Absolute Top

Be a chess master not a chance taker

When learning anything new there is always a period of turmoil.

Out of this chaos you need to impose order. You must learn to think strategically, anticipate your opponent’s moves and have a play in place to benefit from the unexpected.

When considering your approach to trading, is it more like a game of chess or a game of chance?

Hypothesis testing or taking a punt

Trading is like a science experimentTrading is rather like a scientific experiment. You have a hypothesis/strategy which the markets prove to be true or false. If you do not have a strategy to test in this way how will you repeat your successes and limit your mistakes?

When my partner and I were first learning to trade, I came home from work one day to find one of our trades had performed rather well and continued to do so over the next few months. Our finances had been in dire straits only a short time before – and all of a sudden now we had more than enough to pay our debts and move house. So I was eager to know how he had found this wonder stock – and how we could repeat the trade.

And therein lay the problem – he didn’t know. He’d come across a a penny share, and thought what they did seemed like a good idea. So he bought some stock for a few pennies a share. For reason we were unsure of, the stock started to move up quite rapidly and he steadily offloaded the positions to realise a fantastic gain.

We’d got lucky. The process could not be repeated as we were unaware of the original plan that was in place. We took a chance and, fortunately, it paid off. But there are thousands of similar companies and we had no way of knowing which would be the next “big thing”.

Usually we learn from our mistakes because the failure hurts. Here we learnt from a mistake despite it being a huge success. Regardless of our monetary gain we had to go back to the drawing board to find a way of making trading work for us more consistently.

So our first lesson in trading was: have a strategy and test it. If it works, use it (it may need to be fine tuned). If it doesn’t work, find out why. A punt can’t be consistently repeated.

Trading day and night or day OR night

Time to investMost successful traders allocate their trading to a set time each day. Some like to trade in the mornings, others the afternoon – whilst some prefer the night sessions.

If you specialise in a particular market, such as a single commodity, your market may only be active for a few hours a day. Some people like to trade the markets live, while others do their analysis and place trades when the market is closed. From my experience, what doesn’t seem to work is trying to trade all of the markets all of the time  – but I am sure there are some who will think that logic does work.

When I was learning to trade I was working full time so I had no chance of scalping or day trading and my only option was to trade longer term. But after a tiring day at work I didn’t check my trades on a regular basis. This meant I didn’t always move trailing stops, or check if trades had been triggered or stopped out, or even do the analysis required to set up a new trade. I became disassociated from my trading and found it difficult to take an interest – even when I was making profits.

My partner was an IT freelancer and was able to trade during the day so initially was attracted to day trading and scalping. The process took a real toll on his health – and life in general. He found it difficult to switch off at the end of the day. Fortunately we hadn’t discovered the round-the-clock world of currency trading at that time, so he did at least get a few hours rest at night. He too found it difficult to keep a track but in his case it was because he was exhausted with so many trades taking place in each trading session.

After several months we assessed where we were with our trading and the stresses it caused. After re-visiting our notes from the many trading courses we attended and trades we had taken, we realised that longer term trading was a lot less stressful and actually more profitable too. But it needed regular, daily commitment to stay interested, involved, and to manage the trades to maximise profits.

Our second lesson in trading was: find a regular, consistent time for trading that fits our lifestyle – then ensure our lifestyle fits around our trading commitment.

Order or disorder

ChecklistI have a very slight knowledge of chess but just looking at the board set up to play it looks terribly organised. Every piece has a function and a limitation.

When you are trading, is this how your reasons to trade are assessed? Each condition you state should possess a function but will probably include some limitation too. Although I mainly trade from technicals, this applies equally to fundamental trades.

Trading from your gut, or by the seat of your pants, is quite chaotic. If you don’t know the reason for your trade, how can you know if the outcome was a success or failure? A good trade isn’t necessarily a winning trade. And a winning trade isn’t necessarily a good trade. To identify which is which you can read my trading article Is your trade a dud or a dude?

Back in 2001 when we started to trade, I believed trading to be easy – you picked a stock you thought would go up or down and you traded it accordingly. This statement is 100% how I trade today but my thought process has changed beyond recognition.

Back in the early days of trading I relied on things I knew. I’d discuss this with my partner and we’d agree, or not, and make a decision to trade, or not. Then on we went to the next stock. If we liked the company and thought they generally were a “good thing” we’d buy, and if we didn’t like them and thought they were a “bad thing” we’d short. There was no logic, other than our personal beliefs, to buy or sell. The consequences were not good.

For us it meant a move towards technical trading. Here we could assess and measure different indicators. What do they do and what don’t they do? When do they work and when don’t they work? They all had a function and a limitation.

From this we created checklists. After cross-referencing the various indicators (patterns, moving averages, sub-chart indicators etc.) we selected those which we felt did not suffer from multicollinearity.

Over my time as a trader I have developed checklists for every aspect of trading. Many of them I no longer need, such as how to place a trade with my broker. For a few months this was essential to make sure I didn’t make any silly errors – such as position size, the correct entry and stop, or even clicking the wrong button to buy or sell! Of course, I still use this checklist but it has been internalised – like driving a car. My subconscious still goes through the checklist but I am no longer aware of it.

Other checklists I continue to use today – although the steps no longer need to be written down. For example, when I’m analysing a chart to trade it must contain the 5-7 points I deem necessary. I mentally tick them off as I go.

Checklists are a fantastic way of bringing order to disorder. I know many people do not like to have lots of lists which need consulting everytime you want to analyse a chart or take a trade. But it’s not forever – as the process becomes automated, and you become proficient at that particular task, the physical list can be put aside.

Lesson three: Have checklists to keep your trading organised. This minimises mistakes and enables you to learn what works and what doesn’t.

Simplicity or complexity

Simple trading strategiesThe simple life is not something everyone craves. Some people just love a drama. But, as the well known business speaker Keith Cunningham once said, making money is and should be boring.

One of the reasons trading is boring is because it’s best to keep it simple. Simple is rarely exciting.

Since I began trading the software and tools available have increased in number and ease of use. The downside of this is that the choice is huge and the complexity infinite. When we started trading, my partner and I kept looking for the “holy grail” of trading and, despite being warned otherwise, we were convinced the more complex the indicator or strategy, the better the results would be.

Eventually, after another period where we stood back and assessed our position, we decided to go back to basics. We decided to only use indicators we could understand and which used uncorrelated calculations. Over the years we have simplified even further. We still use tools and indicators to help us speed up our analysis and calculations (for entry and exit) but they are all things we could manually recreate fairly easily if we had to.

As a basic rule, if you don’t understand how an indicator or strategy works, then don’t use it. You don’t have to be able to recreate it yourself, but you do need to understand how it is calculated. School level maths should cover it, you should not need an advanced level of calculus to work it out.

Lesson four: Keep it simple – not just the indicators or systems you use but your whole approach to trading. It’s about doing the little things well.

Finally, do you procrastinate?

Leap of faithIf … then … or just do it!

There are so many ifs and buts with trading because – let’s face it – none of us can see into the future. We can only make an educated guess based on past behaviour. Again, this is true for technical and fundamental traders.

While I would not encourage someone to just start trading with no knowledge whatsoever, there is only way to learn – practice.

Of course, you should always practice to improve and this can only be done if you have feedback. Having an experienced trader to guide you, whose style of trading tallies with your own, is the quickest and most effective way to learn. But if this is not an option you can still practice and improve if you follow the lessons in this article. By testing simple, logical systems at consistent times over a consistent period, you can quantify your results and see for yourself what works and what doesn’t.

So when I say, Nike-style, to just do it, I don’t mean in a haphazard, jumping-in-feet-first, chaotic kind of way. I mean in a strategic, chess-master way.

Making trading decisions can be a lonely business and we were really isolated when we started our trading journey. All trading decisions were made on our own and with no guidance or anyone to turn to for immediate help or advice. For that reason, some years ago we started a private trading forum of like minded trend traders who help and support each other and all grow as traders together and this really has really accelerated the learning curve for new traders.

One of my trading weaknesses used to be indecisiveness. Many times I would say “I knew that was going to go up” (or down, as the case may be). And my partner would say “Why didn’t you trade it, then?”. Building a strategy I had faith in certainly helped with this – and so did just taking action. After a few trades your confidence grows. Even if they’re not all winning trades, you get into a good new habit of taking action on your analysis.

I always recommend trading using a live (not demo) account to learn to trade (which I covered in my article Trading theory into practice). Use the smallest position size possible, of course. Taking live trades based on a well thought out strategy is the only way to take the next step in trading.

There is always a balance between too trigger-happy and too trigger-shy. Have enough confidence in your strategy to test it in the markets (with enough flexibility to make amendments if necessary).

Lesson five: You have to take a leap of faith, based on logic. It is the only way to get the only feedback that matters – what the market thinks of your trading strategy.

Summary

I have covered five lessons I have learnt over the years in my trading career. They are:

  1. Have strategy and test it – don’t try and second guess the market
  2. Find a time to trade that fits around your lifestyle and stick to it
  3. Have checklists to keep you organised
  4. Keep it simple and understand why you do what you do
  5. Test and review your strategy based on logic – the only feedback that matters comes from the markets

Don’t leave your trading success to chance. Be a chess-master, not a chance-taker.

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Successful trading…

Anne Chapman

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