This list is based on conversations we have had with different traders over the course of 2008. Most of the items on the list are timeless trading principles. So, in no particular order, here are 10 things you can do to improve your trading results in 2009.
1. Focus on Risk Management — If you didn’t learn this principle back in the 2000-02 bear market, then it’s hard to feel bad for you now. Once again, the events of the past year have brought risk management to the front of most investors’ minds. This time, make sure it stays at the front. Your risk management process should include a position sizing model and a strict selling discipline. While there may be some exceptions, most successful traders make money by cutting their losers and letting their winners run. We’ve all heard this before . . . because it works.
2. Pay Attention to Process rather than Outcome — As you exercise proper risk management, you should also be focusing on your process. Most successful traders agree that you will have a lot of little losers and a lot of little winners, but that the bulk of your profits will come from a few trades each year. In our weekly newsletter that we send to clients, we see similar results: a lot of small winners and small losers and a few pretty big winners. For example, early in the year we did really well catching the bulk of the move up in gold. In March we caught the breakouts in most currencies against the dollar, and then at the end of October we caught the majority of the breakdown in the Euro. And the past few weeks we have caught the move in corporate bonds. Aside from those trades we had several small winners and losers. In fact over the summer we had a streak of 8 losing trades in a row. By applying risk management to those trades, we made sure that all of the losses were small. And by focusing on the process, we were able to catch some strong winners as well. Remember, in a vacuum, any trade is irrelevant, meaning that one trade does not affect the next trade. You must have a systematic process and apply it over and over. Yes, you will have losing streaks, but over time, process will allow you to generate strong consistent gains and miss fewer trades.
3. Be Consistent — This goes hand-in-hand with Process. It’s critical that you have a consistent, systematic process to look at and track your ideas. How many times have you had an idea, forgotten about it, then looked at a chart a few months later and noticed that you missed a 50% move? If you’re like most traders, that happens fairly regularly. By having a systematic process that you look at consistently and that you apply every day or week or even every month-consistently-you’ll be able to capitalize on your ideas in a timely manner.
4. Accept Imperfection (in other words, leave your ego at the door) — Anyone who says he never has a losing trade is either a liar or doesn’t trade. As traders and investors, we must accept the fact that we are dealing with imperfect knowledge; therefore, we will not have perfect results. If you can’t handle that, you are in the wrong business. Investors who are not able to admit when they are wrong may get lucky for a while, but they will inevitably blow up. Ego might be useful in some fields, but it is absolutely destructive to your trading account. The worst investors are the ones who can’t admit when they are wrong. On the other hand, many of the best traders in the world are only right about half the time, and they’re not shy about admitting their failures. They make money by focusing on risk management and by making sure that they are in good risk-to-reward situations, and they always have a predetermined point at which they will get out if they are wrong. Spend more time following their example and less time pretending you never make mistakes.
5. Search for the Best Risk-to-Reward Ideas – As you may have noticed, we focus a lot on an investment’s potential downside. At times, this will cause us to skip a good trade or be small when we wish we were big, but more often than not, paying attention to risk-to-reward saves us from otherwise large losses. We only take trades where the return significantly outweighs the risk involved. Looking for good risk-to-reward scenarios also enables you to be wrong more often and still make money. For example, if you have $10 and lose $1 four times in a row, then make $10 once, you have only been right once or 20% of the time and yet you are up 60%. By focusing on the relationship between risk and reward, you are better able to make outsized returns.
6. Make Your Research More Efficient — If you are like most traders, you fall into the trap of trading the same things over and over. While sometimes this works, a lot of times you trade that way because you can’t find any other good trading ideas. You can avoid this by finding services that you trust to give you a virtually endless supply of potential trades that fit your criteria. Because we offer a weekly newsletter with trading ideas in several asset classes, you may be saying “aren’t you just trying to get me to buy your product?” Yes, we are, but we are also sincere in wanting to help you find good trades so that you can generate positive and consistent returns. Many people look at newsletters and other research providers as marketing services just trying to take their money. While there are no doubt some unscrupulous firms out there, there are many firms like ours that do a lot of work to provide you with useful, actionable, and real trading ideas. Some traders balk at paying for research. Our answer to that is that you can make up the cost of our service with one good trade. Think about it for a minute. If you spend $395 a year for a research service and are able to get a few good ideas a year from it, you will recoup the cost several times over. Most active investors should subscribe to 1-5 services that fit their style or that fill gaps in their style.
7. Invest in Some Technology — Technology can take a few different forms. You can spend a lot of money on new computers, software, etc. Or you can invest time to learn how to best use your current tools. Most investors do not need a new system; instead they need to take the time to learn how to use what they have. If you already have a good computer, a charting platform/data provider, and Excel, you can do tons of analysis if you learn how to use them. Go take a spreadsheet class or buy a book. You will find that a lot of trade tracking and model building can be done in a piece of software that you already have. If you are already well versed in the use of spreadsheets but require more analytics, it might be a good idea to finally get that back testing, option analytics, or other software or data provider that you need to do further analysis. Basically, investing in technology means looking at what you are doing that is taking up your time and deciding what you can do to make it more efficient. The less time you need to spend scanning, updating, etc. the more time you can spend researching new ideas, the more time you’ll have to spend with your family-now there’s a great investment.
8. Research, Research, and a Bit More Research — This is fairly self explanatory: Most of the best investors in the world are voracious readers. They read about trading, security analysis, risk management, economics, general business, science, manufacturing, philosophy, math, etc. Essentially they read about everything. You would be surprised how many good trade ideas were born in a book or magazine that had almost no direct relationship to the idea itself. Of course the other benefit is that you also get a lot of ideas that are directly related to a potential trade. Continuing education is one of the best things that you can do to enhance your trading results. Research is just another name for continuing education.
9. Be healthy — Some people may balk at this idea, but the healthier you are the better you are able to focus and think. The better you focus and think, the better you can function. The better functioning you are, the more you can get done and the better you can trade. Aside from better functioning, you will also live a longer and more enjoyable life. Health has countless benefits. Invest in your health.
10. Be a Critical Thinker — Critical thinking is not the same as pessimistic thinking. Critical thinking is a mental process of discernment, analysis, and evaluation. Critical thinking allows you to find out the pros and the cons of an investment. It allows you to be objective and make more of the right decisions and less of the bad ones. Critical thinkers look behind the news, the PR, the spin, the figures. Critical thinkers look for bias, conflicts of interest, puffing, and spin. If all you see is the potential money you can make in an investment, then you need to start thinking critically. Doing otherwise will simply take money away from you and give it to someone else.
We could talk about each of these for hours. We could also make this list 100,000 items long instead of 10, but that would be a waste of your time and ours. Trust us, following these 10 points will help 99% of the investors and traders we know, and they will help you.
Happy Trading and Happy New Year,
The Macro Trader
P.S. If you want to receive our Macro Trading 101 course just put your e-mail in the box below.