Rules you should follow

With systems such as this, if all the indicators and signals fail to go in the same direction, this causes you to risk not opening positions or trading for months. I read, also, of sophisticated strategies, as if “the more complicated the strategy” actually is, “the greater your odds of success” will be.

You might also read articles and analyses on financial sites, listen to TV interviews, or hear someone say something; somebody else is thinking differently... And all this does is create more confusion for you. This makes your insecurities increase even more, making the situation worse.

There is a beautiful phrase by Paulo Coelho that reads: “the simple things are also the most extraordinary things, and only the wise can see them.” In 1931, Clare Boothe Luce, an American author, politician and U.S. Ambassador, wrote, in a play: “the height of sophistication is simplicity.”

Thousands of gurus are eager to make the matter Complex, filling simple arguments with theories and building increasingly 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 to yourself

In trading, you always have to look at one aspect. When a market has a marked uptrend which attracts many investors that are willing to buy at any price, that might be the right time to get out of the market. Let me tell you a story that many of you may well already know.

1928, in New York City, John D. Rockefeller was having his shoes shined. The shoeshine boy, presumably not knowing who Rockefeller was, started giving him stock tips. Rockefeller took his shoeshine boy’s advice, but not in the way you might expect.

He decided that if a shoeshine boy, making a penny a shine, was giving stock tips, it was time to get out of the market. He did, and this is the reason his family were able to survive the Depression, enabling him to continue being one of the richest men in history.

Returning to herd-behaviour, do not stick to the mindset that if everyone is investing, then the markets will definitely go up, and equally, 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, hear and do 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 always remain in an oasis of calm and tranquillity, 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 weapons, strategies and solutions is vital for ensuring you sleep soundly at night, even in stressful situations

Diversifying will enable you to live your trades quietly, 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. And to achieve this, an important step requires you to have precise, but also 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 into 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, in some instances, even annul them.

Be humble

Presumptuous people often get hurt. It is due to the classic tendency of being over-confident about your own abilities, which then becomes fatal for your survival in the markets. It leads you to evaluate your investments, but not with accurate information. You tend to overestimate the accuracy of your analyses, and as a consequence, you think that 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 the peculiarities of “false prophets.” Great experts of the markets, who think they know what a currency pair or stock will do, are the people who think 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, don’t make excuses for your levels of success. 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 get out of a trade when it is at a loss and to hold a position of profit. Our state of mind has a significant influence on objectivity in trading decisions.

Your mind does not have a correct perception of reality, rather, it is “distorted” by your feelings, opinions, what is happening around you, the judgments of others, etc. You have to be cold and distant when you observe the markets.

I have already said this, but since, as the Romans claimed, “repetita iuvant” (“repeating does good”), you do not have to fall in love with your ideas or opinions. You do not have to fall in love with a currency pair or a stock just because it has, in the past, made you earn. You always have to look at the market with respect and learn increasingly to recognise the differences between what you see, what you feel, and what you think.

When you trade, being objective is far from easy. Oscar Wilde 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 actual possibilities for earning, and the probabilities you have of closing a trade at a loss.

You have to be honest with yourself, also because, in life, “lies have short legs” (this means you cannot get away with a lie, 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 in the second chapter, you will cut your gains and let your losses run. If you already know how much you risk losing (if the trade goes wrong), your emotions will be faced 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 could be led to perceive a project failure. For this reason, you have to set realistic goals and connect them to your general plan, with many small plans serving to help you handle the individual steps that will take you to your target. In this way, even though you get to a dead-end, taking these little steps will allow you to find ways to overcome the obstacles.

Relevant: although it is essential to set great goals, these must, primarily, be realistic. 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 yield the results you want from them.

Time-Based: your goals cannot be endless; each target must have a limited time period. That time period can be of 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 and proper considerations towards achieving the final results. Also, having an expiration date is an excellent way of motivating yourself.

Respect your money

It is a concept that you have already seen. You have to demonstrate respect and appreciation for money the same way you would do for anything else of value in your life. You must have the utmost respect for money because it is thanks to it that you will 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 to the money. If with the earnings you got from a trade you then become particularly aggressive in your next trade, this means you are not respecting your money. That money, however, once earned, is yours. It is your property.

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

As the Roman emperor Vespasian once said, “pecunia non olet” (i.e., money does not stink). It means that money is money, regardless of its origin. This sentence was Vespasian's reply to his son Titus, who had complained about the urine tax his father had imposed.

A proverb recites: “A penny saved is a penny gained.” Likewise, if you avoid wasting money in aggressive operations (money you got from a good trade), you will have saved that money from a likely loss (and therefore, earned twice).

The solution to solving 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 you are aware of what might happen with a trade (loss, gain), the more you will be able to see your emotions decrease. And the more your emotions are lowered, the more quietly you can get on with your work, performing well and increasing the quality of your life, which is also an essential aspect.

Money Management is the starting point for a trader, it is the most important aspect of this business, and you will begin to see it in detail in the next chapter.