A lesson I always love to pass on to young traders is to deeply understand the concept of tides and waves.
Tides are the biggest waves and motions we see in ocean, caused by the celestial bodies.
Waves on the other hand can be caused by a simple gust of wind.
Markets work in a very similar way.
A tide would be a booming economy for example. Hence the famous aphorism “A rising tide lifts all boats.”
A wave on the other hand could be a news-piece, a long awaited product release, or a promising statement made by a company, causing a single boat to rise or fall out of sync from the other boats.
What must be observed, however, beyond anything, is the strength of the tide. For just as a rising tide can lift all boats, a sinking one can crush them all should the water be too shallow.
A strong tide can break any wave and force the wave to go the direction of the tide. Hence it is wise to ensure that you are never trading against the tide.
Most traders have the urge to have the biggest position possible when they open a trade. Why wouldn’t they? After all, the only reason they are opening the position is because they feel so confident and certain about it’s outcome.
There are a couple reason why this alone is the very reason most traders fail.
Everyone has the same appetite for reward but not everyone has the same appetite for risk. While some can unflinchingly watch a trade cost their portfolio 10% others already break a sweat watching 2% vanish. If you know that a certain loss size would make you clench your teeth and bring the nerves out, you have to calculate your position size ahead of time to ensure you never get there.
What often happens is that traders sell perfectly good positions at a loss, because they could not handle the trade go against them. If you have a stop, make sure you can stomach the trade going...