The reason why it can seem so hard to make money as a trader is best summed up by the following paradoxical statement by Ray Dalio in the book Hedge FundÂ Market Wizards
(Ray is the founder of Bridgewater, the worldâ€™s largest hedge fund):
â€œIn trading, you have to be both defensive and aggressive at the same time. If you are not aggressive you will not make money, and if you are not defensive you will not keep money.â€
It is trying to balance being aggressive enough to make money while being defensive enough to keep the money youâ€™ve made that is the most basic problem a trader faces in the market. Todayâ€™s lesson will give you some tips on how to keep the two in balance so that you can not only improve your chances of making money in the market, but more importantly, not give that money back to the market.
How to be an aggressive trader but notÂ tooÂ aggressive
As a trader, you face constant temptations to trade too much and to risk more than youâ€™re comfortable with, all because thereâ€™s an idea in the back of your mind that you could â€˜get rich quick. Itâ€™s very hard to ignore such an enticing idea due to all the warm and fuzzy feelings it brings you and the images of being â€˜richâ€™ that it drums up in your mind.
In other words, itâ€™s EXTREMELY easy to be too aggressive in the market. However, as you may well know by now, being too aggressive is a quick route to losing money and possibly blowing out your trading account. But, youÂ doÂ need to be aggressiveÂ enoughÂ if you want to make money trading, so how do you find that middle ground between not being too aggressive and not being aggressive enough?
Thereâ€™s no one answer that will easily solve this problem for you, rather, itâ€™s a combination of realizations and abilities that you need to acquire and implement. Hereâ€™s a quick-list of these realizations and abilities to help you find that aggressiveness â€˜sweet spotâ€™:
- Realize that you need to pick and choose your trade entries carefully. If you are not picky with your trade entries, youâ€™ll end up over-trading, i.e., being too aggressive, and youâ€™ll lose money as a result. You need to first obviously know exactly what youâ€™re looking for in the market (what your trading strategy is) and then commit to only trading when that strategy is presenting you with a signal.
- Realize that you cannot hesitate once you identify your trading strategy is giving you a signal to trade. Hesitation and fear have no place in a successful traderâ€™s mind. You need to know what youâ€™re looking for, as I said above, and then act on the signal without hesitation once it arises.
- Realize that itâ€™s better toÂ trade less frequentlyÂ but with a bigger lot size when you do trade, rather than entering many smaller trades per month. Going in relatively â€˜bigâ€™ on two or three trades per month that exactly meet all your trading planâ€™s criteria, is much more intelligent than constantly being in the market on a bunch of random trades that are basically just gambles.
- What you need to do is be aggressive, but infrequently. If youâ€™re too aggressive, either by trading too much (over-trading) or by risking too much, or the worst possible combination, risking too much and over-trading, you will lose money. The key lies in being aggressive only when youâ€™re trading strategy is clearly telling you to trade. In other words, save your â€˜bulletsâ€™ for the easy / lucrative targets, then youâ€™ll get the most bang for your buck.
- When I trade, I go in â€˜bigâ€™ relative to my account size, but because I only trade maybe 2 to 4 times a month, I am probably still risking less relative to my account size than a smaller trader who enters 20 or 40 trades per month, each with a small dollar risk per trade.
- All those little trades add up very quickly, and they canâ€™t all be high-probability, good signals. So, the key is to wait patiently for the most obvious signals and then back yourself when they form, i.e., donâ€™t risk TOO much to where you canâ€™t sleep, but donâ€™t go in too light either.
How to be a defensive trader but notÂ tooÂ defensive
On the flip side of the coin, you have to be defensive in trading, but notÂ tooÂ defensive. As I discussed in my article,Â How to Get Your Trading MojoÂ back, traders very often give back their trading profits, usually all of them and more. This can be very frustrating and is a big reason why most people fail to make money over the long-run in the market.
Again, finding the middle ground between being too defensive and not defensive enough is no easy task. But, the following tips should make it easier for youâ€¦
- Withdrawal some of your profits at the end of the month, if you had any. Doing this will not only make sure you canâ€™t give them back to the market, but it will serve to reinforce the fact that itâ€™s your (real) money and itâ€™s not just numbers on your computer screen. This way, you will start to view profits as something more real, and this should make you a bit more defensive of them.
- Realize that youâ€™re going to be the most emotional and thus most likely to give back profits right after a trade. Donâ€™t jump right back into the market for no reason after your previous trade closes out. Monitor yourself after a trade, whether itâ€™s a winner or loser. Make sure you donâ€™t jump back into the market on a â€˜whimâ€™ and give back the profits you just made. Profits are not easy to make in the market, so protect them.
- Realize that you donâ€™t need to trade every day, or even every week. Often, the best and most lucrative position is to be out of the market. Strong trends are the easiest time to make money (like we are seeing now in many pairs, e.g. EURUSD, USDJPY and other majors), but they donâ€™t happen very often. Thus, if thereâ€™s not a strong trend underway, odds are you should be flat the market unless your trading strategy has fired off a very obvious signal, like we discussed above.
In trading, you have to be aggressive enough to make the most out of a valid trade setup when it arises, but you also need to be defensive enough toÂ not give back the profitsÂ you made on winning trades. These two things can often feel as if they are at odds with one another. But by learning an effective trading method like the one I teach in myÂ trading course, combined with proper planning and a healthy dose of patience, discipline and common sense, you will find the elusive â€˜middle-groundâ€™ between aggressiveness and defensiveness that will result in long-term trading success.