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Trading Lessons from the Market Wizards

For novices and professionals trading the forex market, there are a couple of must-read books. And right near the very top of the list is Jack Schwager’s, The New Market Wizards.

The book itself contains so many trading gems from Jack’s interviews with various pro traders, so I thought I’d summarise a few really key points and lessons.

– This may sound incredibly stupid, but ask yourself if you actually rally want to trade? It’s pretty common for people to get seduced by the idea of trading, only to discover that they really don’t want to do it, or even enjoy it.

– Determine your reasons for trading. Ask yourself ‘Why do I want to trade?” If you say excitement, then don’t waste your money – go skydiving to get your kicks instead with the money you’ll save.

– Choose a trading method that matches your personality. This is crucial, some people are suited to scalping, some to trend trading, some to Forex, some to stocks. There’s more than one way to skin a cat, so to speak, so choose a method that suits your personality and lifestyle.

– You MUST have an edge. Even with the best discipline and money management skills, without an edge, you’re guaranteed to ‘bleed to death’. It’s worth mentioning that if you don’t know what your edge is, you don’t gave one.

– Develop a method. In order to have an edge, you need a trading method. This goes vice-versa too.

– Shortcuts rarely bring success. Developing your trading approach means research, brain power and observation. Expect that it will take a lot of time and hard work. Expect that you’ll hit a few dead ends and fail several times before you find the right approach to deliver success to you. You’re playing a sophisticated game against thousands of professionals with access to more information than you, better equipment than you, and probably much more training than you. Why should you assume to be better than them? If trading was that easy we’d all be millionaires.

– Skill vs. Hard work. As a general rule, exceptional trading performance requires you to be both talented and hard-working. Virtually anyone CAN be a profitable trader, but very few will become supertraders. Be realistic with your goals.

– While hard work is preparation for Forex trading, trading itself should be effortless. Think of it like archery, whenever you’re putting effort, force, straining or struggling… it’s wrong. You’re out of sync and harmony with the market.

– Money Management and Risk. Let’s break this down plain and simple:

– Never risk more than 5% of your capital on any

– Predetermine your exit point before you enter a trade

– If you lose a predetermined amount of your trading capital, take a step away, analyse what went wrong, and slowly build back confidence using the smallest possible position size to get back in sync with your strategy and the markets.

– Trying to profit in the markets without a trading plan is like building a house without a blueprint; Costly and avoidable.

– It’s the most popular word in the trading vernacular – Discipline! Why? It’s a prerequisite for risk control and it needs to be applied without hesitation in choosing which trade to trade.

– No one is immune to bad trading habits, but you can keep them latent.

– Regardless of whether you win or lose in a trade, YOU ARE responsible for your own results.

– You need to do your own thinking. That means you make your trade decisions based on your trading system / criteria. Don’t be swayed or pay attention to other opinions, instead stick with YOUR edge.

– The ability to demonstrate unwavering confidence in ability is a universal trait amongst the traders interviewed in the book

– All good traders know that taking losses is an unavoidable element of trading. This doesn’t hinder their confidence. Instead, because they’ve demonstrated an edge in their strategy, they know that over the long term they will win!

– Trade only when you feel confident. If you’re rattled or on tilt, take a walk.

– The urge to seek advice of others shows a lack of confidence in your strategy.

– Waiting for the right opportunity always increases your probability of success. You don’t always have to be in the market in order to be highly profitable. Being overeager to trade in order to win back losses is a recipe for disaster.

– Not too dissimilar to the above, but patience. This doesn’t only mean waiting for the right trade, but staying with the trades that are working too. It’s quite common that novice traders will enter a trade quite well, but they fail to capitalise on a good entry. Let winning trades run until you’ve got a valid reason to exit.

– The idea of ‘low risk’ as a lot of merit. It combines two vital elements: Patience and risk control.

– When there are varying probabilities, it makes sense to vary your position size. The higher your perceived (and proven) chance of a successful outcome, the larger (within reason) your position size should be.

– It’s not altogether necessary that you get in or out of a position all at once. Scaling in and out of a trade can often be helpful in building positions, and also maintaining a position that’s trending well.

– Never be loyal to a trading position.

– Hope is a bad word when it comes to trading. One can hope a losing position will turn around; hope the market comes back; hope for a reaction so you can catch a missed trade. Just don’t!

– Scared money never wins. If you’re risking money that you can’t afford to lose, your emotions are going to cloud your judgement, big time!

– Pick bottoms, get stinky fingers. There’s no point in trying to pick every top or bottom in a market move. Catching just part of an established, trending move is completely fine, because momentum in that particular direction already exists.

– Maximize your gains, not the winning rate. The success rate in the number of trades you take isn’t as important as the size of your gain from a given winning trade. In fact, it can often be inversely related to your performance.

– Remove loyalty to your trading positions. NEVER stay in a position because you’re loyal to it.

– Reward yourself by taking partial profits on positions.

– One of the dirtiest words in the trading industry is ‘hope’. Hope is what makes people procrastinate while in a losing position, hoping that the market will come back. Hope also implies a predetermined expectation of a trade, instead of reacting to what’s actually happening in the market.

– Don’t do what’s comfortable. Do what’s right!

– Scared money never wins. Risking money you can’t afford to lose results in amplification of the emotional pitfalls of losses. The market will not tolerate the carelessness of those who trade from desperation.

– Think twice when you get let off the hook by the market.

– A narrow or closed mind is a terrible trading trait. The market is unpredictable so an open mind is one of the more valuable tools of all successful traders. Think ‘strong opinions, loosely held’.

– The forex market is an expensive place to look for excitement. Trading for excitement has absolutely nothing to do with trading for success.

– If there is any emotional state that you need to associate with the markets, it’s the polar opposite of excitement. All successful traders are able to detach themselves from their emotions regardless of what the market throws at them.

– Identifying and then eliminating stresses in trading is paramount. Stress is a sign that something is wrong, so identify the cause of your stress so you can eliminate it.

– Pay significant attention to your intuition. Intuition is subconscious experience that doesn’t have the restrictions of the constraints of over-analysis

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