In today’s episode, you’ll learn how you’ll become a great trader by following these 3 golden rules.
So listen to it right now…
Hey, hey, what’s up my friend?
In today’s episode, I want to talk about how to become a great trader.
There are 3 unbreakable rules that you must follow.
1. Have an open mind
I know this sounds cliché – but have an open mind.
But from the way I see things on social media and how people are interacting on forums, most traders have a close mind.
For example, in my early years of trading, I have a close mind. After I tried indicators and it didn’t quite work for me, I went into the realm of price action trading. I thought price action trading was the real deal, the Holy Grail, the way to trade the markets.
There’s nothing wrong or bad about price action trading. But if you want to grow as a trader, you can’t just think that your method is the best. Because if you think it’s the best, then you are closed to other potential opportunities or new stuff that you can learn out there.
I thought price action trading is king and I should chuck everything else aside.
I couldn’t even be bothered with other strategies or methodologies until I came across a book called Trend Following by Michael Covel which opened my eyes to how hedge funds are trading the market.
They don’t look at support resistance, trend lines, candlestick patterns or whatsoever. These trend-following firms simply buy what’s going up higher and sell what’s going down lower. That’s pretty much their principles to trend following.
That really opened my eyes and I wouldn’t have come across that trend-following portion of my trading career if I didn’t explore new ways to trade the markets.
Then from trend-following, I got myself exposed to systems trading, how traders trade the markets systematically.
Back then I had a few objections in my own head, thinking that for systems trading I need to be a programmer and know how to code in Java or C++ etc. And when I dived into it, I realized that my fear was actually unfounded in this day and edge.
Even if you don’t know how to code, you can still develop your own trading systems.
And again, I got involved in systems trading because I had an open mind.
I went in with an open mind and see what it’s about, then see if there’s something that could fit my lifestyle personality.
Because I dived into systems trading, today I can employ trading systems to trade my account. In fact, more than half of my capital is allocated to trading systems. Like mean reversion trading, momentum trading in the stock markets and even ETFs.
And again, it’s because I went with an open mind. The moment I tell myself that I don’t know a lot about the markets and there’s more out there than what I know, I start learning new stuff.
So number 1 – have an open mind. Don’t think your method is the best, don’t think that there’s nothing else to learn. Trust me, there’s a lot out there. Things are always changing and there’s always room for improvement.
2. Adopt multiple trading systems
I find this to be one of the Holy Grails out there that not many people talk about.
Yes, you can have one trading system. But if that trading system goes into a 50% drawdown, that’s 50% of your money underwater.
But if you have multiple trading systems, say 5 uncorrelated trading systems, maybe one for trend following in the futures market, one for mean reversion trading, one for breakout trading, one counter-trend trading, and one portfolio rebalancing or passive investing.
You’ve 5 and they’re uncorrelated. When one system goes into a 50% drawdown, if you look at a portfolio level, that’s only a 10% drawdown of your trading capital.
Let’s say you have a $500,000 trading capital, with $100,000 of capital allocated to each trading system. That’s about 20% of your capital to each trading system.
So if one system goes into a 50% drawdown, in the grand scheme of things that’s only a 10% drawdown of your portfolio, of the $500,000 capital you have. That’s the beauty of it.
When one system goes into a drawdown, other systems might be doing well. It might not even be a drawdown is a portfolio level. At the portfolio level, it might even be breaking up new equity highs.
So that’s the beauty of trading multiple systems. If you trade one system, you’re kind of slave to that one system. When the market conditions change, things will go sour for you.
But when you trade multiple systems, your equity curve moves up over time.
So that’s the second lesson I learned, and I see many great traders do as well. They adopt multiple trading systems.
3. Never trust anything and always verify everything
What do I mean by this?
I think this is what most of us are probably guilty of, where we go to forums, books, we learn something new and we just take their word for it at face value.
We just trust them because they are an authority, a guru who seems to know what they’re talking about and we just take that strategy and methodology to trade with our own account.
But here’s the thing…
How do you know if what’s being taught to you actually works?
For example, you go to a car showroom and you want to buy a car. The salesman comes up to you and says, “Hey check out this model. This car is very good, you should buy it.”
Do you trust the salesman? No. Because you know that he has an agenda and it’s the same for trading. When you’re interacting with other traders out there, who could be educators, social traders or just hanging out on forums. How do you know what’s their agenda?
You’ve no idea. That’s why you must always verify everything that you come across, and never trust anything. That’s the only way you know whether something works or not.
So how do you verify it?
Well, this is where you’ve got to put in the effort to do your backtesting and forward testing.
I know this is not sexy stuff, but this is what separates pro traders from the amateur traders. This is what separates winning traders from losing traders.
You’ve got to do the work. No one is going to do it for you.
So that’s it, I’ve come towards the end of today’s episode and I’ll talk to you soon.