The Education of a Trader (3)

BarroMetrics Views: The Education of a Trader (3)

So far I have been  considering the ‘how’; I am answering the question, ‘how I acquire the knowledge I need’? In this blog, I want to turn to the ‘what’?.

Most of us have heard and read that success depends on acquiring the know-how to construct a set of rules that form the base of our trading strategy and risk management. We have also heard that we need ‘winning psychology’.

I define winning psychology as a set of tools and concepts that facilitate consistent execution of our rules. That said, you can immediately discern that it would be  intensely personal to craft the tools and concepts. Some areas you may want to consider are:

  1. What will I need so I can improve ?At the very least, we’d need a journal that records our emotional responses and observations about the market. We also need to keep a record of our trades. The latter will form the basis for analyzing our performance.
  2. How to integrate your emotions and your reason. It is now known that the best decisions are the ones that come about when both are in sync.
  3. What are the habits and routines that I want to establish that will help my trading success.

On risk management, you need a strategy on how to manage winning positions – what I call trade management and a set of tools to manage position sizing and risk control.  Here I’d start by focusing on determining what constitutes a ‘normal’ position size. True, you would need a set of stats that many of us don’t keep.

If you fall into this category,  the Turtle position-sizing formula is as good as any.

(% of capital to risk x Capital)/(Dollar Value of 10-day ATR).

What the formula lacks is the trader’s variables: his average dollar win, average dollar loss, win and loss ratio. There are better position-sizing formulas around but all require the trader’s personal input.

In this area, you also need to consider:

  1. maximum portfolio risk (when you are trading more than one instrument)
  2. when to allocate winnings to the trading capital base and when to deduct losses from the base.
  3. when not to trade.  What number of consecutive losses are you prepared to bear before calling a break? What maximum loss will suggest you need a sabbatical from trading?

I’ll conclude the series in the next blog.

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