I learned a lot of things over my couple of decades working in dealing rooms around the world.

I can, for example, swear fluently in multiple languages, can smash a phone handset or headset to smithereens with one angry blow and, thanks to my time in Russia and Poland, I have an extraordinary capacity for vodka.

Fortunately, I also learned some other things, many of which can be just as useful for those that trade from home as they were to those of us who traded in dealing rooms. 

1: Don’t Rely on Any One System or Signal

When assessing the viability of a trade, you have to look at more than one thing.

For starters, both fundamental and technical factors should be included in your calculations. It could be that Gann theory, or Fibonacci retracement levels, or RSI, or whatever your preferred signal is suggests that you buy stock in an oil company, for example. But if demand for oil is weak and the market is oversupplied, none of that matters.

For trades designed to last more than a few minutes or hours the idea should be based on fundamentals, while the timing is based on technical analysis.

2: Understand That You Could Be Wrong

Even if you follow rule number 1, not every idea will pan out.

I know this sounds obvious, but it always surprises me how many people just don’t get it… or at least don’t act as if they do.

I have made a living from financial markets for around forty years and spent twenty working in dealing rooms around the world and I can tell you that not even the best traders, those whose salaries and bonuses are measured in the millions, get every call right. 

So why do so many traders and investors buy things without any idea of what they will do should it go down?

The natural thing to do once you accept that is to follow rule number 3…

3: Set, And Stick To, Stop Loss Orders

Once you understand that some trades won’t work out it is only logical to have a level at which you will accept that fact, cut the position, and move on to the next one. That can be frustrating sometimes as things do bounce but dealing with the occasional frustration when that happens is, over time, better for your wealth than habitually running losers into the ground.

Those levels should be set at the time you initiate a trade. Once you have a position, a logical assessment of when to cut and run becomes much more difficult.

Human beings are wired to be bad traders. We tend to focus on the good and do our best to ignore the bad. That is important in dealing with life’s ups and downs but when it comes to position management it is a recipe for disaster. It makes us take profits too early and run losses too long. 

The best way to guard against that is to set parameters for every trade before it becomes “yours” and you form an emotional attachment.

Of course, setting a level to cut a position is only any use if you actually stick to it. 

Once you have a position it is amazing how your perspective changes. What looked like a level that indicates that your initial assumptions were wrong can easily become one that looks like a good place to buy more. 

It isn’t. 

If you were wrong at 30 you are even more wrong at 20. Trust your logical, pre-position analysis, not your emotional response to failure.

In a volatile sector like energy, success is not just about good ideas. It also involves limiting losses and maximizing profits. Following these three rules will help you do that.

Cheers,

M