Despite the fact that trading is promoted on social networks as an easy and fast way to earn money, the reality is that it requires discipline and a lot of knowledge. The above is affirmed by those who have adopted trading as their main activity or even those who use it to obtain extra income.
It is because of this complexity that traders follow a series of rules that allow them to advance despite the high risk they assume in each transaction. It is important to mention that there does not seem to exist a formula to get 100% of the transactions right, in fact, this profession assumes that a percentage of the negotiations will have negative returns.
If you want to be a successful trader you must control losses and avoid striving to obtain very high returns in a very short term. A lot of trades without a clear strategy can end up quickly affecting the value of the portfolio. The best thing is to grow calmly, but always attentive to take advantage of that opportunity for higher and faster returns that usually appears once in a while.
That said, I am going to quote 5 rules from Ed Seykota, a commodity trader who focused on algorithmic trading systems and who gives psychology a lot of weight when trading.
MINIMIZE LOSSES
Creating a system where you never lose seems like an impossible task, losses are part of the job. What you can do is focus on cutting losses so that they do not affect the portfolio too much. If in a transaction you lose 20% you will have to obtain a return of 25% to return to the initial capital, but if the loss was only 5% you need to earn 5.3% in the next transaction. Additionally, if you made a mistake it is better to close early and try a new position.
LET THE WINNING POSITIONS RUN
The tiger does not usually go out to hunt every day I usually say in my classes. When you have a winning position, keep it as long as you can, not all the time you are going to be right, so it is better to be very attentive and let the profit run. This second rule complements the first and creates the mantra “lose a little win a lot”. Your stop loss should always be less than the trade profit potential. So if your stop loss is set at 5%, aim to earn at least 10% on each trade.
KEEP THE BETS LOW
This rule is easy to explain, however, at the beginning many traders often break it. When you have a losing position it is better to close it, do not continue to increase it hopping a faster recovering. Sometimes buying at a new low will work, but when this fails the losses will get bigger and you don’t want to heavily impact your portfolio. Another approach to this rule is to not increase your trading position in the event of a loss. If you are trading 10 lots and lose, don’t try to win back with 20 lots. It is best to always keep the lot constant until the strategy allows you to gradually increase the base trading amount.
ALWAYS FOLLOW THE STRATEGY
It is clear that following the strategy is always trust in the stop loss and follow your profit limit. Additionally, if you have found a trading method that works you can stick with it until it is consistent.
KNOW WHEN TO BREAK THE STRATEGY
The only thing you can modify in your strategy is the take profits level as long as you observe key changes in the fundamentals or in the technical analysis. This premise includes that you can move the stop loss to protect capital or profits, but not to stand more losses. Remember to lose little and win a lot.
If you follow these 5 rules together with a fundamental and technical strategy, it is likely that despite errors and losses in some operations, you will end up increasing the value of your portfolio. What usually makes it difficult to follow the rules is the fear of lossing money, so as a last piece of advice I can tell you that losses are part of this business and you should not lose control when you have to execute the stop loss. You will lose but remember that you could recover.
