In part I we examined where traders can go wrong. In an essentially fifty-fifty business, it is widely acknowledged that over 80 per cent of traders lose money — so, clearly, most are doing something badly wrong. Conversely, there can be good profits for the minority who do well. I should add here that, of the minority of successful traders, some will achieve success through chasing risk or simply through luck (please refer to Fooled by Randomness by Nassim Nicholas Taleb for more on this). For most of us, though, relying on luck and risk-taking will result in failure, so I hope that by now you will want to focus on trying to make good decisions.
In part II we begin the process of building our trading and analysis techniques. We do this with some key concepts that must be incorporated into our methods:
- We must preserve our capital.
- We need to be able to trade in as many market conditions as possible.
- We need to understand the context of the price action we are seeing.
- We need to employ our System 2 — more thoughtful decision making that tries to overcome unreliable biases and heuristics.
Preservation of our trading capital is crucial and should be our first goal. We can only take advantage of good trading opportunities if we have funds to trade with. During the course of my career I have seen too many traders lose their capital chasing great profits, when in fact they were taking too much risk. I am actually a very conservative trader, hence ...