Adam Grimes has two decades of experience in the industry as a trader, analyst and system developer.

Adam Grimes.

Simple Trading Ideas that Make a Difference

Adam Grimes,

Trading is hard. We all know that, and, if we forget for a moment, the market is more than happy to remind us. Successful trading requires many skills and tasks. Writing an article on the most important thing in trading is virtually impossible because everything matters. Even the smallest point can make the difference between winning and losing.

It’s also very difficult to create rules that apply to all styles of trading. If you are a long-term fundamental trader, what works for you will be very different than what works for the 2-5 day trader who looks to pick off overbought/oversold spots. Even well-worn trading wisdom (for instance, let your winners run) does not apply to everyone and to all styles of trading! This rule could be very harmful to a countertrend trader who should be taking quick profits.

With this in mind, I want to take a few moments today and share some big picture rules that I think do have fairly universal application. These rules focus more on you, the trader, and the things you will and will not do. Let’s think about some of those small things — some of those little things that make a big difference.

Trading with an Edge

It seems obvious that we must have an edge to trade. Over time, over a large sample of trades, what we are counting on is that those small edges add up. However, I’ve seen too many traders struggle for too long doing things that simply do not work. Too many trading methodologies are unexamined, and traders don’t even really know if what they are doing has an edge. If you’re trading without an edge, you’re wasting your time and money.

This question must be asked and answered before we spend much time on anything else: does your system have an edge? What does that edge look like (in terms of magnitude and duration of signal)? And how do you know? If you don’t have solid answers to those questions, be very careful with putting risk on in the market.

As an aside, most things that are advertised or discussed in chat rooms fall into the category of not having an edge. Systems that depend on specific patterns (of price or indicators) should be testable; if they haven’t been tested and you can’t see the results, be very, very suspicious.

There are a lot of ways to make money in the market, but the apparent contradiction is that all of those ways are pretty hard to find. It’s hard work to find and maintain a trading edge.

The Discipline Rule

You have to be disciplined to trade successfully. No matter what your trading style, market, timeframe, risk profile – whatever you do, you have to do it consistently and with discipline. It’s easy to overlook something we hear this often, but the reason this advice is so often repeated is that it really is that important. However, there is one little detail that makes all the difference – if you are going to be disciplined, you must be disciplined all the time.

So you make your trading rules, and you refine those rules. You monitor how they work in real time, and you make adjustments as necessary. Your job is now simply to follow those trading rules – do what the rules say always. Again, I’d be willing to bet that every one of you reading this knows what I just said is important, but can you truly say that you are disciplined every moment, in every interaction with the market?

Sometimes you will hear traders say they are usually disciplined or they almost always follow their trading rules. Wrong. You are either disciplined or you are not – it’s a yes or no thing.

If you are disciplined 999 times out of 1,000, but you break discipline that one time, you are not a disciplined trader. There is no halfway, usually, mostly, or almost always – either you are or you aren’t.

This way of thinking is a good reminder because it forces us to be mindful of the damage we can so easily do to ourselves. All it takes is one slip – one trade held too far past the stop, one crazy addition to a losing trade, or one impulsive entry – to undo weeks of disciplined work. Not only can the financial impact be extreme (it’s not that hard to lose a month’s profits in five minutes), but the emotional and behavioral impact can be devastating. Once you’ve opened the door and done something silly, you are much more vulnerable to future mistakes. And, if you make money doing something stupid … well … that’s almost the worst possible thing that can happen to trader because you will do it again, and eventually the bill will come due.

This is another one of those simple rules that is so easy to overlook: you must be disciplined, and you must be disciplined every day, every minute, every moment, and every interaction with the market. If you are not always disciplined, you do not have the right to call yourself a disciplined trader.

Real Risk for Real Market Feel

All of our decisions, in everything we do, are based on a combination of rational analysis, emotional reaction (or analysis), and some degree of intuitive feel. Even if we think we are completely rational, we aren’t – these other influences are always there, and most smart traders/investors know how to harness them for good. Getting that intuitive sense can sometimes be hard because we don’t really know what we think about a position until we put it on. Here’s a so-simple-you-might-miss-it tool to help you get that feel: put on a position.

In my experience, it’s enough to put on a tiny position and see your P&L fluctuate. To put numbers to it, let’s say you are a stock swing trader who usually risks $2,000 on trades in individual stocks; maybe you put on a trade in the SPY (or equivalent) and trade small enough – no, tiny enough, that you only risk $50 on the entire trade. Or maybe, this might be the one time we don’t worry about position size and just put on a few shares. For another example, if you are a stock index day trader who normally trades a 10 lot, you only put on 1 (or even less than 1 if you can do it with an ETF.)

Why does this work? I think the reason is that the experience of having actual risk on in the market, even if it is tiny risk, is very different from sitting on the sidelines and watching prices. Being “in the game” has a completely different emotional context than watching prices. (This is one reason why I think new traders should move from paper trading to real trading by going through a period of small risk. Even if that risk is small enough that it is insignificant financially, it is significant emotionally and behaviorally.)

Small habits and behavioral tweaks can make a big difference. Simple things can have a profound impact. Give this a shot. Next time you aren’t sure how you feel about a market, put on a real, but very small position, and watch your reactions to the fluctuating P&L. Information comes to us in many ways, and there’s no better way to understand a market than to have real risk on in that market.

A Simple Rule for Adding to Positions

So, imagine you are in a position, and then, for whatever reason, you know it’s right. In fact, it’s so right that it’s time to add to the position, and so you do. Now, think about what happens if the trade turns out to not be right, or to not develop as you expected – what do you do? Here’s the rule: if you add to an existing position and it does not work out as expected, you must get out of more than you added. Simple rule, but effective.

To put numbers to the idea, say you are long 5,000 shares of a stock. As the trade moves in your favor, you get a signal to add to the trade. So, you add 2,000 shares. Somewhere down the road, the trade does not work out, and probably is under the price at which you added. Now, you know the right thing to do is to reduce the position size, and you must do so, but how much do you sell? Answer: more than 2,000, and probably more like 4,000 than 2,100. You now hold less than the original position size, and you’ve booked a loss on part of the position, but you’ve also reduced your risk on a trade that was not developing as you thought it might.

One of the classic trading mistakes is to have on a winning trade, add inappropriately, and have that trade become a losing trade. For some traders, being aggressive and pressing when they have a good trade can add to the bottom line, but there is a tradeoff: when you become more aggressive you do so by taking more risk. The psychological swing – going from aggressive to wrong – can be one of the most challenging experiences for a trader, and many mistakes happen in this heightened emotional space. The rule of exiting more than you added is a simple rule, but it protects you from yourself.

Do Your Homework

Trading is complicated, and it’s made even more complicated because we are complicated beings with complex and often contradictory psychological traits. Monitoring our behavior – not our thoughts and feelings – but the things we do, can give us some real insight into our mental state. It’s also common for traders to avoid homework when things are going badly.

What is “homework”? Well, it depends on your trading plan, but at the very least, homework should be checking account balances and activity every day. You might think you don’t need to do that, but you’re wrong. Odd things happen, and they are rarely good for your bottom line. (Examples of odd things: new stocks added to your account due to spinoffs, position adjustments due to margin requirements, shorts being bought in because of availability (especially fun if part of a pair trade). At the bare minimum, checking your activity every day is required, but many traders should do far more: check open orders, look at potential new entries, review related markets, move stops on open trades, review open trades, etc.

When you are in a period in which you are losing money, you’re probably going to be tempted to skip your homework. In the old days, perhaps the account statements that came in the mail would go unopened — a not-so-subtle way to avoid facing the facts. (As an aside, listen to the excuses you come up with – the mind can be very amusing under stress!) You might justify skipping a day, a few days, or simply just refuse to look at the account even though you know you should. This is a severe break of discipline, and a warning that you are in trouble.

The tendency to not look at an account that is losing money is natural and very common. Perhaps you are not afflicted with this problem. If so, good for you, but I’m willing to bet that many more of you have faced this than have not. The solution is simple but it requires a lot of mental strength: do your homework. Every day, without fail, do your homework. Even if you don’t want to or don’t have the time, it’s part of the cost you have to pay to be a trader. When you really don’t want to, take that as a clue and do some extra digging into your mental state (and perhaps it’s time to review those losing positions!) I guess this, and most rules, are an extension of the discipline rule: follow your rules, every day, without fail. Follow the rules. Do your homework.

Putting it All Together

Everything I’ve mentioned here is important: there’s no one most important thing. Imagine you are going parachute jumping and you can have a canopy, shroud lines, a harness, or a ripcord. Pick one? Which do you want? Which do you want to do without? That’s the way trading is and why it’s so hard to learn this skill — everything matters.

In the beginning, work on your system and discipline, and then revisit some of these other rules: are you always disciplined, every moment you are in the market? Do you ever shirk your homework? Do you use tiny risk to get a better market feel? Do you know when to be aggressive, and do you know how to protect yourself when the market tells you you’re wrong? Use these tools and hints, and perhaps they will help you to move further down the path to a long and profitable trading career.

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