Full Show Transcript
Have you ever wondered why it’s so hard to improve your trading? There’s so many different things to focus on and it can be really confusing to know exactly what you should do next. My name’s Adrian Reid. I’m the founder of Enlightened Stock Trading, and in this video, I want to share with you a simple but really powerful framework to show you how to improve your trading results now, not next week, not next month, not next year right now, by identifying and focusing on exactly what you need to do next.
Let me just share my screen here. And what I’ll do is I’ll show you this framework, step you through it, and give you some ideas about how you can improve your trading right now. So this framework is called the pathway to trading success. And what I want to do is just share with you a couple of thoughts about how you can make your trading … how you can give yourself a big step forward in your trading really, really quickly. So here’s what’s important when you’re thinking about how you can get from where you are to your trading goals. The first thing you’ve got to do … you’ve got to do three things. The first one is you have to absolutely protect your account. You’ve got to protect your capital, protect yourself, to make sure that no matter what happens, you can keep trading successfully. You don’t blow up your account, you don’t have a massive dip in your equity that’s difficult to recover from, and you don’t psychologically scar yourself so you want to quit the game and walk away and do something easier. You’ve got to protect your capital and yourself in order to survive.
The second thing you’ve got to do in order to accelerate your trading is to systemize. Now systemization gives you a huge benefit over the vast majority of traders. There’s lots and lots of benefits of systemizing, but the most significant one is systemizing your trading, which basically means putting rules and processes around everything you do. The big benefit that that gives you is it eliminates all of the uncertainty about whether you should buy, how much you should buy, whether you should sell, how much you should sell, because everything is rules based.
Some of the traders that have the biggest problems are the ones who are taking into account lots of different information sources. They’re looking at news articles, they’re looking at share prices, they’re looking at technical price patterns, indicators, analyst, recommendations, tip sheets, all of these things, and trying to make a decision subjectively, discretionarily about how to trade, whether they should be buying or selling and whether it’s a good position to hold. When you systemize, you eliminate all of that uncertainty because you have a set of simple, absolute rules that are objective that tell you when you should buy, how much you should buy, and when you should sell. It eliminates most of the stress and most of the psychological mistakes from trading. And the really powerful thing is when you systemize, what you can do is back test your rules. So you can actually take those rules that are objective, put them into your trading software like AmiBroker, run a back test, and see are these rules actually profitable?
And you’d be amazed how many times I’ve taken someone else’s rules, who they think they’re great rules that maybe even they’re published in a book and I’ve run them through a back test and realized that they’re at best break even or even losing money or loss making because the rules just don’t work, or they used to work but they don’t work anymore. And you can only know that if you back test your rules.
The next thing that you’ve got to do, the third thing you’ve got to do to accelerate your path to trading success is to diversify. Now diversification typically means don’t put all your eggs in one basket, don’t hold just one or two stocks, hold a broad portfolio of stocks. But as a trader, you’ve got to go so much further than that. You got to diversify more broadly across different types of systems, different markets, different timeframes. And we’ll go into that just a little bit. But these are the three things you’ve got to do to accelerate your path to trading success.
So what happens if you don’t do one of these things? Well, if you protect your account and you systemize your account but you don’t diversify, the trouble is you’re going to end up with limited growth potential. Because you might have one set of rules that works, but they only work in a particular set of market conditions. And when that happens, you’re going to make money in those market conditions, but you’ll lose money or be sideways in other market conditions. In order to grow smoothly and really accelerate your results, you’ve got to diversify. You can’t just manage your risk, protect your capital, and systemize. You’ve got to diversify as well.
Now if you systemize and you diversify, but you don’t protect your capital well enough, you don’t manage your risk well enough, you’re going to end up with very inconsistent results and you’re probably going to blow up your account. It doesn’t matter how great your system is or how many systems you’ve got or how much you’re diversified or how many markets you trade. If you don’t manage your risk well, eventually a trade or a set of market conditions is going to come up there’s going to destroy your account. You have to protect your trading account, which means managing your risk, which means eliminating trading mistakes and really making sure that you protect your account at a portfolio level, keeping your overall risk and exposure within tolerable ranges.
So you got to protect, you got to systemize, you’ve got to diversify. Now, if you protect your account and you diversify your account, but you don’t systemize, then you’ve still got a problem, right? Because you’re not systematic, which means every single trading decision you make is a discretionary trading decision. You got to take into account huge amounts of information, all of the different sources of information to make your decisions. It’s going to take a lot of time, a lot of effort and it’s going to cause you a lot of stress because you’re not going to be consistent. So all three are super critical. Protect, systemize, diversify. If you don’t do any of those things, you’re really going to suffer as a trader. You’re going to slow down your growth, it’ll be much more stressful, and you’ll risk blowing up your account.
But what do you do … what happens if you get these right? If you’ve managed to protect systemize and diversify your account, well, then the result, the benefit of that is your trading becomes a very high reward, low effort endeavor. And that’s exactly what we want. We’re all busy. You’re busy. We’ve all got our lives. We don’t want to sit in front of our computer all day, everyday trying to make our trading decisions or come home after a long day of work and spend three or four hours trying to figure out what stocks we’re going to buy and sell the next day. We want high reward, low effort, and we just want to get on with our life and make money in the markets. Is that what you want? Because that’s exactly what I want.
So what I want you to do right now, if you’re watching this, I want you to comment below wherever you’re watching this video. And I want you to comment which of these three areas you need most work on right now. Do you need to really work on protecting your account? If that’s the case, in the comments write protect. Do you need to learn how to systemize your trading, put rules in place and back test them so that you have confidence that your approach, your rules are actually profitable and they’re going to work and make you money going forward? Or do you need to learn how to diversify and move into other markets, move into non-traditional markets, move off shore? Maybe you’re trading stocks right now and you want to learn to trade crypto, or maybe you’re trading US stocks and you want to move into other markets like the Australian stock market or vice versa. So if that sounds like you then comment diversify in the comments below. So comment right now below. Protect, systemize, or diversify, which one do you need most? And that’s what I want you to do first, because what that’s going to do is give you focus.
Now, once you’ve got your focus area, what do you need to think about? Well, in each of these … each part of this model, there’s three trading accelerators that you need to learn about and master. So in order to protect your account, you’ve got to do three things. You’ve got to have a daily trading process so that you can follow that process and tick it off just like an airline pilot, and really just nail your trading every single day, do it the same way and not miss a step, not miss a beat, and get it right.
Once you’ve got your daily trading process down, you need to manage your risk. Managing your risk means a lot of things, but first of all, it means keeping a risk on each trade low and consistent. So no matter how many trades in a row you have wrong, you don’t lose too much money, you don’t have a massive drawdown. But managing risk is about far more than that. It’s also managing risk, your exposure and your account and your exposure to individual systems and markets. So we’re going to manage risk on multiple dimensions.
The third thing you got to do to protect your account is to eliminate mistakes. Now, mistakes are the bane of trader’s existence and here’s why. When you’re a new trader, and even when you’ve got some experience, chances are you’re making mistakes and you don’t even realize that you’re making them. And the trouble with that is if you’re a mistake that you don’t realize you’re making, you are leaving money on the table day after day. So we need to identify our mistakes and eliminate them. So if you need help on any of these three areas, process, risk management, or eliminating mistakes, I want you to comment protect down below in the comments below this video. Because I’ll get you … I’ll reach out to you and show you how you can do that.
Now once you’ve got those three areas under control, and you’re looking at systemizing, there’s three things that you need to do to systemize your trading. First thing you need is objective rules. You need objective rules in place that are profitable. You need to know exactly when to buy and exactly when to sell. Now a trading system, which I’ve covered in many other videos, consists of the setup, the entry rules, the stop-loss, the exit rules, and the position sizing, and various other components. You need absolute objective rules to tell you when to get in and when to get out of the market so you can do it without second guessing yourself. You can take action. You can pull the trigger, regardless of what’s going on in the world, knowing you’re doing the right thing. That’s what objective rules do for you.
Once you’ve got objective rules, you need confidence in those rules. So you need to be able to back test the rules and make sure that they actually work. Now, it’s not as simple as just opening up a chart, looking at your indicators on the chart, and saying, “Okay, yeah, I would have bought here and it would have sold here, and yeah, that was profitable,” and then finding another example of it, “Would have bought here. And would have sold here and that was profitable.” That’s not back testing. That’s looking manually at charts, finding some cherry picked examples of trades that might work. When you’re back testing for real, you’re going to be testing over decades of data, over thousands of stocks to make sure that you get a huge sample set, hundreds of thousands of trades generated by your rules so you can be confident they’re actually profitable.
So back testing is absolutely critical once you’ve got objective rules. And then thirdly, after you’ve back tested your rules and you’ve put them in place, you’re going to monitor and improve those rules so that you can constantly be improving your trading, be on the lookout for a decay in the edge of your system and any changes that might affect the way you’re trading. So to systemize, you need objective rules, you need to master back testing, and you need to monitor and improve. Now, if that sounds like what you need, what I want you to do is comment below systemize, because systemization, if you haven’t got this in place, is going to give you a huge leap forward in your trading. Make sense? Great.
So what do you do once you’ve got systemization under control? Diversify. There’s lots of different ways to diversify. The three areas that are most important, I’d have different strategies. It’s not a great idea to have all of your money in one trading strategy because not all trading strategies work all the time. We got to diversify. So we need trend following, we need mean reversion, we need short selling, we need momentum trading. We got different types of trading strategies because each of those are going to be in sync with the market at different points in time.
Once you’ve got a few different strategies, you want to look at different markets. Different markets might mean if you’re an Australian trader and you’re trading Australian stocks, maybe you want to move into US stocks or Hong Kong stocks. Or if you’re a stock trader, maybe it’s time to move into crypto trading. Because when you move into other markets that are non-correlated, you can dramatically increase your returns and increase the percentage of time that you’re actually going to make money.
So diversifying, firstly strategies, secondly market, thirdly timeframes. If you are a long-term trend follower, you can get some really significant improvements by adding some shorter term trading strategies, maybe a mean reversion [inaudible 00:12:29] system or a system that has a hold time of a few days to a couple of weeks, instead of the trend following that might hold weeks to months. Maybe you can trade even an inter-day system if you’ve already got a daily bar system. If you’ve got a daily bar system, maybe you’re on a weekly bar system. But to diversify your account, you need to do these three things, different strategies, different markets, different timeframes. So if that sounds like you, if you’re ready to diversify to improve your trading results, what I want you to do is comment down below diversify. And depending on what comments I get for protect systemize, diversify, I’ll produce some extra content for you to help you move on this path.
This model is the path to trading success. This is how you accelerate your trading results. Better protect, better systemize and better diversify your account and implement these nine trading accelerators to improve your trading results. Comment below protect systemize or diversify. And if you’re not subscribed to this channel wherever you’re watching it, hit the subscribe and notify button so that you get notifications next time I release a video. Make sure you like and comment, and I’ll see you in the next video. Again, my name’s Adrian Reid. This is Enlightened Stock Trading, and here is the model to accelerate your trading performance. That’s all for this video. I’ll see you in the next one. Bye for now.