Keys To Good Trading

Asia Charts established the “SR Traders Hub” in November 2007. This is our unique facility that provides daily live coaching to our students. This allows newbie traders to practice what they have learned at our seminars and practically see the ‘behind-the-scenes’ workings of professional day traders. These sessions have been highly beneficial to our students and it is not uncommon to hear our students recoup their investment in Asia Charts just by trading a few days with us at our SR Traders Hub.

However, what is more important is my observations of novice traders and the obstacles that are preventing them from being successful. Through these Traders Hub sessions and interactions with the students, I realized that most novice traders are weak psychologically and despite having our trading system, they do not follow it strictly enough to make substantial gains from the markets.

This is very natural and common for most novice traders. Therefore for the benefit of our students who have not had the opportunity to join us at our Traders Hub, I would like to summarise my findings and stress on the importance of mental fitness to complement our SR Trading System.

Good trading requires two things in place:

i. a sound plan
ii. discipline (self-control)

Trading is essentially about decision making, more importantly it is sound decision making. Most people find it difficult to process information and make a good decision especially when there is information overload. Therefore, for good trading itself you need a plan to tell you what stocks to buy, when to buy, how much to buy and when to sell.

If you have already attended our course, you are already in possession of a very good trading system to help you overcome this information overload problem and make informed trading decisions.

Now, armed with a good trading system, you would expect most people to ‘cruise’ along in their trading activities. However, the common problem I observed is that most students do not use the system as it is intended to be used.

For example, in one recent case a student exited a stock prematurely and when I asked him why he did that resulting in him missing out on a major upward movement subsequently, he replied that he observed that “MACD crossed down” therefore he sold off immediately. But I never taught that in the first place!

In another case, when another stock had a breakout signal, some students did not act on it because “RSI overbought”, but again this was not taught in our syllabus.

In summary, one common failings I noticed is that novice traders tend to modify their trading system by adding “extras” hoping to make it more “reliable” in search for a perfect system – the holy grail! They add in other indicators such as MACD, RSI stochastic and such. As a result they got all sorts of mixed signals and end up in a confused state that lead to poor decision making instead.

Trading must be simple. A trading system must be simple, the easier it is, the better. Over at Asia Charts, we have already provided you with a sound plan to trade. Stick to it and do not “experiment” unless you are very good in research and back-testing.

Next, good trading requires self-control.

To be successful in trading, 40% comes from risk control and whereas 60% depends on self control. Of the risk control, 50% is money management that is your position sizing and 50% is market analysis that is your trading system.

Risk control is important and if you focus on managing your risks, the profits should take care of itself. As a trading wizard, Bruce Kovner, once said,

“Risk management is the most important thing to be well understood. Under-trade, under-trade, under-trade is my second piece of advice”

Now, while we know that risk control is important and you can manage it with good money management and a sound trading system, however the challenge for a trader is as how Dr Van K Tharp, a top trading psychologist, aptly puts it,

“Most successful traders achieve success by controlling risk.

Risk control goes against human natural tendencies. Risk control requires tremendous internal control

Trading is a game of probability. There is no perfect game. Win and lose is part of the game but accepting losses require tremendous internal control. Therefore you will need to know how to control your mental state regardless what happens in the market.

To put it simply, a lot of people may have a plan when trading but if they have a disruptive mental state, it would easily affect their discipline to follow their game plan.

For example, I sometimes observe students getting angry or upset when they have to take stop-losses. Or they start blaming the market or external events for their trading predicaments. Clouded by negative thoughts, they usually lose their self-control and the discipline to follow the trading system.

Firstly, we need to understand that people take actions based on their feelings. Therefore if you feel good, you will be in a good mental state and that results in good decision making. However, if you do not feel good, it would affect your mental state and result in poor decision making.
So if you see a trading setup, feel good about it, act on the feeling and the money will come naturally and frequently. On the other hand, the next time you see a setup and do not feel good about it, do not take the trade.

Basically we need to get rid of the negative states so as not to interfere with our trading decisions. We get into a negative state mostly because some of our standards have been violated and cause us to feel emotions such as anger, regret, anxiety, impatient or frustrated. We must remember that our negative reactions have no effect on the market. On the other hand, it has a great effect on the trader that has those negative feelings. Whether you are angry or not, the market does not know nor care about it. You cannot simply call the SGX to complain just because you lost money in the markets! But it will affect you greatly if you continue to feel frustrated.

In summary, we need to cultivate our ability to respond and to exercise self control. Whenever a situation arises, we need to think clearly how to respond to it. Do not go about feeling like a victim and start laying blame. Instead, respond appropriately and positively such as to review how you could have done better or consult your mentors to gain more knowledge.

Most trading problems result from an inappropriate state of mind. People who are disciplined (internal control) are able to respond well to what happen in the markets. They are not victims of their mental states. Focus on what is going on INSIDE you instead of what is OUTSIDE you.

To Your Trading Success,

CK Ee,

COO and Chief Trainer
Asia Charts Pte Ltd