I have slowed down my trading pace recently. Taking a step back and review my trading behaviour and psychology. It was apt to pick up Conrad Alvin Lim’s “Secret Psychology of Millionaire Traders” from the library to aid in the analysis of myself.
Find Reasons NOT to trade
I confessed I am a compulsive trader. I am quite fearless before I enter the market, which is bad as I tend to take unnecessary risks. I have conviction in the system that I used and protected by stop loss, I always think how bad can it go? But what if I missed the trade and the profits when I did not participate? It is a combination of “no fear” and greed that propelled me to enter trades carelessly. Conrad believes traders should take a defensive approach to trading. Instead of looking for signals to make an entry, traders should look for reasons NOT TO TRADE. This is like playing the devil’s advocate. By finding just one reason NOT TO TRADE, one shall not enter the market. If I have adopted this mentality earlier, I would have rejected many trade signals and save myself from unnecessary losses.
Focus on one or two instruments FIRST
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
I felt that I need to be more zen to my approach of trading. Quoting Google, “do one thing and do it good”, I should be focusing on one or two instruments/markets first. I used to trade many different currency pairs, but I realised the price movements among the pairs are more or less correlated. Instead of overwhelming myself with these currency pairs, my plan forward is to concentrate on EURUSD only. As for stocks, I will be staying out of Hong Kong market and concentrate on a group of Singapore stocks with good liquidity. This will give me more time to look at these few counters and generate a “good feel” about their movement.
Realistic Risk Reward Ratio
For a 1:2 risk reward ratio (RRR), an 8% cut loss means the stock price needs to go up by at least 16%. Asking myself, how many stocks can actually go up 16% in days or weeks? It is only possible when the market is trending strongly. This means that I should not be trading so often at all as market is flat or range bound most of the time! By looking for at least 1:2 RRR, I will be very selective on my trades and it should serve well to prevent me from over trading.
Are you sure you want to be a trader?
In my last post, coconut had shared an important point – we should not look at trading as a money generating activity. It is a profession by itself. An aspiring trader who is not prepared or willing to quit his/her job and dedicate full time to trading will have a very low chance of suceeding in trading. They are unlikely to beat the seasoned traders who do it full time, day in day out. It is part of their lives. Think about the chance of amateur footballers beating the professionals. If you intend to be a successful trader, you have to take the leap of faith. If not, coconut’s advice is to stay out of the market. Successful traders make alot of money, but it does not mean you need to be a trader to make a lot of money. You may be good in your own profession, and you have a better chance to provide more value to the society by doing things that you are good at. You will realise your potential and also make more money for yourself. Hence, how sure do you want to be a trader?