My Lesson Learnt for My Trading Journey so far [2016]

I started trade stock actively since beginning of last year. This month mark my 15th months of survival in this game so far. I started investing in stock way ahead back to 2013 (was like 3 years ago) when I profit 1R+ from my first trade before i am down with near 20R due to lack of understanding to the market for my consecutive trades.

**R stands for reward, 1R=100SGD

It took around 2 years for me to pick myself up from the losses that hurt my little pride and fragile heart before I am back to the investing and trading “games”. This time equipped with some basic F.A (Fundamental Analysis) and T.A (Technical Analysis), I started to trade stock again.

Delightfully, I start to break even with my losses and The R went up multi-fold from single digit to three digits. How did I do it? Did I comprehend all the F.A and T.A and understand the market as a whole? Not really…

The truth is, I just know piece of the iceberg of the market but the interesting thing is this, you don’t really have to know everything in the market to profit from it. What really change my trading is that I just purely depend on candlestick pattern and from there I am able to spot the momentum stock which can run up to 10 , 20% per day or per week . From there, I slowly gained confidence and more friends and closer one start to chip in and the capital grow bigger and that’s how my R starts to take flight.

After having some profit from the market, my interest in trading just keep growing thus lead to explore more and more of the market, learn more and more of the stock and financial market. Despite having said that, here’s the ugly side of it. When someone always getting their trades right and get consecutive winning profits, that’s how their pride start swallowing them and mistakes start to occurs. There’s a period of time my hundred plus R down left to half and lesser. That’s the turning point where I really learnt, improves my trading skills and plan and become a better trader. By that point of times, I have trade close to 100 times in stock market within less than a year.

So what is the turning point? What has changed?

1. Swallow the Egos, Be humble, Be Realistic with profit expectation.

When I am up with hundreds R, I started to become unrealistic, I wanted to achieve more in a shorter time frame which makes me to take more unnecessary risks. jumping to trades without a trading plan and getting too emotional without able to see the market as it really is. Worst, when i jump into wrong trades, instead putting RRR as the priority I am way too care about right and wrong of the trades which makes me sway away from my own trading rules and never cut the losses at appropriate level. Ultimately every trades has bigger -R than +R, in long run all the +R that I have will eventually being wipe up if I didn’t stick back to my trading rules.

Also, for the past I am very narrow minded and look down on Forex, Indices and Commodities. I feel that stock market is the safest and most profitable out of all. I can’t say that I am so wrong enough. I guess is a blessing also part also  disaster that I finally open my heart to learn about those financial instruments. The blessing is that I am able to find the leading indicator for my stock trading and my trading gain more overview, edges and understanding now. The disaster is that due to I didn’t have any trading plan to play Commodities and Forex, eventually without stop loss I blew my account (thankfully for the broker house 100USD free cash and my capital is less than 200SGD) it able to reduce my losses to its minimum. With second retry with the same capital as previously, plus trading plan, I am now on the path to break even the losses.

On top of that, I also learnt with more open minded with other Technical indicators like SMA, MACD, stochastic, trend line and so on instead just sticking and relied only with my candlestick pattern. Every indicators and patterns has its strength and weakenss. What they provide is the information for you to decide and plan your trading setup. If you able to use and comprehend them well they will certainly reward your trades.

2. Risk Reward Ratio

This is like the key understanding that you must have when come to trading or investing. The first rule is that you should never try to go into a trade that has higher risk than reward, it just didn’t make any sense. There are a lot of opportunities waiting for you.

One famous quote from Paul Tudor Jones on Risk and Rewards goes like this,

“[I’m looking for] 5:1 (risk /reward).  Five to one means I’m risking one dollar to make five.  What five to one does is allow you to have a hit ratio of 20%.  I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.”

If you risk 2 dollars to earn 1 dollar, a hit ratio of 50% instead of break even it will wipe out half of your capital. Imagine you trade with 1,000 dollars, you got into 10 trades. when you make a right call, you earn 500 (for 5 right call) but when you make a wrong call (5 wrong call), you lose 1000.

On contrary, if you risk 1 dollar to earn 2 dollars, a hit ratio of 40% will still give you a decent 20% return.

3. Trading Plan and Rules

Know what is the price entry, where is your target profit, where is your stop loss are all part of the plan. The trade reasoning behind it. When you got into a trade is like you got into a war. If you fail to plan, you plan to fail.

In addition, know when not to trades and when to stop. For example, when I am down with 2 consecutive loss trades, I will stop my trading for that day. I can still write my trading journal but I will not execute any trades anymore until the next day.

4. Trading Journal

The best traders are very efficient at what they do while most amateur traders do not follow a set trading routine and have an inconsistent approach. Having an established routine is important and you can see it in many other areas: before a pilot takes off, he has to go over the same 100+ points checklist every single time; a surgeon has a very strict pre-surgery routine to follow and almost all professional athletes are religious about their pre-game routine.

The benefits of a routine are that it minimizes mistakes – especially unforced mistakes – it allows you to add a professional layer of consistency to your approach, it makes you super productive because you avoid unnecessary tasks and it also calms you down because you know exactly what to do

A lot of traders just busy jumping into trades, one after another without spending enough time to reflect on their respective trades. Don’t waste a single cent on a wrong/loss trade and didn’t getting any lesson out of it. When you have a loss trade that is the best teacher and experience that you will ever had. Don’t simply waste that encounter. For those good trades, review it, repeat it and master it! It all down to a trading journal. Not a single profitable traders, trade without a trading plan and trading journal.

5. Patience and Practice! Practice makes perfect!

Let me share something might be new to you -Law of large number

Ok, so how it will impact your trading?

Before anything else, you must understand the law of large number.

Wait, what’s that?

The law of large numbers is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value, and will tend to become closer as more trials are performed. – Probability Theory

For a trader, this means you need a large number of trades for your edge to play out.

You will not be consistently profitable every week, taking 5 trades a month.

Why?

Because according to the law of large number, results are random in the short run, but will be closer to the expected value in the long run.

Focus on whether what you are doing is right, not on the random nature of any single trade’s outcome. – Richard Dennis

A lot of traders give up way too early or expect to trades 1 or 2 a year and see the results out of it. The truth is you might very close to success but you just don’t have enough patience to see the reward coming to you.

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Trading is also a waiting game just like fishing, that’s one of the key difference between professional and amateur. Amateur always jump into a trade way too early while professional wait most of the time and strike when the time is right. A good trades with very high probability always come to your trade setup rather than you chase it.

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6. Grit

GRIT Poster.JPG

Grit in psychology is a positive, non-cognitive trait based on an individual’s passion for a particular long-term goal or end state, coupled with a powerful motivation to achieve their respective objective.

Last but not least I think I will acknowledge the importance of grit which I am thankful that I didn’t lack of,  if there is one weakness on me is that I  just don’t know how to give up whenever I start something. This is also one of the factor that give me urgency to master the trading because if I don’t excel it, is a matter of time I will ruin by it as this trading game require my wealth as a stake to play.

A lot of articles, sources and people say that in this trading game, 95% traders lose money, this probably lead to a demotivating factor for most people to give up. Some might takes few months, some takes years before they bon voyage with trading.

End of the day, trading and doing a startup I find that is petty similar. Is not the success that define you, is when you are down with failure how you deal with it define who you really are. 

I shall end this article with this quote,

Every master was once a disaster — T. Harv Eker

Thanks for spending your time reading! Wish you all the best in your trading journey. Have a great week ahead, till next time~~

 

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