Accept your losses before a trade, don't trade more than 2% of your total capital, cut your losers and let your winners run etc.....
I know I only follow about 5% of this advice, but nevertheless I'm very familiar with it.
They also all stress the need for a system. I dont' really have a system, my method is not something that can be written down. In short, it's a complete mess. I have a belief that I will do better by having an "anti-system". For example, I have a statiscal prior belief that any system works well until it doesn't, and this process is Poisson. I.e. the more you use the system, the higher the chance that it will blow up against you. So my philosophy is to randomise the systems, in the belief that when the system is undergoing a period of severe underperformance, due to my randomisation I will luckily not be employing that system at that time.
I have no proof for this philosophy, and it is probably fallacious. But I like it, because I believe all systems work (momentum trading, swing trading, scalping, fundamental etc), it just depends on the time period the system is being employed.
I also believe that it is very important to take a loss. At least one 2% loss in a one month period. It's sobering, slows you down, and sharpens your mind.
For me, if there was one key to trading, it's when you've reached the level when when you make money, you feel like you've made less than you've actually made, and when you lose money, you feel like you've lost more than you've actually lost. It's when you're in this mental state that one tends to be most profitable.
I'm saying this because I used to be the opposite. I was gleeful when I made 10k on a 50k margin (1:5 gain:loss ratio) and I didn't feel so bad when I lost money. I'm trying to say that you should 'game' your psychology, to percieves your trading reality and experience as worse than they truly are. You're better off if after winning 10k you've felt that you've won only 6k instead of feeling like you've won the actual 10k.
So this ad-hoc haphazard approach serves me well until I hit a few speed bumps. A speed bump is not a loss (I expect those and am well aware that my execution is relatively mediocre). No, a speed bump is when you're philosophy gets roughed around a bit.
For example, everyone knows that correlations work until they don't work anymore. We saw during the early periods of the subprime crisis (late 2007) that USDJPY and USDCHF were strongly correlated. But then this broke down, and USDCHF tracked the USDEUR, and USDJPY became the inverse of the S&P500. So breakdowns of correlations are not new to me.
What really throws me off is when the market is internally inconsistent. For example, I lost money last week when I was hoping for the yen to rally against the dollar as risk aversion rose. It didn't, the correlation failed, and I'm ok with that. What bothers me was when there was noise about the state of the US financial system, and both US Treasuries, the Dollar and Gold all rallied. This made no sense, and was evidence of internal inconsistencies. Gold was not rallying on inflation fears (we are surrounded by evidence of deflation) so it could only be rallying on fears on the quality of the Fiat US dollar. But if this was true, why was the USD and US treasuries rising? It's the complete opposite behaviour!
This instances really throw me off. Are there underlying stories? Is it a short term anomaly, and will reality restore itself and either gold or US dollar assets fall?
I guess why these instances throw me off is because I derive almost all my information from prices across markets. So when this happens, these internal inconsistencies, I am not getting much information from the market.
When I see such things, I develop my own fanciful theories (which are probably almost entirely wrong). For example, to explain the gold/USD anomolay, I put it down to inter-temporal mismatches in pricing. The dollar is stong for short term reasons, and gold is strong for medium- to long-term reasons. People want to buy dollars now to get in line for repatriation of dollar portfolio flows. So it's a short term technical reason for buying USD. If you were in the spot USD cash market, would you care about what might happen a year or two from now, or get in line and play along with the real flows that are occurring right now.
Gold however, is not a real asset (no one buys it for anything. It is pure sentiment). There is no 'flow' element to gold (and hence why there is no real 'market' for gold. Supply and demand are meaningless concepts when it comes to gold). So anyone who is in the gold market and fears the current expansion in the Federal Reserve BS leading to eventual inflation could buy gold essentially as a call option on eventual currency debasement. With lease rates so low, this is a call option that is relatively cheap, and has almost infinite maturity.
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