3 Resolutions Every Trader Should Make for 2017
Not all New Year's Resolutions stick, but these 3 habits of successful traders are worth adopting any time of year. If you already do them, great! And if you could use a refresher on why they're essential, read on.
By Vikram Rangala
Thursday, December 29, 2016 - 00:00
Trading is, by definition, the management of uncertainty. Just like in a math problem, when you have variables, you also need constants. To put it another way, when the markets are unpredictable, you need some things that you can be sure of. These basic habits, of attitude and behavior, are common to virtually every successful trader who ever lived.
1. Keep a journal
Research shows that the mind can only hold about half a dozen ideas in active memory at a time. Let's say you have certain things you know you must do for every trade:
- look at the long-term chart and then zoom in on the short-term
- choose an expiration that will give adequate time for the market to do what you expect
- compare at least three binary option strike prices before choosing one
- decide your exit strategy in advance: hold to expiration or get out with the first significant profit, and so on.
That's a lot to remember. That's why good traders do what surgeons and pilots do: use a written checklist to make sure every step gets attention.
A journal can do much more than hold checklists, however. Keep a record of each trade, not just the contract and profit or loss, but your emotions. Traders who ignore their emotions are taking a big risk. In fact, managing emotions may be the most crucial part of trading.
A journal gives you a place to express rather than suppress those emotions. Just telling yourself, "Don't be nervous," won't make you less nervous about trading. But if you can record where exactly you felt nervous, what points in the trading process triggered it, and which times you managed to trade well in spite of it, you'll have data you can analyze. Do that for a few weeks, for profitable trades and losses, and you'll be able to see patterns.
Some of those patterns may surprise you. You may find that your best trading days came when you had a good breakfast. If so, always eat breakfast. You may find that you usually lose on the first couple trades of the day, but then get a better feel for the markets' movement. If so, you might do your first few trades in your practice demo account and then switch to live trading.
There are many reasons to keep a trading journal, but this one is worth mentioning. Hundreds of studies show that simply writing about stressful events can not only reduce the stress of future events, but actually improve your overall health. Studies have found that writing for just 3 20-minute sessions reduced asthma and arthritis symptoms, improved chronic fatigue and migraines, and helped with concentration. Think about that the next time you're sitting uncomfortably and struggling to focus, and break for ten minutes to write it out.
There's probably no more powerful step you can take to improve your trading (and your enjoyment of trading) than keeping a journal. Get a notebook and pen or do it in your word processor or a Google Doc. You might even try Evernote, OneNote, or the great outliner, Workflowy.
2. Embrace losses as part of the trading process
All successful traders take losses. That's probably not news to you and it may not be helpful to hear it again. For example, I used to think that sentence was part of a longer sentence that ended, "but good traders take fewer losses than bad ones."
Or something like that. I used to think trading was about predicting the markets' direction correctly most of the time. That made me susceptible to those ads for trading "systems" which promised "80% winners" and the like.
The truth is quite different: most successful traders, including those trading multimillion dollar accounts for themselves or big funds, are right less than 50% of the time. It's been that way since the days of Jesse Livermore. While some high-frequency algorithms have higher rates, they do it by front-running, which was and is illegal when human traders do it to each other, but is allowed if it is done in milliseconds by a computer. But let's put that aside, since it doesn't alter the basic nature of the market. Moreover, there is no high-frequency trading on Nadex.
Turns out, you only need to be right about market direction about 40% of the time. Actually, 37%. How? The simple answer is the old trading advice: keep your losses small and let your profits run. That's easy advice to say, but it takes discipline to very quickly say, this trade isn't doing what I needed and expected it to do, so I'm getting out with a small loss.
Notice that I didn't say anything about admitting that you were wrong. Being wrong or right has nothing to do with it. In the simplest terms: trading isn't about being right about the markets. It's about making money.
Think of it this way. When's the last time you said, "I made money on that trade, but I really regret not being right about overall market bias"? Probably never.
On the other hand, when's the last time you said, "I was right about the market reversing on me, but I held on anyway and I lost money"?
Exactly. There's only one way to develop the self-awareness and discipline to treat small, quick losses as just the cost of doing business. That way is to practice.
3. Practice, practice, practice
There is a shortcut to rapid skill acquisition in any field: it's called not taking any shortcuts. The sooner you accept that trading is a skill like playing the guitar or baking a cake, the sooner you can get on with the work and fun of gaining the necessary experience.
What's another way to say "experience"? How about, made all the necessary mistakes already. You have to become comfortable with making mistakes, with not being perfect and not needing to be perfect. Remember, it's not about being right all the time. It's about making money.
Some traders get their practice in the hard way, with real money. And you may also pay some "tuition" in real money to get your trading education. But think of it as tuition, learn from it, and keep in mind it's probably less than a semester of business school and more beneficial. That said, there's no sense spending real money to gain practice you can just as easily do for free.
That's why Nadex traders get a free practice demo account that never expires, even after you open a live account. We know that successful traders continue to improve themselves, test out new strategies, or use their demo to "warm up" at the start of the trading session. For us, it's good business to offer that free practice account. Sure, we won't collect fees on those trades. But if it helps you join the thousands of traders who trade with Nadex for years, it's a win-win for everyone. Plus it's the right thing to do.
You'll see lots of analysis of what the markets will do in 2017. What they actually will do is outside your control. But what is under your control is what you will do in 2017. Will you improve your self-awareness, your self-discipline, and your ability to stay resilient and positive even when the markets hand you some losses? Will you make some definite commitments to keep a journal, to adopt a successful attitude towards profit and loss, and to practice those good habits until you can't help but follow them every time?
If you can take a few steps towards those goals, then 2017 will be a year to look forward to with optimism, no matter what the markets do.
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