Disclaimer: these articles are intended to increase your awareness in the matters of trading & investing in general. Some of the content is subjective in nature, while others are more objective. Please filter the information and apply what best suits your trading style.
The most important thing to remember about trading is – trading is NOT gambling! Many use the Vegas analogy, but if you treat the stock market like a casino floor, chances are you won't fare better than you do in one of those establishments. In fact, one of my preferred ways to refer to trading is the comparison with poker. Poker is also not gambling! At least not if you want to do it professionally. The biggest mistake people make when approaching trading (and poker) is they jump in with very little preparation. They just throw money at the market (or on the table) and hope to get lucky and win. And the biggest psychological trap is that you can win (a few times). You can sit down at a table with pro poker players and win a few hands just due to sheer luck. But if you do it like this for a longer period, odds are you will lose and the pro-players will take all your money. UNLESS you take the time to learn how to play consistently and make the choices based on odds and mathematics, rather than gut feeling or emotions. And it's the exact same thing with trading.
In order to trade and invest in a profitable manner for the long term, you will need a strategy. A strategy consists in a set of rules which tell you when to enter a position and when to exit. The mcm tools definitely help with that and work best when integrated into a system. If you already have a trading system – great! The mcm tools will improve your entries&exits and provide an in-depth view of the market like you have never seen before. If you don't have a trading system... well, then you need to create one. You can definitely use the mcm tools for it, and build a trading system around them. They work best combined with basic Technical Analysis (trend lines, moving averages etc) or Elliot Wave Patterns, but if you have other indicators you are using, then feel free to test them with those as well. The mcm tools show OBJECTIVE inflection points which is what makes them a very powerful addition to any trading system.
2. TRADING VS INVESTING
Before determining how you should trade, you must first ask yourself what are your realistic goals for the coming months, years, decades. Writing down both a short term and a long term strategy will help you visualise realistic targets along the way to reach your goals in wealth creation and preservation.
Place every type of trade into 2 categories – short term trading (less than 1year) and long term investing (greater than 1year). Intra-day and weekly trades, swing trades, option trades, all fall into the short term category, while parking your money into ETFs or other funds fall into the long term category. The mcm tools help with both as even if you invest long term, you will want to be in cash for some periods when the market is at high risk of a bigger correction.
3. RISK MANAGEMENT
Risk Management is paramount in protecting your capital. The most common rule is to NEVER risk more than 1% of your capital on any 1 trade. That way, you ensure that even if it's a losing trade, you will still be able to trade tomorrow and the next day and it won't hurt you too much.
Before entering any trade you should determine to duration (scalp, intra-day, intra-week etc), the stop loss level and the profit target. Do not deviate from any of them!
The only exceptions from this rule should be:
having a good reason to book profits early (for example taking off part or the entire trade if an opposing singal is triggered).
moving your stop loss into profit once price moves in your direction, in order to be sure you won't lose money on the trade. Be careful not to move it too soon and get shaken out. This means NEVER move the stop loss to allow for a bigger loss in the hopes the market will turn and you will get out without a loss.
NEVER change the duration unless the trade moves in your direction and you move your stops in profit deciding you can just let your trade continue to run.
4. TRADING PSYCHOLOGY
In trading your emotions are your worst enemy. This is one reason why a system (together with a few trading rules) is so important. It takes the emotions out of the process as long as you follow it with discipline.
There are 2 types of fears which trigger strong emotions in traders and have to be avoided at all costs: the fear of loss and the fear of missing out (FOMO). It is these emotions that can make you chase the market when you shouldn't or avoid taking an entry even though your system flags that you should. They are also responsible for taking profits too often instead of letting your trade mature and go towards your profit target.
It is not happenstance that 2 of the most often rules found in many traders "arsenal" are:
- let your profits run
- cut your losses short
The fear of loss is the one which needs to be held under control for these rules to be followed. Moving your stop loss in the wrong direction is often because one doesn't want to book a loss. And usually that turns into an even bigger loss and that is a dangerous road to go down on. Losses shouldn't be avoided at all costs. They should be embraced as a normal cost of trading. One doesn't need to have a 100% win rate to make money. That is in any case impossible to reach regardless of which tools you use. If you keep your losses small and let your profits run (i.e.hitting your profit targets) then a win rate above 50% is enough.