The Most Neglected Strategy in Trading Financial Markets-Consistent Profitability
Hey hey! here we're again after a while. Only read this if you're into investing, day trading, or just interested in financial markets. That being said, let's dive right in.
I recently came across a social media post by Alan Edward (author of "The Blueprint to Trading Psychology") outlining two ways to change your trading game for the better. He listed two points;
1) Not following your trading plan.
2) Not Managing Risk.
I'm going to be speaking now based on experience for it is said that experience is the best teacher. The only reason I think I have earned the right to speak on this aspect of consistent profitability is because of my 3 years of experience. After going through tonnes of videos, courses, webinars, articles, and books, I must say I agree with Aland E. Never for once has anyone sat down and really try to drill down the importance of those 2 points. Those two points encompass what is generally known as trading psychology. For the typical trading journey, one goes from learning basically every trading strategy there is out there only to end up realizing that their psychology is the best strategy there is to master. And not to sugarcoat this but only a few do come to this realization.
I personally followed this route and learned every strategy I could find. I'm sure you reading this can relate to what I'm talking about. I have gone from those "gotcha" moments to "aha I thought I had mastered trading". These moments occur after you place some really big lots/risky positions and end up with a big chunk of profits. At this point, you feel on top of the world and to make matters worst, you do this and end up with a winning streak. This causes sets up a dopamine spike attributable to or even more than those who take hard drugs. This is a bomb waiting to explode because the times you eventually start to lose, everything just goes out the window and you get emotional and begin over-trading and revenge-trading. Of course, I don't need to tell you the end result of this kind of trading. Absolute disaster.
You think not following a plan is the cause of this type of trading so you go out looking for a rule-based strategy. Point 1 is sorted out but you fail to stick to it or your mind starts conjuring up million-dollar lifestyles or you get excited and fail to follow the plan after seeing your peers make huge profits. The thing is, a good plan is one with a good risk management plan.
Today, we know of probably two of the greatest investors to have ever existed (the persons of Warren Buffet and Charlie Munger). Many people do not know that back in the day, these two guys had another friend whose name I can't recall. He would have been celebrated today like his peers Warren and Charlie but he woefully failed at risk management. Often overleveraging on some particular stocks. This is one of the dangers of financial markets in that those who fail to play the long game eventually get sent to the grave by the markets. This is because markets are very unpredictable and when dealing with probabilities, you don't want to be wrong and overleveraged at the same time.
I have fallen on many such occasions and lost a lot too. My game changed when I began really sticking to that at least 1:1.5 risk-to-reward ratio on any trade. I had to adapt my strategy because a good trading strategy is also one with good risk management. Now, I don't get those drug-like dopamine spikes one gets from over-risking and ending up in profits but I did realize after reading about Warren Buffet and the strategy of playing the long game. No one who is profitable in the long term will tell you otherwise. If you want to change your game, lower your expectations and go slow playing the long game. I can guarantee you that you'll end up ahead.
On this note, I end my talk and wish you the best as you continue to be better. It is said that if we know better, we will do better. Go and do better and even if you fail, pick yourself up and go again until doing better becomes a habit.
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