Trading is 60% psychology, 30% Risk Management and 10% Technical Analysis/charting. That is not to say that technical analysis of the markets isn’t important. It’s vital. You can’t trade without a plan based on technical analysis that encompasses support and resistance, trend lines, moving averages, momentum, volatility and the like. But you can’t possibly execute that plan consistently if your mental game and risk management is off. That’s where the ‘Ten Commandments’ of trading come in. These 10 commandments have been authored by Lewis J. Borsellino.
1. Trade for success, not for money. Your motivation should be first and foremost to make a well-executed trade. If money alone is your motivation you will severely limit your chance of success. Why? Because focusing on money will raise all kinds of emotional issues, from fear to greed. It will make you afraid of losses to the point that you will abandon your discipline. It will tempt you to trade too often, too large and with too much risk. Whereas if you focus on making solid, well-executed trades – even if the result is a losing trade that you exit quickly – you will reinforce your discipline and increase your trading potential.
2. Discipline is the one quality that all traders must possess above all others. For a trader discipline means the ability to devise a trading plan, execute according to that plan, and to never deviate from the plan.
3. Know yourself. Do you break out in cold sweat at the mere thought of risking something – such as your own capital? Do you think of trading like ‘gambling’, long shot to make a million? Or can you handle risk in a disciplined fashion knowing how much is ‘too much’ for your capital.
4. Drop your ego. No matter how much success you enjoy as a trader, you’ll never outsmart the market. If you think you can, you are in for a humbling experience. The market rules, always and for everyone. You need to silence your ego in order to listen to the market, to follow what your technical analysis is indicating – and not what your intellect (and your ego) thinks should happen. To trade effectively, you need to put yourself aside. At the same time, you cannot be so emotionally fragile that unprofitable trades shatter your confidence. Don’t be crushed by the market, but don’t ever think you’ve mastered it either.
5. There’s no such thing as hoping, wishing or praying. I’ve seen so many traders staring panic-stricken at the computer screen and begging the market to move their way. Why? Because they have lost their discipline and allowed what was a small loss to turn into a much bigger one. They keep hanging on, hoping, wishing, and praying for things to turn around. The reality is on the screen. When the market hits your Stop Loss level (the price at which you’ll cut your losses at a pre-determined level), get out.
6. Let your profits run and cut your losses quickly. This is golden rule of trading and most people do exactly the opposite. Most people would book their profits quickly and hang on to their losses in hope of getting back to even – letting their losses run to become bigger eventually. When you place a trade, know in advance where you’ll exit in case position goes against you and do not change that level. When you are in profits exit by trailing your stop losses. Keep increasing your stop loss as the stock goes higher. This way you can keep participating until a rally lasts. So you will let your profits run and cut your losses quickly.
7. Know when to trade and when to wait. Trade when your analysis, your system and your strategy say that you have a buy or sell to execute. If the market doesn’t have a clear direction, then wait on the sidelines until it does. Keep your mind on the market, but keep your money out of it.
8. Love your losers like you love your winners. Losing trades will be your best teachers. When you have a losing trade, it’s because of some flaw in your analysis or your judgment. Or perhaps the market simply didn’t do what you thought it would. Examine what went wrong – objectively – then adjust your thinking, if necessary and enter the trade again.
9. After three losing trades in a row, take a break. This is not the time to take on more risk, but rather to become extremely disciplined. Sit on the sidelines for a while. Watch the market. Clear your head. Re-evaluate your strategy, and then put on another trade. Losses can shake your confidence and tempt you to become emotional. But if you take a break, you can gather your wits and regain your composure more quickly.
10. The unbreakable rule. You can break a rule and get away with it once in a while. But one day, the rules will break you. If you continually violate these ‘Commandments of Trading’ you will eventually pay for it with your profits. That’s the unbreakable rule. If you have trouble with any of them, come back and read this one. Then read it again.
MULTIPLY CAPITAL 