Many of us have read countless trading articles stating how you can; “make it in trading if you try hard enough, never give up, have a winner’s attitude”, which is why we deliberately avoid writing ‘you can dream the dream’ style articles. The longer you’re in this business you realise there’s several key attributes that you need to have, or need to develop in this business, in order to succeed, I was recently reminded of these attributes when perusing a forex trading forum…
I tend to skim read articles and forum discussions and then laser in on the pertinent points looking for clues as to the credibility of the contributors before wasting too much time. My attention was immediately drawn to one of several points made in relationship to a much misunderstood and maligned trading concept – ‘survival’.
If you’re relatively new to trading it can be quite daunting and a mysterious journey when you’re just starting out, many of the skills you need to thrive in the industry take years to develop. Two in particular, surviving and managing risk. can take a while to ‘sink in’ as concepts.
No matter how many times it’s explained to inexperienced traders that they should minimize risk when developing their trading strategies and simply concentrate on surviving first, by taking as little risk as possible with their funds, the advice can often fall on deaf ears. But it really can’t be emphasised enough that you should take small positions and have a medium to long term view on the industry. Whilst the accepted wisdom is to risk 1-2% on each trade there’s absolutely nothing ‘wrong’ with retail traders lowering that risk to perhaps 0.5% per trade, or lower. I’m fond of using this analogy in an attempt to prove a point…
Lets imagine that you’ve developed a great reputation in the industry and you’re hired by a top hedge fund. Suddenly you’re placed in charge of a large fund, let’s say $20 million. Your target is to perhaps double that fund inside twelve months. However, your boss is absolutely obsessed by risk, as his directors are and your permitted drawdown is only 3%, breach that and you’re out of your job with a tarnished c.v. So what’s your options? Well you’re not going to risk 1-2% of the account size, you’ll scale risk right back to perhaps between 0.1% – 0.2% knowing that 30 losing trades in sequence is never going to happen. You also know that with the effective use of dynamic trailing stops your loss per trade could possibly be cut from 0.2% to perhaps half, a loss of 0.1% per trade. Can you see the point we’re making? No? well here’s the punch line..
You’re your own boss when trading independently and you should treat your trading account with the same obsessive protection as if you were a leading light in the industry managing $20 million with your boss breathing down your neck. Your savings should be as precious to you as a $20 ml fund, you lose them and you’re out of the game, it’s over. Bottom line; you can develop strong survivorship skills by lowering your risk to an absolute minimum, if you do that then your chances of success in this game is multiplied exponentially. It really is that straight-forward.
