Rules you should follow

Do Not Be Hasty

There is no situation in the world that causes more hasty behaviour in novices than speculation in the financial markets. It almost seems as if the markets will suddenly close in the next few weeks, or as if current opportunities were unrepeatable and unique.

You do not have to be excessively anxious in order to earn, and yet this anxious eagerness often characterises those who approach the trading world. Many see the market as a money-making machine, something easy. Maybe you have invested money and time (in courses), which makes you want to earn money fast. In the frantic world in which we live, the desire for instant gratification can become a driving force, but that is not always a good thing.

Two Italian proverbs say: “the hasty cat had blind kittens” (the English equivalent is “more haste, less speed”) and “haste is a bad counsellor” (which I think is said all over the world). The prospect of an immediate gain often pushes you to predict the trend of a market, even when nothing is predictable, and this often leads to a loss.

Success in trading is built slowly, step by step, day after day. If patience is the virtue of the strong, hurry is the counsellor of the weak, of those who want everything immediately and do not enjoy small improvements. The only solution is to find an inner balance, one that lasts over time.

Keep It Simple

We live in a world where there is an overabundance of readily available data and information. However, an analysis that takes into account too much data is not necessarily effective. I have seen charts that were filled with so many indicators, trendlines and moving averages that I could no longer see the price.

I challenge you to understand anything that is going on in this chart.

With a system like this, if the indicators and signals do not all point in the same direction, you risk not opening any position for months. I have also read about sophisticated strategies, as if the more complicated a strategy is, the greater its chances of success would be.

You might also read articles and analyses on financial sites, listen to TV interviews, or hear someone say something, while somebody else thinks differently. All this does is create more confusion. It increases your insecurities even more and makes the situation worse.

There is a beautiful line by Paulo Coelho: “the simple things are also the most extraordinary things, and only the wise can see them.” In 1931, Clare Boothe Brokaw (later Clare Boothe Luce), an American author, politician and U.S. ambassador, wrote in her novel Stuffed Shirts: “the height of sophistication is simplicity.”

Thousands of gurus are eager to make the matter complex, loading simple arguments with theories and building ever more complex strategies in order to sell courses, books and trading signals.

Always rely on information that is clear, simple and accurate, in order to avoid getting into trouble.

Think for Yourself

In trading, there is one aspect you should always keep in mind. When a market is in a strong uptrend that attracts many investors willing to buy at any price, it might be the right time to get out of the market. Let me tell you a story that many of you may already know.

The story is often told about Joseph P. Kennedy Sr., the financier and father of President John F. Kennedy. In 1929, according to the tale, a shoeshine boy gave him stock tips. Kennedy reasoned that if even a shoeshine boy was giving stock tips, the market was full of people with no real expertise, and it was time to get out.

There is no solid evidence that the episode happened as told, and at least one of Kennedy’s biographers dismisses it. But the lesson holds: when everybody, even people with no experience, is confident about the market, it is time to be cautious.

Returning to herd behaviour, do not fall into the mindset that if everyone is investing, the markets will definitely go up, or that if you buy, you will earn. Remember, “all that glitters is not gold.” Sir John Templeton, an American-born British investor, fund manager and philanthropist, once said: “If you want to have a better performance than the crowd, you must do things differently from the crowd.”

You have to remain detached from what is happening around you and always think with your own head, without being affected by what you see and hear, or by what others do.

Diversification

A famous proverb says “do not put all your eggs in one basket.” The reason is easy to understand. The wisdom of proverbs can be applied to every field, even to trading.

I assure you that if your portfolio is adequately diversified, you will remain much calmer, even whilst a storm is battering the financial markets. You should always live a quiet trading life, and to achieve this, diversification is essential. Having multiple tools, strategies and solutions is vital for ensuring you sleep soundly at night, even in stressful situations.

Diversifying will enable you to live through your trades calmly, no matter what happens, and when things are quiet, you are emotionally serene. And when you are emotionally serene, you make fewer mistakes. So, calm and inner peace will lead you to the best results. To achieve this, an important step is to have precise and diversified investments.

Paraphrasing the above proverb, I find it natural to say: “do not put all your money into one asset.” Do not invest your savings in one asset, be it equities, forex, commodities or something else. Instead, invest them in more than one market. By investing in multiple markets, you can significantly reduce the risks, although you can never eliminate them completely.

Be Humble

Presumptuous people often get hurt. This comes from the classic tendency to be overconfident about your own abilities, which can become fatal for your survival in the markets. It leads you to evaluate your investments without accurate information. You tend to overestimate the accuracy of your analyses and, as a consequence, you think you are immune from error.

You have to be humble towards the markets, and not grow presumptuous when things start going well. Always be humble, and eager to learn and improve, regardless of whether you have been trading for a week or thirty years. It is imperative that you keep on evolving, because in trading, just like in life, you never stop learning.

Arrogance and lack of humility in trading are typical of “false prophets.” These supposedly great market experts, who think they know what a currency pair or stock will do, believe they are never wrong.

They are like meteors in the trading world, whereas your goal is to stay in the business for a long time, making a steady income month after month, year after year.

When you incur losses, do not make excuses for your results. I have heard thousands of excuses: the broker did not execute the stop-loss order, a piece of news was released that I could never have foreseen, and the fault lies with other traders who are idiots. Do not look for excuses: understand your mistakes and work on them.

Always remember that the first step to solving a problem is recognising and admitting an error.

Be Objective

You have seen how difficult it is to close a trade that is at a loss and to hold a profitable position. Our state of mind has a significant influence on how objective our trading decisions are.

Your mind does not perceive reality correctly; it is “distorted” by your feelings, opinions, what is happening around you, the judgments of others, and so on. You have to be cold and distant when you observe the markets.

I have already said this, but since, as the Latin saying goes, “repetita iuvant” (“repeated things help”), I will say it again: do not fall in love with your ideas or opinions. Do not fall in love with a currency pair or a stock just because it has made you money in the past. You always have to look at the market with respect and learn to recognise ever more clearly the differences between what you see, what you feel, and what you think.

When you trade, being objective is far from easy. Oscar Wilde, with his usual irony, wrote: “It is only about things that do not interest one that one can give a really unbiased opinion.”

You always have to be honest with yourself and look at each trade objectively, without creating false illusions and expectations, but rather by looking concretely at the real possibilities of earning and at the probability of closing a trade at a loss.

You have to be honest with yourself also because, in life, “lies have short legs” (this means that lies never get far: the truth always comes out). And in trading, these legs are even shorter, so by lying, you will only end up harming yourself and your trading account.

Define Your Goals, Be SMART

In trading, as in life, having goals is very important, but these become useless without a well-defined plan.

Specific: define clear and precise goals. For every trade, you need to know how much you are willing to lose and how much you want to earn. Otherwise, as you have seen earlier in this course, you will cut your gains and let your losses run. If you already know how much you risk losing (if the trade goes wrong), you will handle your emotions with far more tranquillity.

Measurable: each objective should be quantifiable, so you know when you have reached it. To do this, you need to create a measurement system that allows you to keep track of your progress and achieve your final goal. A goal is measurable if it includes a series of steps, which lets you realise if you are moving in the right direction throughout the process.

Achievable: if your end goal, and the parameters you have created, are not realistic, you may come to see the project as a failure. For this reason, you have to set realistic goals and connect them to your general plan, with many small plans helping you handle the individual steps that lead to your target. In this way, even if you reach a dead end, taking these small steps will allow you to find ways to overcome the obstacles.

Relevant: although it is essential to set great goals, these must, above all, matter to you and fit your overall plan. You have to decide whether it is worthwhile or not to spend time and resources on achieving them. You always have to keep your goals in mind if you want them to deliver the results you want.

Time-bound: your goals cannot be endless; each target must have a limited time period. That time period can be weeks, months or years, depending on the complexity of the goal itself, but there must always be an end date. Otherwise, you risk not devoting the right amount of attention to achieving the final results. A deadline is also an excellent way of motivating yourself.

Respect Your Money

It is a concept that you have already seen. You have to show respect and appreciation for money in the same way you would for anything else of value in your life. You must have the utmost respect for money, because it is thanks to money that you earn by trading, and if you want it to last, you have to take care of it.

Always remember that your goal with trading is to get an income month after month, year after year. You can only get this if you give money the right importance. If you use the earnings from one trade to become particularly aggressive in your next trade, you are not respecting your money. That money, once earned, is yours. It is your property.

You have to value money in the same way: the money you earn must be worth as much as the money you invested or deposited in your trading account, because you got that money by working hard.

According to the Roman historian Suetonius, the emperor Vespasian replied to his son Titus, who had complained about the tax he had imposed on urine (collected from public urinals), by holding a coin under his nose and asking whether it smelled. When Titus said no, Vespasian answered that it came from urine. From this episode comes the saying “pecunia non olet” (money does not stink), which means that money is money, regardless of its origin.

A proverb says: “A penny saved is a penny gained.” In the same way, if you avoid wasting money in aggressive trades (money you got from a good trade), you save that money from a likely loss (and therefore earn it twice).

The solution to all the psychological problems you have seen so far has a name: money management. A clear plan with clear rules must be respected. The more aware you are of what might happen with a trade (loss or gain), the more your emotions will calm down. And the calmer your emotions, the more quietly you can get on with your work, performing well and improving the quality of your life, which is also an essential aspect.

Money management is the starting point for a trader and the most important aspect of this business, and you will see it in detail later.