I just finished reading Trade Your Way To Financial Freedom by Van K. Tharp. Great read, and it really opened my eyes to several mistakes I am making in my trading – which is why my account is left open to so many major losses. This is dangerous when trading with limited capital, as I am.
Here were the big things I took away:
1. Need to have your beliefs about the market in line with your trading philosophy.
I think I’m in good shape here. I believe that we are in a secular commodities bull market, and that the long term trend of the US dollar is down.
2. Trade with the trends – have a system to enter positions long on the rise, and exit when the trend turns.
I have failed this part miserably, often trying to time the exact bottom of positions and buying things “all the way down” – like my current sugar positions. Several methods are described in the book to identify these trends.
3. Limit your losses and let your winners run.
My winners run, but so do my loser. I need to start using stops in order to limit the downside of my positions. As my account stands today, I could lose 50% in a day and have no way to prevent that.
4. Properly size positions to manage risk
Bottom line is that you have a finite amount of capital, and you need to be able to survive a downturn. If you let everything ride on every spin of the wheel, you’re going to get wiped out sooner or later. Deep down I knew this, but I’ll admit that I was blinded by greed and didn’t want to learn more, for fear I would need to scale back.
This week I plan to put in stops on my positions to limit downside risk. I’ll also evaluate my total capital at risk, and may scale down accordingly.
Overall this book is a solid read and really opened my eyes to these concepts.