Trading for a Living

Trading for a Living

Big question every new member/aspiring trader should ask - How do I follow the analysis here and how do I put together a winning trading plan and process? 

Now everyone is different and how you approach trading should gel with your personality. There is no size that fits all. Some people scale in.. others are more precise hitting at supports and resistances. But whatever you do, you have to approach trading as a business else the market will take you in and spit you out of the tailpipe of life as EHE likes to say. 

Ed Seykota once said everyone gets what they want from the markets. Some folks are just hardwired to lose money. Infact most of us are this way initially. We have to get rid of this mindset and move toward a winning mentality to stay ahead in the game. Most successful traders went through a very painful period of struggling and losing before they actually have something that works for them. And then you continue to work on it and improve from there.

Do you know the stats of your system or your trading? Do you even know if you are following a system? What is it? Based on counts? Or something more mechanical? Or a combination of both? Whatever it is, it has to be a process…. less the emotion the better it will be.

Controlling your psychology/mindframe while in a trade and having stats for your system are very critical elements to success--in both being able to follow a method and to even have a clue whether one has a chance at consistent profitability with low risk of being killed by the market.  Most fly blind — I know I have for a long time. Just a matter of time until one flies into the side of a mountain.  

You need to have a system.. You need to run stats on your system. And this will create a belief in your system which will allow you to follow the process every single time you see a setup without having to second guess it whenever you see conflicting opinions out there.

The majority of traders have terrible position sizing.  Wide stops would kill them.  What does that say?  It says they are too heavily sized, either due to undercapitalization, or due to a "get rich quicker" mindset.  Wide stops are easy to deal with--just reduce size so that one's max risk is less than 2% of collateral capital.  I'd be willing to bet that most trades placed out there carry a potential max risk of greater than 2% of one's available capital.  This is almost GUARANTEED DEATH for the majority of trading methods!!

Most of us think 10 times about buying something in a shop comparing prices between many products but when it comes to trading, think nothing about placing a huge bet on a trade without thinking you are put a big portion of your hard earned precious capital at risk.   

How you trade and analysis itself are 2 very different things. Which is why you need to look at actual positioning also along with analysis.

OMH or OML always looks tantalizing for that perfect trade and risk reward..

Will we get it? Maybe..Maybe not.. I just shake my head at some questions I get like… what if we have one more high.. what if we have one more low?… How can anyone know? All you can do in trading is control your entry, your stop and your sizing… 

I like to position myself with reduced size.. no leverage. no options. This is not a get rich quick scheme. Most people do not think of trading as a business. I know. I have been guilty of this for a major portion of my trading life. But I find when I take smaller positions, I do much better as an effect of controlling my emotions. I used to do crazy trades with weekly options and have been successful with them for the most part. But when you get into a losing streak, it can just feed on itself and you find it very tough to get out of it again. And your emotions just run haywire. Atleast it is that way for me. Nowadays I find I trade much better when I am at a lower size.. I know my risk.. I know my possible reward.. And I always have leeway to add if the position does not go right for me immediately. Scale in and out. What works for me does not have to work for everyone which is why I said initially you have to find what fits your personality. Is it swing.. is it day trading.. is it something more longer term etc. For me, I like to keep things simple and my mind works in the best way when I do this… Smaller size, lesser worry, more rational decisions. 

Find out what works for you…I suspect most people will reach similar conclusions that I have reached over time… You just trade better without leverage and reduced size… Always know what is your risk on a trade instead of focussing on what you could make...

So what is a system.. 

It can be anything... but you need to know what it is... and you need to have run some stats on it.

For example lets say its Avi's blue boxes - sell resistance and buy support... you would be surprised at how well this works if you back test it.. And once you test it, you will have belief in the system and you trade it no matter what your mind says.. or what someone's opinion is.

Or it can be something else... like a simple pivot based system I outlined a while back here...

What I am trying to say is.. it doesn't matter what it is... as long as you have tested it, you have a belief in it's success rate... and you follow it religiously with proper sizing and stops...

I will post a follow up to this post tomorrow.... Metrics... and how important they are to you as a trader... Are you trading blind? Are you entering a trade and closing your eyes... hoping it comes back.. gives you a profit.. did you enter TVIX a few weeks back?.. yes you fall in this category... Have a process folks... buying something and closing your eyes is not it..

Princely Mathew hosts The Smart Money premium service at ElliottWaveTrader.