Mike’s note: Mike Merson here, managing editor of Trading Icons.
Today we’re featuring another essay from trading legend Andy Krieger, offering some crucial trading advice…
This advice might seem counter to everything you’ve heard about trading before… but legends like Andy know that following it is, as difficult as it can be, what makes trading success stories happen.
And if you haven’t already, be sure to sign up for Andy’s BIG Trade event this Thursday night, and secure your chance to receive Andy’s trading research and ideas 100% free.
Follow This Advice to Outperform Every Trader You Know
By Andy Krieger, editor, Andy Krieger Trading
As a discretionary trader, I have gone through many trading cycles – both good and bad.
When I am totally in sync with the markets, nearly all my trading decisions are insightful… my timing is excellent… and the profits flow effortlessly. Somehow, I manage to execute the right trade at just the right moment.
Then suddenly, without warning, I can shift into a cycle during which practically every decision I take is a loser…
Try as I might, I can never figure out what causes the change. I do the same analysis and preparation… But during the negative cycles, I have a remarkable ability to snatch defeat from the jaws of victory. Even when I have the right positions, I miraculously find ways to lose money.
But I’ve come to recognize that I’m never truly as good as I seem during my good cycles… and I’m never as bad as I seem during my bad cycles. Fortunately, I have always found that the pain of losing overwhelms the sense of happiness I experience when I’m winning.
I believe this is what has enabled me to survive for so long as a successful trader.
You see, the pain of losing keeps my ego in check. It helps me remember how fallible I am. Therefore, my trade recommendations almost always include a stop loss… or, alternatively, a limited-risk option strategy.
I’ve made lots of mistakes in my forecasting and trading. It’s just human nature. Over time, though, I have almost always managed to end up net profitable. That’s because I understand something that’s crucial to trading successfully that many traders don’t…
Without using a rigorous risk management system and embracing the reality that losing trades are an important part of successful trading, a trader is doomed.
The Biggest Misperception in Trading
All traders – professional and retail – have to come to grips with the fact that being a winning trader means being wrong a lot. For me, it’s over 40% of the time.
When I’m in sync with the markets, I feel like no one can possibly trade better… And conversely, when I’m out of sync, I feel that no one could possibly trade worse. During both cycles, it feels as though some mysterious, unseen hand is guiding my every move and decision.
To that extent, I have learned to take neither my winners nor my losers personally. It doesn’t mean I don’t care… I care very much. I just don’t allow bad trades to damage my sense of self-worth, or permit winning trades to inflate my ego. Learning to laugh about the bad trades and losses is hard, but it is essential to long-term success.
I love the challenge of figuring out where the markets are going and trying to structure trades that either break even or generate profits – even when I have it wrong. That is not so easy, but it is often possible with the clever usage of options.
But here’s where people get hung up: Making losing trades and admitting one is wrong doesn’t suggest a lack of skill or competency. Actually, owning up to and reflecting on your mistakes is a positive quality.
Brutal self-honesty is essential to long-term success… and being able to take losses is part of that process. The traders who cannot do this are the ones who wind up quitting after losing a large portion of their capital, due to frustration and doubling down on bad trades.
During the bad cycles, I never knew what had changed or why my instincts had suddenly become so counter-productive. But I have learned to quickly identify when my timing and feel for the markets was off – and reduce my exposures accordingly.
So regardless of whether I’m in or out of sync, I aim to take sensible trades with the same level of analysis. I’ve learned that if I’m patient with myself – and the markets – then I will eventually slide back in sync… and find ways to earn excellent, risk-adjusted returns.
I’ve managed this cyclical trading pattern since 1984, when I first started seriously speculating in the markets.
Whether my trading was in foreign exchange, stocks, bonds, or commodities, it made no difference. I could follow all the technical rules, do my fundamental research, and prepare myself as thoroughly and professionally as possible. I always adhered to strict money management principles.
But making money when that quiet little voice was silent… the one that popped into my head when I was on a hot streak… was, for me, next to impossible.
The frustration of fighting so hard to keep my losses small when I was out of sync made the joy of making money effortlessly all the more satisfying.
The strangest part of it, however, was that my best trades never brought me a sense of ego satisfaction. Rather, they triggered a sense of gratitude and appreciation. An awareness that, for some unknown reason, I had been given a special gift… and this gift would allow me to trade effortlessly and make significant profits.
The next time I write you, I’ll share a story of this dynamic… And how I used it to take the unpopular, but ultimately profitable side of a big trade.
Editor, Andy Krieger Trading
P.S. This Thursday at 8 p.m., I’m stepping forward for the first time in decades to reveal my next big trade idea to the world.
You see, I’ve spotted a strange compression pattern across multiple markets. And I believe it’s pointing to a significant, market-shaking moment that will happen in the next few months… which could either make you millions, or take away a large chunk of your profits from the current bull market.
I want you to be prepared. And attending Thursday’s webinar is the first step to doing that.