9: Accept your losses – but learn from them
Although most traders inherently focus on winning, trading is mostly about losing. In fact, successful traders think of trading not in terms of how much they can win, but how much they can afford to lose.
Losses are a certainty in trading, and despite claims that some trading plans or systems are 100% profitable, the reality is that many successful plans win only about 40% of the time. The key is to make more on each winning trade than is lost on each losing trade. This is what allows traders to make money over time.
Although traders must be willing to accept losses, it is important to learn from them as well. One method for this is to maintain a trading journal or diary. A journal can help traders gain important feedback and detailed information about individual trades that performance reports cannot show. Typically, a journal includes the date, time, price, direction, reasons for the trade and individual trade notes. This provides a record of activity that can be used to evaluate the overall performance of the trading plan.
10: Keep trading in perspective
While it is important to remain focused each and every trading day, it is equally important to remain focused on the big picture. One losing trade (or day) should not be a surprise. It is a part of trading. Nor should one winning trade (or day) be cause for a celebration. It’s just one step along the path to long-term profitability. Because trading is a business, it is the cumulative profits that matter.
Win or lose, trading is just another day at the office. Once a trader accepts that wins and losses are part of the business, it is easier to keep emotions in check.
Setting realistic goals is an essential part of keeping trading in perspective. If a trader has a small trading account, for example, it would not be reasonable to expect huge returns: a 30% return on a $5,000 account is much different than a 30% return on a $1 million account. It is helpful to remember that the multimillion-dollar traders are the exception, not the norm. Most traders who survive the tough part of the learning curve are able to make a comfortable living.
Some of these rules are directly related. For example, part of Rule No. 1: Treat trading as a business depends on Rule No. 2: Always use a trading plan. And Rule No. 9: Accept your losses can help traders fulfill Rule No. 10: Keep trading in perspective.
Together, these rules make up general guidelines that can be used by discretionary and system traders alike. Traders who have the patience and discipline to follow these rules can increase their odds of success in the challenging and competitive business of trading.
Jean Folger is the co-founder of, and system researcher with, PowerZone Trading, LLC. Jean can be reached at www.powerzonetrading.com.