The two key skills that separate winners from losers are risk control and self-control.
Managing risk in your account is pretty straightforward once you know the formulae, which you’re about to see. A professional trader may allocate up to a third of his research time to calculating money management angles, as he compares risks and rewards for different stocks. He discards many stocks that look attractive but whose risk parameters don’t suit him.
How much time does an average beginner spend calculating and managing risk? Most likely zero, zip, nada. Right before placing a trade he may briefly scratch his head or some other part of his anatomy and decide to double his usual size because he made money in the previous trade or skip this trade because he lost money in his previous trade. Both choices are equally wrong. If you let your latest trade determine what size to trade next time, it means giving up control of trade management. If you follow the formulae in this book for controlling risks, you’ll accomplish a goal in which most beginners fail.
The second essential skill – self-control – is harder to quantify. Fortunately there is a clear and concrete tool for implementing and measuring self-control: keeping good quality trading records.
After Entries & Exits, my book of interviews with traders, was published, people kept asking what those traders had in common. The 16 traders in the book – men and women, long-term and short-term traders, stocks, futures and options traders, American and foreign traders – what did they have in common?
They all kept excellent records.
I say to my students: “Show me a trader with good records, and I’ll show you a good trader.
Show me a trader with poor or nonexistent records, and I’ll show you an average trader. And that’s a very poor sight because an average trader loses money. The majority must lose in order for a small, informed, and disciplined minority to make profits. We’ll pay attention to record-keeping as well as risk management in this book.