Random Trading/Investing Tips - Part 3

More Trades More Data

Beginner traders and investors all make the same mistake starting out. They usually take fewer trades and risk high amounts on every trade. They want to extract the most amount of profit they can from an idea they think will come to fruition. But that's not how the learning curve in this field works.

When trading financial markets, we get feedback within minutes, hours or days depending on the timeframe you trade. That feedback we receive on the decisions we made gives us data that will help us learn and get better as time goes on.

The goal shouldn't be to make money when you are first starting out. The goal is to gather as much data as possible on what is working and what is not. The best way to do this is to place a lot of bets with low risk than by placing a few bets with high risk. You are getting more feedback and information that will help you learn and grow as a trader when you take 10 trades risking 1% than taking 1 trade risking 10%.

Once you have a large sample size to base your trading system on, then you can start taking fewer trades and risking higher amounts on those trades because you now know what is a high-probability opportunity and what isn’t.

You’re not some genius that will instantly extract money from the market like an ATM when you get started. It takes time. A lot of time. Take the route that will help you gain mastery, not temporary profits.

Lose Small Win Big

This one is simple in theory but tough to execute. All the great traders and investors I know make sure their wins are bigger than their losses. They have a high risk-to-reward ratio. Usually at least 1:2 or 1:3. This means they have to lose twice or three times to lose the profits they booked on one win.

Most people think they have to be right more than 50% of the time to be a profitable trader or investor. But that's not the case. Some of the most successful traders of our time have a win rate of less than 50%. Some even have a win rate of 20%.

This is only possible because of their high risk-to-reward ratio. When they win, they win big. And when they lose, they lose small. It's contradictory to human nature to lose more times than we win and still come out as a winner so this is harder to execute than you can imagine. Some people just have a hard time accepting losses so they try to minimize them as much as possible.

But if you can internalize the power of big wins and small losses, then you have no problem taking losses. You understand that one win can wipe out all those losses you accrued. Flipping the switch in your head and approaching markets with this perspective is the key.

I used to trade with a risk-to-reward ratio of 1:1 which means that my losses and wins were of equal value. I would need to be right more than 50% of the time to come out profitable. Since making the switch to a higher risk-to-reward ratio, I've never looked back.

Trade Your Personality

I can give you a trading strategy right now that is proven to make money in the markets but you probably won't make money with it. The reason is that what works for me probably doesn't work for you. You have to tailor a strategy to your unique personality.

This is why whenever people try to copy online trading strategies it never works out for them. Other than the fact that you didn't create that strategy so you are not as confident trading it as the person who did create it, you are also moulding your personality to a strategy when you should be doing the opposite, moulding a strategy to your personality.

This is just another version of telling you to play to your strengths. If you are a naturally impatient person, maybe don't create a trading system that holds positions for days or weeks. If you have a hard time following strict rules that give you no decision-making power, maybe you shouldn't trade a fully objective strategy.

Your first objective before creating your trading system is to look at yourself. Understand your strengths and weaknesses. Study what has worked for you in the past. Have the awareness to know what kind of person you are. Once you figure all these things out then you can tailor the right trading system according to your personality.

Consistency In Everything

Consistency in process breeds consistency in outcome. But how do you expect to be consistent in your trading/investing if you are not consistent with other aspects of your life? Behavioural consistency is the hardest part about being a trader. So if you are not consistent with the easy things in your everyday life, how do you expect to be consistent as a trader?

I hate to break it to you but if you want to be hitting the gym 5 days a week but you're struggling to be consistent at that, then you will never be a profitable trader. The same thing goes with any other habit or behaviour you want to be consistent with. Whether it's reading, meditating or something simple as going to sleep and waking up at the same time every day, if you are failing to be consistent with those simple habits then how do you expect to be consistent with your behaviours when it comes to trading financial markets?

Some of the best traders and investors in the world are incredibly consistent in their lives. Warren Buffet has been doing the same thing every day for the last 60 years. This is the sacrifice you have to make by being in this field. You're not just working when it’s time to be in front of the charts. Your whole day is basically a workday.

Consistency is a skill. Build that skill by starting with the easy behaviours in your life. You will notice that your trading improves immensely once you become consistent in all aspects of your life. This is another reason why the trading journey is a journey of the self. Cultivate consistency in your life before you think about cultivating consistency in your trading/investing.