Random Trading/Investing Tips - Part 2

Factoring In Market Conditions

Financial markets are constantly changing and evolving. Volatility, price action, momentum and volume are just some of the variables when it comes to identifying market conditions.

If you have a trend-following strategy, a month where price is in trend is a good month for you. But a month where price is sideways probably won't be a good month for you. This is a problem almost every trader faces on their path to profitability. Most traders expect the same or similar outcomes every month. But the reality is that your results will be subject to market conditions. You just have the accept the fact that some months are better than others.

What separates the winning trader from the losing trader is that the winning trader protects his capital in those bad months and the losing trader usually sets himself back or just blows up. This also usually ends up in traders losing faith in their system after one bad month which causes them to jump from one strategy to another. World-class investors understand market cycles and know good market conditions are right around the corner.

A practical solution to this conundrum would be to have multiple strategies for different market conditions. That way when one strategy isn't doing well, the other is. It is a form of diversification that will give you peace of mind and better results overall.

Process Over Results

Most novice traders come into the market caring only about their results. Their results determine if they've had a good or bad day in the market. This is one of the biggest reasons why most traders fail.

If you want to become a consistently profitable trader you have to let go of the results-oriented mindset and take on a process-driven mindset. Being disciplined and following your process day in and day out is what will bring you profitability. Consistent behaviours breed consistent results.

Losing a trade on a day you followed your plan is better than winning a trade on a day you broke your plan. Obsessing over the outcome of each trade will cloud your thinking which will result in trading errors. Obsessing over the process and knowing that each trade is just one piece in a larger data set will put you in the optimal mindset to execute flawlessly in the market.

Remain Neutral

This one is pretty simple. You can't feel down during a losing streak and you can't feel high on a winning streak. You should try as hard as you can to remain neutral for every single trade. Whatever can take you out of the optimal mind state to execute properly for every trade has to be avoided. Of course, we are human so you will inevitably feel good when you're doing well and feel bad when you’re not. The important thing is to not let those emotions take over you.

Be aware of those swings in your emotions and keep them in check so they don't affect your next trade. The goal is to approach every opportunity in the market with the same objectivity and not bring the emotions of past trades into the present moment.

Marrying Positions

The basic theme throughout this piece is to approach financial markets with a calm and clear mind so you can execute without emotion or bias. Another way to sabotage your results in the market is by marrying an investment or a trade. Marrying a trade means you've attached yourself to the trade.

You have high optimism for the trade and you only look to confirm that idea. Your rational mind is instantly thrown out the window and your judgment becomes clouded. You no longer see the market through an objective lens. This might end up in having an unrealistic profit target that makes you hold the trade for too long, risking a bigger amount than usual or even removing your stop loss for the trade.

The best traders in the world don't care about the outcome of any one trade. They care about the outcome of 100, 1000 or even 10000 trades. They don't value one trade over another. Their execution for the first trade is the same as their 100th trade. Marrying a trade and identifying with it puts you in a short-term mindset and won't serve you over the long run.