In today’s episode, you’ll discover 5 things you should start doing as a trader.
So tune in right away…
Hey, hey what’s up, my friend? In today’s episode, I want to share with you 5 things that you should start doing as a trader.
1. Think independently
The way to think independently is to always ask, “Why? Why Rayner?” For example, let’s say I share with you a trailing stop loss to trail your stops using the 50-day moving average.
You don’t want to be asking things like what’s the best moving average settings to trail the stop loss and stuff like that. You should ask why Rayner chose the 50-day moving average.
When you think about that, it might be because the market is in a healthy trend, and it seems to be respecting the 50-day moving average. That’s why he’s using it to trail his stop loss.
Or maybe he has done some backtesting and found that the 50-day moving average works best. When you ask why, you’ll have multiple answers to your questions. And when you get multiple answers, you can then use those answers to do your research and see whether they are true or not.
If I tell you to use the 200-day moving average, and you take it at face value, then your learning process just stops short if you don’t ask for the reason.
When you ask why, you’ll get answers to your questions which you can use as the basis for further work validation which you can explore further down the road. And this brings me to my second point…
2. Be prepared to get your hands dirty
If you want to be the best chef in the world, you have to be in the kitchen cooking. If you want to be the 100 meters sprinting champion, you’ve got to be out there running. If you want to be a bodybuilder, you’ve got to be lifting weights.
So if you want to be a professional trader, you’ve got to be out there getting your hands dirty, validating trading strategies, doing backtesting, forward testing, etc. You got to get your hands dirty.
For example, the top bodybuilders in the world will never ask an opinion of a second-tier bodybuilder on diet and tips, etc. Instead, they get their hands dirty. They experiment to see what food works best for them and they push themselves to the limits on how heavy they can lift.
It’s the same for trading. There is no such thing as someone spoon-feeding you and telling you the best strategy or the best thing that you should do. You got to do the work yourself by researching, validating and backtesting.
These are the kinds of work that will make you progress as a trader. So get your hands dirty, because if you’re looking to take hands off, waiting for the good stuff to come to you, you’ll never make it as a trader. I’m being honest and serious over here.
3. Leverage on the works of other traders before you
Because this helps you to reduce your learning curve. It can be in the form of reading books, listening to podcasts, blogs, etc.
Let me share with you how I leverage on the work of other traders. There are a few traders that I respect and I follow like Andreas Clenow who wrote the book Following The Trend, Nick Radge wrote Unholy Grails, and a few others.
So what I do is I’ll study their books and the works that they published out there, and I’ll take the concepts of those trading systems to backtest and validate to see whether those concepts work.
If it does, then great, I can take those concepts and tweak it to a trading strategy that I’m willing to trade. That’s how you leverage on the work of other traders.
For example, if you’ve watched my videos and you find that my price action trading stuff makes sense to you, then you should take those concepts, develop your trading plan around those concepts and validate to see whether they work for you.
Don’t take what I say or what any other traders say at face value. You have to do the work, you have to get your hands dirty as I’ve mentioned previously.
4. Respect the markets
The markets can do anything. It can be in an uptrend, a downtrend, a low volatility or a high volatility environment, or be in a range etc.
So if you learned to respect the market because it can do anything it wants to, then you’ll manage your risk and have a plan for exit like setting a proper stop loss.
Stop loss isn’t the only way to manage your risk, you can also use a time-based stop loss, you can adopt portfolio rebalancing, or even through options (which are which I seldom talk about).
But whatever the case is, you must respect the markets because only when you respect the markets, will you respect risk.
If you think you know exactly what a market is going to do and you’re over-confident of your trading strategy, and you don’t respect the markets, then that one time when it hits you, you’re going lose everything and more.
That’s because you don’t respect the market. So always respect the markets, respect risk.
And this brings me to my final point…
5. Project the worst and work backwards from it
Let’s say you’re trading a strategy and that historically has a 25% maximum drawdown for example. So when you trade that strategy, you must ask yourself what you will do if this trading strategy has a drawdown that’s worse than 25%, which could be 30% or 40%.
Will you continue trading it? Will you be prepared to lose 40% of your capital? This is what I mean by projecting the worst and working backwards from it
Another example is, let’s say you put $500,000 with a broker and if this broker goes belly up, and you lose that $500,000, can you live with it?
Well, if you can’t, then you shouldn’t be putting $500,000 there. Maybe you should put $100,000 or $50,000, or down to a point that you’re comfortable with.
One more example, let’s say for stock trading, you want to buy a stock. And maybe next week, there’s an earnings report that could possibly go against you by 30%, 40. So before you put on a trade, you should ask if you can swallow the potential 30% against you.
If you can’t, then you should reduce your position size down to a point where even if it goes 30% against you, that loss is still contained. This is what I mean by projecting the worst and work backwards from there.
This is what you must do as a trader because, in trading, you’re dealing with probabilities. You’ll never know what’s going to happen ahead of time, but you can prepare for the worst-case scenario and develop a contingency plan to not get caught off guard.
Here’s a quick recap…
- Think independently and ask why
- Get your hands dirty – you have to validate the concepts and strategies that you come across
- Leverage on the work of other traders – via their podcast, books, blogs, etc.
- Respect the markets and respect risk
- Project the worst and work backwards from it
With that said, I wish you good luck and good trading. I’ll talk to you soon.