Trading can be (no, is) a brutal game. I know this firsthand because I've blown up several trading accounts and fell victim to numerous cognitive
and emotional biases along the way. It took a series of (very) painful losses during many years and some serious introspection to reach my "aha" moment: don’t « draw down ».
When I started trading, it was just before the internet boom (and subsequent bust). I was filled with confidence and excitement, believing I could
ride the wave of this new era.
However, I slowly realized that the market doesn’t care about your feelings. I made every mistake in the book—overtrading, ignoring risk management,
fear of missing this trade and as consequence letting emotions drive my decisions.
After blowing up my accounts (just mine?) multiple times, I knew something had to change. That’s when I truly understood the importance of avoiding
drawdowns.
Here’s what I learned:
Risk management is king (yea you heard that before). Only risk a small percentage of your capital on each trade (also). This way, even if a trade
goes south, it won’t take you down with it. Always set stop-loss orders. They’re your safety net, automatically closing out losing positions before they get out of hand.
Staying disciplined is crucial. Create a trading plan and stick to it. It’s easy to get swayed by market movements, but consistency is key. Less is
often more, so focus on high-quality trades instead of trying to catch every market move.
Controlling your emotions is crucial for your trading success. Trading often feels like an emotional rollercoaster, but keeping a clear head and not
letting fear or greed dictate your actions is key. Remember, emotional control is a result of having a well-thought-out trading system that you trust completely, not the root of your issues.
Start by building and thoroughly understanding a system that you have deep confidence in, and the emotional stability will follow.
Understanding trading expectancy is also important, but we’ll save that topic for another day. For now, focus on managing your drawdowns to build a
strong foundation for your trading career.
A crucial lesson I learned is that it’s better to miss a massive trade than to « draw down ». A profitable trader doesn’t rely on one massive
overnight trade but on thousands of trades over a lifetime. True success in trading comes from consistent, incremental gains rather than a single lucky break.
Charlie Munger’s advice resonated deeply with me even though he had not the reputation of being a trader: The first rule of compounding is to never
interrupt it unnecessarily."
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