Happy New Year!
The markets are back in action and the brokers returned to full and normal hours this week, so it’s back to business.
Now the big thing at this time of year (of course!) is the dreaded New Year’s Resolution.
The trouble is, whether it’s a new fitness goal or a new financial goal you’re working on, an ill-chosen course of action can actually do you more harm than good.
It’s easy to get swept up in the novelty of doing something new without really taking time to consider if it’s all leading to a positive outcome for you.
That’s why we’re taking a look at common-sense trading today.
Your Checklist for 2020
If you’re kicking off 2020 with new trading goals, maybe even a brand new trading strategy, take a few minutes to run it through my 5 common-sense filters first. It can really help ensure your New Year trading plan isn’t going to turn around and bite you!
Unfortunately, common sense can easily fly out of the window in today’s digital age. I’m sure you’ve seen those stories of people driving into canals and lakes because they blindly followed instructions from the Sat-Nav in their car for example!
Well, it can be a similar case when less responsible traders go looking for opportunities in the markets.
One example is the trader who becomes blind-sided to the bigger picture developing in the market because he only focuses on very small timeframes.
His automated system tells him to buy on a signal from the 5 minute chart. But it doesn’t take into account a huge level of resistance looming overhead on the daily chart which is, of course, a much more powerful feature of the market. He then sits scratching his head (or blames the ‘broken system’) when his trade takes an immediate nose-dive.
Another example is the trader who expects a strategy to continue working year after year without making adjustment for changes in market conditions.
He wouldn’t expect his car to run for years on end without taking it in to be serviced. Even a bicycle needs its tyres replacing or brake cables adjusting at some point. So is it reasonable to expect something as valuable as a profit-producing trading strategy to run without a bit of ‘service and maintenance’ along the way?
Things change. And the responsible trader would take notice and be prepared to adapt accordingly. He’d perhaps widen-out his stop loss and profit targets a bit to accommodate increasingly volatile conditions. Just the same as he’d sit up, take notice, and get his car’s gearbox inspected if it started to make strange grinding noises.
But let’s leave the narrow minded traders to do their thing while we focus on our own wellbeing.
Let’s take five ‘common-sense’ qualities and use them to check we’ve got a well-rounded trader’s outlook in place as we head into 2020.
5 Qualities of Common Sense Trading
1) Truth: Does your strategy or trading approach have a logical basis? Does it take into account the ‘truth’ of real-time trading?
I’m a big believer in Price-Action trading (trading without indicators) because it lays the market completely bare. You’re letting the market reveal to you what it is thinking. But make sure you’re not trying to force your own will on the market by expecting a fixed amount of profit every day, or a set amount of trades per week…
TIP: Let the market show you when to trade and when to rake-in your profits.
2) Trust: Do you have complete trust in your trading system? Are you willing to accept a random distribution of winning and losing trades knowing you can make money over the long term? Can you pull the trigger on your trades without hesitation?
Having trust in your system and your ability to trade it are the essential building blocks of trading with discipline.
3) Discretion or ‘The freedom to decide what should be done in a particular situation’.
Do you have a ‘safety-catch’ built into your strategy; do you know exactly when you shouldn’t trade?
Perhaps you should avoid trading when an economic report is due. Or when extreme volatility hits the market and you don’t know the reason why (it could be some geo-political event yet to hit the news – bombings, political assassinations etc…)
TIP: Make sure you know exactly when you’d be better to stand aside and let the dust settle.
4) Responsibility: You simply must be willing to take responsibility for your own actions as a trader. There’s no shame in making mistakes, it’s the ability to learn from them that can actually give you your biggest breakthroughs. And we’ve all placed trades the wrong way around – buying instead of selling – or entered a typo on the price and missed a good trade, or any of a hundred other ways you can trip yourself up.
TIP: Keep a daily journal of your trading exploits, warts and all. Read back through in from time to time. You’ll be surprised at how far and how quickly you can make progress without really noticing.
5) Reason: You must be able to think things through clearly – to understand what’s going on when you look at a chart and to arrive at your trading decisions logically.
It means if you’re right at the start of your trading journey you will need to start building-up your knowledge of the markets.
And the best way to do that? Get a bit of background reading under your belt then jump in and get some real-life experience. Nothing beats the knowledge you will acquire by testing things first hand.
Just make sure to keep risk and exposure in check while you navigate the inevitable ‘apprenticeship’ period.
Common sense dictates you won’t achieve greatness without laying firm foundations first!
Trade safely and catch up with you again soon.