Discipline for the Impulsive
Lets face it. I am never going to be a selective trader. I will never sit around with the patience of a sniper or the calm control of a deep sea fisherman and wait for the “perfect” one. I will always want to explore, always want to get involved, always want to trade in the market. If you are at all like me then all the talk in the world about discipline will do you no good. You’ll stand down for a while trying to pick your spots, but eventually you’ll give in to the siren call of the market and will start putting on trades every day of the week.
Trading is as much a study of self as it is a study of the markets and I am convinced that if your trading style clashes with your personality the pressure will ultimately crack you. That’s why if you want to trade for a long time, perhaps even a lifetime, you need to trade in a way that complements your personality rather than suppresses it.
So if you know you are going to be a bit impulsive, if you know that you are going to trade first and think later, if curiosity and experimentation rather than caution and certainty is what drives you, then there is only one rule that you absolutely, positively must follow. To trade more you must trade less.
As every retail shop owner will tell you there are two ways to get leverage -- you can turn over your inventory or you can borrow a lot and increase your stock. When you are trading frequently, across several currency pairs then you are in fact increasing your level factor without even realizing it. So if you want to trade a lot, you need to trade smaller. How small? Well that’s an individual question but if you are like me and use a 50 pip stops on your intraday trades then you cannot trade more than 2:1 lever factor risking about 50 bps per trade.
When you examine most of the blows ups both individual and institutional they are almost the result of two behaviors -- the refusal to takes stops and trading too big. While we cannot do much about our personality (nor should we really have to) we can learn to manage our risk by controlling our trade size. Whatever you default trade setting is -- cut it in half and then maybe cut it in half again.
When it comes to trading more frequently, small is beautiful.