Time and time again I have discussed the necessity to trade to trade. One thing that goes hand in hand with this trading commandment is the other commandment which is to protect your capital.
Successful professionals in occupations throughout the world use tools to accomplish their goals. Whether the tools are tangible such as a doctor's stethoscope or intangible such as knowledge and discipline, these tools are cared for by the professional who uses them. A surgeon doesn't drag his stethoscope on the floor as he walks down the hall and a mechanic doesn't leave his tool box open and out in the rain.
As a professional trader, your tools consist of your ability to read and understand charts as well as mental and emotional discipline to follow your trading rules. Don't treat this in a reckless, careless fashion. Money in your trading account is your most cherished tool and you must guard it with your life.
Statistically, 90 percent of all traders lose the money in their trading accounts in the first six months to one year of trading. If you can hang in there for one year, the statistics for success get much better. After two years it really improves dramatically.
As you sit and read this, somewhere in the world someone is chasing a trade, moving their stops to give the trade "more room," overtrading, buying at a retail point, selling at wholesale or opening a position that's simply to large. In other words, they are treating their capital in a reckless fashion. They get caught up in the excitement of the trade.
I've been there as well early on in my career and I have the losses to prove it. Always keep in mind that even in what seems to be a perfect set-up for a trade, when you open the position, anything can happen. Even though you may have done your homework extremely well to avoid all unnecessary risks, a certain percentage of your trades will lose money. Don't add to this eventuality by making careless moves or you to will become a statistic in the trader bone yard..
Traders who make six or seven figures a year protect their trading accounts like a mother bear protects her cubs. They are cautious with every trade and their discipline is unwavering. Remember, trading is a business and you are going to have the typical expenses involved in owning and operating your own business.
A trade in which we lose money is not a loss; it is an expense trade... a normal part of doing business. Professional traders look at this as a routine business expense as well. They don't compound the problem with carelessness. The famous Jesse Livermore was once quoted as saying, "I made most of my money sitting on my hands." In other words he never felt compelled to trade unless conditions were perfect.
Always ask yourself three questions prior to opening a position:
- What is the purpose of this trade and why am I opening this position. Is the setup perfect
- Is my entry time frame also set up perfectly for an entry? If not, I'll wait.
- Have I planned my trade in terms of a stop loss point and profit targets. "Plan your trade and trade your plan", discipline, discipline, discipline!
Once you become consistently profitable at trading, it truly becomes a very mechanical process. With practice you'll soon be able to answer the questions above in two seconds or less. In this odds based business we want to put as many odds as possible in our favor. Having a solid trading plan and having the patience to wait for those high probability trades will put you well on the path to success and preservation of your capital.
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