Trading Success

The Two Ingredients Needed For Trading Success

There are two necessary ingredients of trading success and it sometimes seems as though they are at odds with one another: prudence and aggressiveness.

Prudence is all about staying in the game with proper risk management, position sizing, and selectivity of trading.

Aggressiveness is all about making the most of the game with proper risk taking, position sizing, and assertiveness of trading.

Depending upon the frequency of your trading, it is good to have a loss limit to constrain the downside each day, week, and/or month. If that loss limit is set prudently, it will keep you in the game (psychologically and financially) during normal, expectable periods of drawdown.

Less well appreciated is that the daily/weekly/monthly loss limits should also serve as benchmarks for your profitability. If a trader has a loss limit of X, he or she should make X or more during that period of time. Thus, for a developing trader who has a $1000 daily loss limit, we should see in the span of a month occasional daily gains of $1000 or more. It is that ability to make the daily limit and not lose it too often that provides good risk-adjusted returns: the ability to make a good amount of money per unit of risk taken.

Many traders lack prudence and trade aggressively, so that their big losing days outnumber their big winning ones. Eventually this leads to trading stress and possible blow up of the account.

Many other traders trade with prudence but not aggressively, so that they don’t have many large losing days and they also don’t have many large winning days. Implicitly, they’re trading to not lose. Eventually this leads to a lot of wasted effort and frustration.

Trading with prudence and aggressiveness means that–during the life of the trade and during preparation for the day/week–you must engage in prudent self-talk and planning and you must engage in aggressive self-talk and planning. In practice this might mean mentally rehearsing where your trade is wrong and planning a stop out (prudence) and also mentally rehearsing what tells you your trade is right and planning an add to the position. In practice it might also mean using the information from a losing trade to place an even larger trade in the opposite direction.

The point here is that your planning and your self-talk have to embrace both prudence and aggressiveness if your trading is to integrate these elements. Many performance fields–from being a fighter pilot to being a chess champion to being a race car driver to being a football quarterback–require the combination of prudence and aggressiveness. Your trading statistics will tell you how well you are doing with both of these vital trading ingredients.