed nevertheless. I can see clearly that the Market is providing me with a couple great entries every single week, and yet I am not acting on many of those.
Naturally, when I look back, I make pictures only of great trades that I missed and so I fail to realize that there are many signals that look just as great in real time but would lose money if acted upon. This goes to show that picking out trading signals is a losing proposition on the whole. We must act upon anything that looks like an entry trigger in the potential long term direction.
Really, when we come thinking about it, how else can it be?
Any entry trigger is uncertain. It can never be a 100% indication of a profitable trade ahead. It is just an indication of a familiar pattern that is utilize in our trading system.
Any future trend is only potential. It can never be certain, we can never know how the Market will behave in the next couple days.
So the trading process is very simple:
- Accept the uncertainty
- Recognize an uncertain, potential future long term trend
- Recognize a pattern that simply looks like an entry trigger
- Accept the uncertainty
- Pull the trigger
This simple procedures assumes that all Money and Risk management is taken care off, and one should never even approach the markets without it. After all, this is the only area of our business where we can achieve some certainty.
If I were to define the most important Money Management rule in one sentence, it would be this:
Make sure you have the money tomorrow to invest with.
It is that simple. Every day, do whatever you should according to your trading strategy (analysis and entry systems), but make sure that no matter what happens today, tomorrow there is money left for new investment opportunities.
I cannot emphasize enough how important this attitude is. Because we are making sure that we have money for investment tomorrow no matter what, we cannot fail. Of course, this simple rule is just the basic foundation for a robust money management strategy, because it implies some important points:
- In order to make sure we have the money tomorrow, we have to make sure that our maximum possible risk (and therefore our loss) is limited today.
- Because we must have the money tomorrow no matter what, we must also protect against force majeure situations, when all our trade protection can fail (15th of January was such an event, as stop losses were not honored by the market, since it traded thousands of pips away in just one tick). It implies that a complete loss of this trading account should still leave us with enough money to comfortably open a new account the next day and continue trading.
There are many ways how each trader will calculate his risks, position sizes, but in my opinion, if this one simple rule is not honored and he leaves even a distant possibility of losing it all, the money management strategy is not planned properly.