7.REALITY CHECK

by theknownothinginvestor

I must say, after two years, I had mastered a trading system but I was not mentally mastered. After my wife told me that I didn’t have a great system, because I had letted profits turn to losses, I made real poor decisions and this happened because I was not sure what I was doing. The inception in my mind of a poor trading system and my lack of confidence led to fear and fear isn’t certainly a good decision counselor.

But there were other mistakes, such as I didn’t real understand time-frame of negotiation. When I was learning everything was static. Although I was analyzing shares based on their past performances I never realised how much time it real took for a price to evolve. This made me buy when a stock was high, sell it when I was losing and shortly after it would rebound. I just didn’t get the cycle of a stock and this mainly happened because I was aiming for the long run but trading based on short-term thrills.

Commissions, spreads and cost of borrowing money (because of leverage) were 30% of my total losses. This meant I didn’t keep my fees to a minimum and probably made too many trades taking in account my total capital. When I traded I would immediately lost 1.5% in fees, which is a lot. This was my third mistake.

When I made two consecutive winning trades I felt king of the hill and then I would make a new trade without proper study, like if I was so good that I didn’t need technical analysis anymore. As if my predictions were enough. This really went bad and here was where I lost more capital with this mood trades with no preparation.

Not everything was bad, I respected my hard limit and I stopped trading when it was hit, which shows some level of mental commitment and discipline. I understood that kind of trading behavior would end badly so I stopped to protect my capital and to rethink the way I was in the markets and that was clever.

I had 45% of winning trades, which is ok and if I had kept my profitable trade for more six months I would turn positive. This means that you only need few real good trades to bear many negative ones.

Translating this into a list would be like this:

  • Choose a trading system that suits you and not the other way around – don’t change your life because you think you need to follow real time quotes or to spend a lot of time scanning for the next big mover. Adapting trade to your life will reduce stress and you will have some level of detachment, which is good to make poderate decisions. Emotions aren’t compatible with trading;
  • Be consistent, don’t give up and remember that everything takes time – Write down what you need to see in a chart to open a new position. Read this before you open a new position and only if all ticks are checked you can click to purchase a stock. In the  beginning when we open a new position we are so thrilled that we forget our rules, writing them down help our brain to understand what are we doing and if we are doing it right. This will be a continuous learning process and you probably will fail a lot but stay in course and don’t give up. After some time you will trade without emotion or fear and return will start to appear, but this takes time. In the beginning I thought that I could get ritch or quit my job in medium term, which is silly because only few can achieve this. Is almost like winning lottery;
  • Reduce your trading cost to a minimum choose a broker with low commissions and don’t overtrade. In the long run this will make a huge difference in your performance;

  • Stay humble – When you are losing is real easy to be humble because it hurts, but if you are winning you think that you’re special and everything you touch will turn in pure gold. That silly pride will make you vulnerable in markets, because everyone involved don’t care about if you are a golden boy. What they want is your money, simple as that. So stay focus because out there there always be someone smarter, quicker and (probably) best looking than you.

Those were the lessons that I had learnt after almost a year trading. I understood how hard is to take money of the markets and I was not mentally ready to do it.

With no positions opened I had all time in the world to think without pressures and how it would be more suitable to be in the markets. I knew by then that trading system was not working for me, I was taking too many risks and paying a lot of fees. Because of my wishful thinking I was eager to make good money and that pressure didn’t give time for my position to settler higher. I sold profits to quick and let losses accumulate.

But I also knew that I had a lost battle not the war.  I wanted to continue involved in the game but this time would be nice to be part of the minority that takes profits. I just had to figure it out what was the best way for me to achieve it. So I started to study…

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