Category: Discipline

Must. Remember.

Trading is a mental game.

It’s the ultimate test of mental discipline and mental strength.

Here are some things I need to always remind myself:

  1. Your strategy will NOT work all the time. There will be times it loses.
  2. Your strategy will NOT be able to catch every single move. There will be moves that your strategy just cannot catch.
  3. The moment you deviate even slightly from your strategy, you WILL lose money.

Just these three things alone will take me a long time to learn.

Things I’ve Learnt About Trading

  1. Don’t chase after trades. Let the market come to you. Take what the market gives you, at the market’s own timing. The more you try to chase after wins, the more losses you will get.
  2. Be contented with the profits that you managed to get. Resist the temptation to think about what you could have made, and just focus on the profits you actually made. It’s always better to be in the green than in the red.
  3. Whether you win or lose, just stay the course and stick to your strategy. Switching strategies only makes things worse. (This is assuming your strategy is a sound one and has been fully tested.)
  4. Don’t feel happy when you win a trade, and don’t feel disappointed when you lose a trade. In fact, just don’t feel anything. Be emotionless, as if you were a bot.
  5. Trading is a long-term game. You are merely doing your best to ensure that the odds will work out in your favour in the long run.
  6. Even the world’s best traders suffer losses. Nobody can consistently buy at the lowest and sell at the highest.
  7. Don’t focus on the profits. But rather, focus primarily on flawless execution of your entire strategy. The profits will then take care of themselves.
  8. If your strategy doesn’t have specific rules for (a) entry criteria, (b) stop-loss, (c) take-profit, then you don’t have a complete strategy.
  9. Your strategy rules must be so clearly defined that if you were to let someone else read your strategy rules, he/she would be able to make the exact same trades and get the exact same results as you would.
  10. A mental stop-loss is probably not a good idea.
  11. Trading against the trend is usually not a good idea.
  12. Win-rate means nothing if you’re just scalping for very small profits each time. But it sure feels good to see a high win-rate.
  13. If you only strictly risk 1% per trade, then the good news is that the most you could ever lose in a trade, no matter what happens to the market, is only just 1%. This is a very comforting thing to know.
  14. When you hit a string of losses, you will be glad your bet sizes were kept small.
  15. Everybody’s character is different, and thus every trader will have a specific strategy which will suit him/her. Find the strategy that suits you best. Just because another trader uses that strategy, it doesn’t mean that strategy will necessarily suit your style and temperament.
  16. Nobody ever made money having a great entry into a trade. You only make money when you exit a trade. Your exit strategy is far more important than your entry.
  17. There is no perfect way to take profits. Every take-profit strategy will have its own pros and cons. No take-profit strategy can capture all the available profits all the time. Just find the one that gives you the greatest peace.
  18. Risk management is what keeps you in the game. Revenge trading only hastens the blowing up of your account.
  19. Never give yourself targets, e.g. “I’ll close this trade once this trade hits $300 profit.” or “I’ll take all my profits from this trade once my account balance hits $12,000. I just want my account balance to hit $12,000 before I’m done for today.” The market doesn’t care about your targets.
  20. Approach every trade the same way, regardless of your account balance. Execute every trade the way your strategy dictates. Take profit exactly the way your strategy dictates. Don’t take profits early/late just because your account balance is high/low.
  21. There isn’t a single trader out there who has never wished he/she could have done things differently. Every trader makes mistakes: Jumping into sub-optimum setups, moving to breakeven too early, taking profits too early, fiddling with stop-losses, risking too much per trade. We’ve all been there. It’s how you deal with the mistakes that sets you apart.
  22. And most importantly – React, don’t predict. Take what the market gives you. Never expect anything from the market. The market doesn’t owe you anything.

Important Lesson Learnt

Just learnt an important lesson recently, after going through a day of higher than expected losses.

The lesson is: Create an extremely stringent set of rules so that it completely filters out any discretion whatsoever.

Because if your strategy rules aren’t stringent enough, after some losses you may end up wanting to take more and more trades just to “get back” at your initial losses, and these trades may be ill-advised ones.

And it makes you even more upset when you lose even more.

This is just my own experience.

I personally feel it would be better for me to have multiple stringent rules and indicators so that I don’t take bad trades and start getting upset and want to trade more.

To be more specific, in my case here I’m talking about using multiple indicators to make absolutely sure that I’m in a legit trend (and not in consolidation) before taking a trade.

A Mental Trick To Handle Losses

Here’s a mental trick which I like to use to help manage my mindset when trading, and to help me take losses better.

If you’ve traded long enough, you would know that “revenge trading” is one of the most dangerous mindsets to lapse into when day trading.

Once you start losing (especially if you lose big), you feel angry and you want to hulk smash everything and take risky trades just to get back to breakeven.

Which would obviously lead to even further destruction.

So, what’s the mental trick?

Well, before I go further, I have to first state that the number one rule to prevent lapsing into revenge trading is to keep your risk per trade small.

Small position sizes make you far less attached to every trade, and make you less angry when you lose them.

OK so here’s the mental trick I use:

Before I take any trade, I will determine my remaining account balance assuming I lose the trade and ask myself: “Are you OK with having this remaining account balance assuming you lose this trade?”

If the answer is “Yes”, then I will proceed with the trade.

For example, assume I have an account size of $10,000 and my bet size is $100:

Before jumping into the trade, I will ask myself if I am OK if I am left with $9,900 in the event this trade is a loss.

This makes me mentally prepared in the eventuality that the trade turns out to be a losing one.

And I’ve found that this mental trick serves me quite well in handling losses.

Most of the time, we take trades only thinking that it will be a winning trade, and we refuse to entertain the thought of the trade being a losing one.

And when we see our remaining account balance after a loss, our emotions simply cannot handle it.

Why A Big Position Size Is Detrimental

You’ve probably heard it a million times by now that you should only risk 1% or less on every forex trade you make.

Some might say “Sure, but if your strategy is a winning strategy anyway, what difference does it make to risk 1% or 5%? Your win-rate still remains the same.”

That is true to some extent.

But there are a few disadvantages to using a larger position size as compared to a small one.

The most obvious one, of course, is that by using 1% you can survive a longer string of losses. If you’re risking 5% per trade, you’d be in dire straits if you hit say 10 to 12 losses in a row.

If you’re risking 1% per trade, even if you lose 12 trades in a row you’re still left with 88% of your account intact.

If you’re risking 5% per trade, when you lose 12 trades in a row you’re now left with only 40% of your account.

Additionally, a larger bet size tends to bring about the following “mistakes”:

  1. Makes you feel too emotionally invested in the trade since the stakes are higher (i.e. you’d feel much more pain if you lose the trade).
  2. Makes you set a smaller-than-intended take-profit target because you want to cash out the profits as soon as possible before the trade goes south. (For example if your strategy is meant to take profits at 2x, you may set only 1x for this particular trade because the stakes are too high.)
  3. Makes you cash out the trade too soon because you are simply too anxious about the trade. (For example, if your intended risk-to-reward ratio was 1:2, you may decide to just cash out at 1.75x profit because you’re not prepared to wait for price to hit 2x and you’re too fearful of the trade going south.)
  4. Makes you increase your stop-loss if the trade starts to threaten your stop-loss level, because you simply can’t bear to get stopped out on such a big trade.

The four mistakes above can easily screw up what is supposed to be a profitable and sound trading strategy, because you start to go off-script by cutting corners and short-changing your projected profits, and it will cause you to be far less profitable than initially expected.

And for all the reasons listed above, I feel that all trades should always be 1% or less.

Trust me, I’ve done the whole “large position size” thing many times, and it almost always never works out, and that’s why I speak from experience.

Why A Small Position Size Is So Important

Trust me, I’ve made every mistake that can be made when it comes to forex day trading.

I’m starting to learn one thing – the key to success is to use a small position size for every trade (typically 1% of your account).

You won’t believe how hard it is to adhere to this 1% rule.

Sometimes you see a great setup, or you “feel good” about the trade, and you want to risk more than 1%.

Sometimes you get into a string of losses, and you want to risk say 5%-10% on a single trade so that you can quickly get back to breakeven for the day/week.

Don’t do it. Just don’t.

It usually will not end well.

Apart from the fact that a 1% position size helps you protect your capital when you face a string of consecutive losses (i.e. you cannot possibly lose more than 1% per losing trade), I feel the most important aspect of the 1% rule is the mental part of it.

By risking only 1%, you are much less likely to get too emotionally invested in that one trade.

It’s just 1% of your account. The stakes are considered very low.

If you lose it, it’s still fine. It’s not the end of the world. You’ll live.

You will be able to confidently let the trade play out and not do the following things:

  • Moving your stop-loss to breakeven too soon. (In fact, with a 1% position size you could even afford to not move your stop-loss to breakeven and let the full trade play out, which might even be more profitable in the long run.)
  • Taking your profits too early, before your trade even hits your intended profit target. (How many times have you decided to cash out the entire trade early because you felt the stakes were getting too high?)

Moreover, the best thing about the 1% position size is that you can simply “set and forget” – just set your desired stop-loss and take-profit, and walk away from your computer and let the trades play out naturally.

You don’t have to worry about managing multiple trades (assuming you’re juggling multiple trades simultaneously) by constantly moving stop-losses and taking partial or full profits.

You don’t have to watch every second of the trade play out and agonize over every tick movement.

In other words, once you’ve set the trade parameters, you just simply don’t have to care.

Trust me, it’s far less stressful and taxing this way.

But to each their own.

Professional Loss Taker

I like this term a lot – “Professional Loss Taker”.

I feel it’s a great mindset to have when trading, because you will have to deal with losses whether you like it or not.

If you simply cannot stand losing trades, then perhaps you shouldn’t be trading.

Only Take High-Percentage Shots

In basketball, you always want to take the highest-percentage shot available to you.

A 3-point shot from the logo, or forcing a shot when you are being double-teamed, is considered a low-percentage shot.

Sure, you could still make the shot. But that still doesn’t change the fact that it is a low-percentage shot, and by doing it enough times, you will see that your actual completion rate will be rather low.

A dunk or a lay-up is considered a high-percentage shot because the odds of making it are considered very high.

Sure, there have been missed dunks or missed lay-ups in the NBA, but these are few and far between. And the fact remains that dunks and lay-ups are always going to be high-percentage shots.

My point is that as traders, we always want to take the trades with the highest chance of success.

Sure, you could take a risky trade and still end up winning the trade. It happens.

But the law of large numbers will show you that by doing this often enough, you would end up failing big time.

Play it safe. Be very selective. Be very disciplined.

Don’t take trades which do not match every single criteria of your trading strategy.

At least you will know that the law of large numbers is on your side.

Just Because…

Just because there are more than 70 pairs of forex available to trade…doesn’t mean we have to trade them all.

Different forex pairs have different spreads and peculiarities. It might be better for beginners to focus on the pairs with the tightest spreads and highest liquidity.

Just because there are 5 days a week to trade forex…doesn’t mean we have to trade on all 5 days.

Certain days are known to be more favourable for forex trading. Most traders agree that Mondays and Fridays are generally bad days to trade forex.

Just because there are 24 hours a day to trade forex…doesn’t mean we have to trade every hour.

There are different forex sessions (Asian, London, New York), and each session has different characteristics. For example, the Asian session is known to have the least volatility (i.e. movement).

Simple principles, but I’m still struggling real hard to master them.

The Battle Is With Yourself

It’s really true what they say – that trading is essentially a battle with yourself.

The strategies are all there. The hard part is making yourself stick 100% to the strategies and staying disciplined.

It’s true that when you are day trading, you are discovering who you really are. What you’re really made of.

Some of the struggles I’m still trying to overcome while trying to trade forex

  • Learning to NOT trade during Asian session and wait till London session to open before trading.
  • Jumping into the occasional poorly-planned “quick profit” trade (and ending up losing most of the time).
  • Feeling frustrated that there aren’t enough good setups to find in a day.
  • Feeling frustrated that my trade doesn’t shoot up as quickly as I would have liked.

Still got a lot to learn.