I always tell my customers about the importance of methodology and risk management as well as how picking the right combination of platform, low latency datafeed and overall trading infrastructure can build a solid foundation. But if I had to do it all over again, I would add one more piece of advice; stay practical.
I understand the excitement that comes with entering into the trading world for the first time. You come across many sites, forums, Twitter accounts and they all claim to have the perfect formula. But consider that both successful and unsuccessful traders are given equal weight when it comes to dishing out advice online. Whether practical, real or theoretical value, it may all sound the same without the proper context.
Let me provide you with a few tips that in my opinion will allow you to stay focused and concentrate on your own trading:
- Trade a time horizon you enjoy. Yes, enjoy! If you trade a time horizon that does not match your personality, you will feel trapped and overwhelmed. Time horizons have different levels of risk. A 3-minute chart is no better than a 30-minute chart. Whatever you feel more comfortable with analyzing is the one you should stick with.
- Choose simple software. Simple means picking a software for features that you can and will use today, not one you hope to learn in the future. Having trading software packages that look good but don’t help your trades is just a burden and creates an additional barrier when it comes to making decisions. Stop the “but this one shows…”, and simply ask yourself, “will it help me make a a better decision when it comes to trading?”
- Choose a method that matches your skill set. Some people love micro analysis of Order Flow, Bid and Ask, etc. while others like traditional moving average. Again, one is no better than the other. But when you choose one, ask yourself “Do I have the skill to analyze such a method?” Simplicity is the ultimate sophistication. Drill that into your head.
- Don’t imitate others. What is good for them is not good for you. Spreads are not better than out rights; Options are not better than Futures, Emini SP is not easier than Emini Nasdaq. Do you get the logic? Same applies to the trading methods. One is not “better” than the other. Create your own.
- Assess the risks behind a method. It is usually hidden until you actually start trading. Why? When picking a method, you need to know upfront the downside. Selling Options? The downside is spiked volatility. Scalping? Inability to enter limit orders and add slippage on stops. In theory, everything looks good. If you do not dig into the risk side, you will likely move on to another method because you did not anticipate it. Comfort and knowledge of the risk may allow you to stick with the right method in the long run.
- How do returns work with your method? Understanding the consistency or lack of consistency in your method’s returns is also another key factor when deciding whether you will stick with your method. We feel that most choose a method they think will achieve consistent positive returns, while length and magnitude of drawdowns are ignored, or rather overlooked. All systems and methods have drawdowns, and sometimes they are lengthy. We suggest that you look at automated strategies, managed futures or anything else that has a long-term record. Go month by month and year by year to see what expectations you should set.
Did we miss anything that may have helped you become better? Let us know below.