Your survival guide for the markets

 

Some people spend decades trading the markets … some dip their toes in, get bitten and back away. It isn’t for everyone.

Others dip in and out, sometimes losing faith, and sometimes bracing themselves for another onslaught. For them, it’s a rollercoaster of ups and downs.

But, if you know how protect yourself from the pitfalls, and maximize the benefits, you can expect a lengthy, smoother (and profitable) career trading the markets.

These are my key strategies for long-term survival …

1. Always trade with a stop loss

It’s a no-brainer (and, I hope, stating the obvious to you). Even if you have other plans for how you’ll manage your exit strategy from a trade, all positions must have a worse-case-scenario back-up plan.

2. Have a fixed risk-per-trade and never exceed that

I can say this til I’m blue in the face, yet again and again I meet traders who just use a fixed stake, no matter how wide their stop is. As a result, one trade might have a risk of £100 … the next has a risk of £200 …

This is no way to invest in the markets.

Yes, you may decide to reduce risk on some trades, due to uncertain market conditions, or even just a gut feeling about it … but that should be a decision.

3. Understand and confront your psychological pain threshold.

It would be nice to believe that our trading journey will be a series of winners leading on a smooth journey to a sunlit upland of prosperity.

But the reality is that there’ll be losses along the way, and they won’t be spaced out in the way you’d expect.

Your run of losses might come in your first few trades, making a dent in your starting fund before you’ve even got started. Or your run of losses could come just as you’re getting into your stride – knocking that confidence and making you want to give up.

The standard emotional spiral for a trader experiencing a loss goes something like this: anxiety … denial … fear … pessimism … panic … capitulation … despair …

And somewhere towards the bottom of that spiral we begin to lose control of our senses. Past a certain point, as losses mount, we take on a fatalistic attitude, and grimly watch as our worst fears come true.

It’s happened to me. And – if I’m honest with myself – the blame lies in no small part with my own reckless behaviour.

If I’d been stricter in my risk control, and less dogmatic about my principles being “right” – I would have come out relatively unscathed.

Cutting and running doesn’t mean that you’re admitting that the principles behind entering that trade were wrong. It simply means that you’ve reached your tolerance level.

Accepting this will liberate you from the need to “prove yourself right”.

4. Use a max drawdown

A maximum drawdown limit is a great way to manage your pain threshold by setting clear rules for action before you reach the pain level.

Set yourself a maximum drawdown for a day, for a week, for a month. (i.e. the maximum figure or percentage of your trading pot that you can accept losing in that period.) If you hit it – stop trading.

5. ‘Stop trading’ but keep being a trader

The fact that you’ve stopped trading, doesn’t mean that this is “dead time”. You should still be following your trading strategies – just because you’ve hit your psychological barrier, doesn’t necessarily mean that your underlying strategy is flawed.

Watch and wait, so you’re ready to jump back into the markets. Because you got out before you hit a painful drawdown, you shouldn’t be dreading getting back in, but eager to find the next profit.

Moving beyond survival … to thrive in the markets

There’s a common thread in the survival tips above … they’re about understanding and accepting your points of pain. Unless we do this, we’re going to keep on hurting ourselves in the markets. And where’s the fun in that?

Trading is frequently frustrating … but it doesn’t need to be painful. And between the moments of frustration, it can enormously satisfying, and even a joy!

 

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