Leveraged Trading Best Practices

1 Trading Truths
2 Competent, Constant, Complete, Conscious, Collective Analysis
3 Practice Conviction Outside of Trading
4 Know What Action Loses Money
5 Know What Action Makes Money

1 Trading Truths

I. Analysis doesn’t make money. Only good execution makes money.

II. The magic that turns good analysis into profit is CONVICTION.

III. CONVICTION = confidence, positivity, clarity, accountability, trust.

IV. NO CONVICTION = insecurity, doubt, ambiguity, dismay, emptiness.

IV. Practice conviction, and with good analysis, make money, stay happy, make money.

2 Competent, Constant, Complete, Conscious, Collective Analysis

Competent: My analysis is good. My fundamental and technical knowledge is full. I can read price action.
Constant: I analyse every week, day and hour, to discern the latest information.
Complete: I analyse across timeframes, indicators and angles to gain a compete picture of the market.
Conscious: I’m making a conscious decision to analyse. It is never robotic, never involuntary, and never unaccountable.
Collective: my analysis is public. It is shared so I remain accountable to it.

3 Practice Conviction Outside of Trading

Conviction is a practice. It is an exercise in confidence, positivity, clarity, resolution and vision. How I am in one situation is how I am in all situations. If I have Conviction in life, I will have Conviction in trading.

I know how, why, what and when I eat, sleep, say, have, do and think.

I do what I say I will do.

I know that if I do not, it will destroy my Conviction, and will give rise to insecurity, doubt, ambiguity, dismay, and emptiness.

Conviction is corroded by executing on impulse. Note: executing on impulse. Impulse WILL arise; it is natural. But whether or not impulse becomes action depends on the strength of conviction. More conviction = less probability for action to be generated by impulse. Build conviction.

Meditate and do not move to scratch an itch.

Eat based on a strict diet, once a day. No alcohol, no sugar, no meat, no processed food, no stimulants.

It doesn’t matter how conviction is practiced, as long as I do what I say I will do to give myself evidence that I will do whatever I say I will do.

4 Know What Action Loses Money

Buying close to resistance
Selling close to support
Buying at an overbought zone
Selling at an oversold zone
Buying, exiting at a loss, then re-buying higher
Selling, exiting at a loss, then re-selling lower
Buying with a close stop, stop hit, and price goes much higher
Selling with a close stop, stop hit, and price goes much lower
Buying, not taking profit, and letting price go back to where I bought and lower
Selling, not taking profit, and letting price go back to where I sold and higher
Trading in a market that I don’t understand and don’t have any interest in
Backwards-rationalizing the reasoning behind an open trade
Trading with a wide stop with low leverage, saying “I don’t mind if it goes against me”, then exiting at a loss before it almost hits the stop, then doing it again at a worse price
Trading because I’m a trader and traders trade
Realising I’m wrong, but keeping the trade open anyway, thinking that I can trade out of it
Trading too many markets
Trading with inappropriate leverage
Multi-tasking and assuming that trading is passive income
“It’s just a trade to test the water”
“I don’t care what happens anymore”

The above habits will reliably lose money.

They are all symptoms of a lack of Conviction, i.e. a lack of confidence, positivity, clarity, accountability, trust. A lack of Conviction creates a domino effect of frenetic energy, manifesting as impulsive action. A lot of these actions are then rationalized, as if to make sense of the irrational impulse. Many of these actions are consequences of a previous bad action, and so it compounds. If you simply pick a good entry in the first place, you can avoid most of the above.

The key to preventing each one is Conviction. It cannot be made any simpler. Conviction knows the right market, it knows to buy low and sell high, it knows the big picture, it knows what risk is appropriate, but MOST IMPORTANTLY: Conviction knows when to act, and when not to act. To have deep identity-level confidence in doing NOTHING is the default position of Conviction.

The above 20 points are ACTIONS. Nobody lost money from inaction. You can miss an opportunity, but you can never give away what you have in your trading account by doing nothing. Only action can make you lose. It is no accident that the actions that can lose money are infinite, but the actions that actually make money numbers no more one. This tells us that inaction should be default.

So how do you get Conviction? One way is to know exactly what Conviction ISN’T, and how that manifests as impulse. This creates an awareness – a mental checklist that interrupts impulse.

1, 2, 3 & 4. Buying/Selling close to resistance/support/overbought/oversold zone

Buying at resistance is often justified with the following:
“I don’t care if it falls back in the near-term because the trend is up and I’m thinking long term.”
“Price looks like it will breakout so I’ll get ahead before it does.”
“Nothing can stop this market.”
“I’ve missed so much of this trend, I better buy now before it goes to the moon.”

It’s never appropriate to buy resistance, because the risk is unnecessarily exaggerated.

These are typical symptoms of impulse, which I’m personally more vulnerable to as soon as I wake up. I could have saved myself so much money if I hadn’t looked at the price as soon as I woke up, blindly bought, and regretted it. It would have been better to make some tea, go in the shower, or better still: instead of buying, sell.

The other mistake I’ve often made is trading a spike in a news or data release event, only to find that it retraces. The simple solution is to look at WHERE in the trend this is occurring. If resistance is overhead and the market has already been moving up for weeks, is this the best way of making money?? On the other hand, such market events can ignite a reversal in trend, but that is usually at a significant place where a reversal is already likely. In that case, you can afford to jump on board, but significant resistance is much higher.

Buying at resistance, for example, is all about approach, context, and granularity. If on a short timeframe, with price spiking within a larger consolidation, after price has moved 20% over the last 2 weeks, this isn’t the best place to be buying resistance. But if price has fallen 20% over the same timeframe, and now is spiking on major news, it will blow past near-term resistance, so it is safer to buy.

5 & 6. Buying/selling, exiting at a loss, then re-buying/selling higher/lower

Lack of conviction means lack of confidence in even entering a market, even though the analysis and entry are good.

I cannot count how many times I’ve entered, become anxious, and quickly exited. There is no clearer evidence of a lack of conviction.

A typical pattern is that hesitancy prevents immediate action, then action is taken late, then an awareness of late action provokes a reversal of the action, then when the original action is confirmed as correct a cognitive dissonance creates more hesitancy, and finally the original action is re-instated. When you’re doing it, it seems natural. When it’s observed, it looks like schizophrenia, because it makes no sense whatsoever.

Again, the glue that holds a trader’s sanity together is Conviction.

7 & 8. Buying/Selling with a close stop, stop hit, and price goes much higher/lower

If the entry was so good, why put a stop so close? The conflict here is in wanting a position, and wanting protection, in a zone that is more dangerous. Again, it comes from lack of Conviction.

If the trend is up and you buy at support, you don’t need to close out your risk with a tight stop, because market conditions have reduced risk. If you enter a market that is riskier, why are you entering at all?

If the problem is buying in any area of greater risk, but I have conviction in the trend, the simple solution is not to reduce the stop distance, but to reduce the position size. The risk is the same, but I get to keep my position.

9 & 10. Buying/selling, not taking profit, and letting price go back to where I bought/sold and lower/higher

A distinction needs to be made between having an insignificant unrealised profit, and a significant unrealised profit. If the profit is insignificant, I was simply a wrong. This is part of trading. But if the profit is significant and I let it slip through my fingers, that could only be because I’m not aware of the CONTEXT in which I’m trading.

Buying confirmed support should below an all-time-high is good for a quick move up, but exceeding the all-time-high is a different trade, and may require a significant pullback to clear out longs and positions to be re-built.

Note: it is easy to put this down to the phenomenon of having an unfair expectation. The problem with expectation is that it is very personal and emotional and so it is hard to quantify. I want to take myself out of the profit-taking process as much as possible, and so expectation should be formed from technical analysis, rather than what the money ‘means’ to me.

So isn’t the next problem taking profits too early?

Yes and no. You cannot go poor by taking profit; there is a bias to profit in trading, so it is a smaller problem.

11. Trading in a market that I don’t understand and don’t have any interest in

I read an article by a trader I respect about a market I’ve never considered. I pull up a chart, I do my analysis. I get in on a trade – cocoa futures, the Italian stock market, Japanese government bonds.

On the surface there is nothing wrong. This is how I come to all markets: I hear about it, I do my research, I start trading.

But the problem comes when the market has nothing to do with my personal Universe. Unless the story is part of the things I interact with or think about on a daily basis, it is unlikely that I will be able to devote the Conviction required to trade it successfully. As a result, the profits are small, if at all.

The world I inhabit is very specific to me. I’ve lived long enough to know what I like, and to have Conviction in the things I believe in because I’ve seen evidence for those things building over multiple years. This is not stubbornness. It is Conviction.

The idea of trading a range of uncorrelated, exotic and bizarre-sounding markets is an immature fantasy, unless these things are really part of my Universe. That doesn’t mean I can’t introduce something new into my Universe. But it will be added when it makes sense to add it, and not when it happens to be mentioned to me.

Every market requires attention and capital. Why waste it on something I have no personal interest in?

12. Backwards-rationalizing the reasoning behind an open trade

This is just another thing that happens when Conviction is absent. This can happen with both good and bad trades. It causes you to cut winners and let losers run.

For winners, you might say “a bought the bottom, I can let this ride”. Then just as profits seem ‘good enough’, you decide “I’ll take that profit.” Whilst there’s nothing wrong with taking profit, there was a reason why you had an original Conviction, and now it has been interrupted by the impulse to take profit. Now you have the dilemma of having to go back in at a much higher price, with much higher risk, to establish the same position size.

Alternatively, with losers you might have a certain expectation of an instant profit. Yet, the market doesn’t go your way. You started with “This could be a good entry” and then turn into “I’ll give this one a wide berth.” Thus, the loser isn’t cut when it should be.

Here’s a good opportunity to make a distinction between leveraged trading and spot trading. In trading spot, you can afford the whole “wide berth” thing. This is because you own the underlying asset, which rarely goes to zero, and isn’t automatically liquidated. So in spot trading, you can afford to buy into a consolidation; you can afford a poor entry. If the fundamentals are correct, your entry doesn’t have to be perfect and a less-than-perfect entry won’t niggle at your Conviction. Without the threat of liquidation and the capital requirements of leverage, your conviction is safe.

Leveraged trading is not the same. The threat of liquidation and the cost of keeping a position have to be actively managed. This means that you do not have the luxury of inaccurate entries. The risk has to be pre-defined and minimized, which is done through finding the best entry possible. Therefore justifying a losing position by giving it a wide berth is to misunderstand the leveraged trading environment.

13. Trading with a wide stop with low leverage, saying “I don’t mind if it goes against me”, then exiting at a loss before it hits the stop, then doing it again at a worse price

The peak of idiocy in trading.

Idiocy by intelligent people can only arise through a specific chain of mental processes, from which there seems to be no way of backing out of. A succession of thought patterns, each one compensating for the one before, leads you to a place where you say “what am I DOING?”

The mistake is in not having the conviction to pick a good entry in the first place. The likeliest place for a reversal is where a reversal is the safest to bet on. But with no conviction, there is no trade. In compensation for good analysis but no conviction, the trader decides to wait for the next available opportunity. But the next available opportunity never looks as good as the original spot, so the trader still does nothing. Every tick confirms his analysis is correct and punishes him for doing nothing. Until finally, he gives in and acts on his original analysis. The thought process is: “I’m right, but I know this is a riskier place to enter, so I’ll go low leverage with a wide stop.” This is actually not inappropriate. The trader has some idea about risk. The problem is that he has less conviction than he thinks he does. After being punished, he has a deficit of conviction and so cannot afford the conviction required to see the market move against him. So, he closes at a loss… only to find that the market re-confirms his original analysis. And so, this can be done over and over and over, turning good analysis into bankruptcy.

You can be right, but you only get paid to act on being right with right action.

14. Trading because I’m a trader and traders trade

There are many people in the world with no deep knowledge of markets, who invest sporadically, and do very well for themselves. Students pay for their education; bloggers fund their travels; single mothers pay their bills; business owners look for a second income; IT consultants buying a second home. None of them call themselves traders, yet they might make more profit, more consistently than someone who does.

A pitfall in doing something is becoming more invested in being the doer of the thing than becoming better at doing it. I want to keep at easy indifference to ‘being a trader’.

Students study, bloggers blog, consultants consult. But a trader doesn’t always need to execute a trade. The pressure in calling myself a trader is that it is, more often than not, inappropriate to do the thing I say I do. I’m hesitant to call myself a trader because it provokes me to trade, in order to fulfil a projected ideal of a trader, who goes to work like everyone else.

In reality, one trade a year is enough. The rest of the time can be spent at the beach.

There is no honour in a life spent in front of a computer, to collect pennies. If you can achieve in 1 trade what you can achieve in 100 trades, why trade 100 times?

‘Overtrading’ is a problem that is always flanked by another deeper problem. It could be greed, impatience, recklessness, and addictive behaviour. I think I have overtraded because of all the above. But in the absence of these troubles, the subtlest is overtrading prompted by overinvesting in ‘being a trader’. This is why I call myself an artist.

15. Realising I’m wrong, but keeping the trade open anyway, thinking that I can trade out of it

I realise I’m wrong as soon as analysis confirms it. What prevents me from acting on my analysis is the (bad) assumption that a bad trade can ‘traded’ out of. It can. But it means taking on more risk. Are you prepared to accept that risk, even if it means missing out on much better opportunities? Capital spent on fighting fires cannot be used to actually make profit. At best you will break even.

So bad trades can be traded out of, at the expense of actually making money. The price to pay for a bad trade at the least is a small financial loss. At the worst, its time and opportunity cost, which cannot be won back.

It is also highly detrimental to log into your account and see an unrealised loss every time. It is demoralizing. For as long as its there, it will eat your Conviction in the rest of your trading, because it is a constant reminder of a persistent mistake.

It is psychologically and financially advisable to cut a bad trade as soon as it is recognised as bad.

16. Trading too many markets

The pattern should be clear by now that a pitfall of trading is doing too much. Action is rarely appropriate.

There are no limits on how many markets I could trade. The problem is in diversifying for the sake of diversifying. Diversification is a myth. The world is complex and unpredictable, but what makes money is ridiculously and offensively simple. Diversifying within the same sector is making something more complicated than it needs to be.

It’s also evidence for a lack of conviction. Having many things that may or may not do the same thing is compensating for not having the conviction in just having one thing. Have one thing, know that thing, and be right about that thing. Don’t compensate for your insecurity and doubt.

There is something to be said for having investments with various timescales. Some opportunities come quick, some mature over years. That is diversification. But if several investments will all pay off at the same time, I’m better off with one.

17. Trading with inappropriate leverage

Leverage is what makes trading viable. Trading without leverage is like travelling by camel instead of plane. Leverage is essential to profit, and never inappropriate, with one exception:

If leverage is high enough to eat at Conviction and give way to impulsiveness, it is too much.

Conviction is the real currency that has to be protected at all costs. If you have a good entry in the right market, the only thing that could ruin the party is leverage that is way higher than you’re used to. You might exit the position early, or even exit at a loss, out of fear. You might commit any of the other crimes presented here, all because you subjected yourself to using unusually high leverage.

To be clear, nothing is wrong with being highly levered. But if it is outside of your comfort zone, it will eat your conviction, and throw away good analysis.

18. Multi-tasking and assuming that trading is passive income

I’m guilty of waking up, making tens of thousands in profit from my bed, and going back to sleep. I’ve also made thousands while sitting down to watch a film with family. Most of my money has been made half dressed, naked, or lying down. By contrast, I went through periods of treating trading like a job, with a specific place of work, a morning shower, and an ironed shirt. I lost money.

What you decide to make of trading only means something to you. The market doesn’t care. If the market conditions are right, you can buy anywhere and make money in a few hours, without even looking. Trading for profit should be no harder than this. But that does not mean it’s passive.

The passivity of trading has to do with whether or not you recognize what you’re looking at or not. If you know what opportunity you’re looking for, it will be obvious – you won’t need to look at a chart for more than a second. You can wake up, look at the screen, say “that’s a buy”, buy it, go back to sleep, and let the profits roll in as price hits your limit. But if you don’t see the opportunity you’re looking for, you’ll need to look a lot to see it. This could be because you can’t see it because you don’t have the experience to see it, or it could be because you don’t see it because it simply isn’t there yet. If you don’t have the experience, you’ll be looking at charts for a long time because you’re unsure of what exactly you’re looking for. If you’re experienced, you need to look at charts for a long time to be present at the moment in which the opportunity presents itself.

This distinction is misunderstood, because from the outside an experienced trader appears to be passively making money. It seems too easy – watching a screen and pressing a button. But their success lies in knowing what they’re looking for, which is a very active yet internal process. If you see an opportunity whilst doing something else – sleeping, eating, masturbating – that doesn’t make it any less of an opportunity to be acted upon. What’s important is at that moment, the market requires your attention, and so you must give it.

19. “It’s just a trade to test the water”

The definition of lack of Conviction. This is the mantra of timidity and uncertainty. There is no ‘tester’: There is only real trading for real money.

20. “I don’t care what happens anymore”

Self-destructive trading is no different from all self-destructive behaviour, in that it is a coping mechanism for overwhelm. A large loss or string of large losses may be emotionally overwhelming. Logically, one would think that large losses would prompt introspection and a constructive change in behaviour. But if the losing is large enough and persistent enough, it can flip into overwhelm, and actually accelerate losses even further.

I’ve experienced this both as a visceral, sudden whirlpool in which there seems to be no way out, until all the funds are gone. I’ve also experienced this as a subtle process over days and weeks – every day becomes death, because I was expecting death.

A lot has to go wrong before a trader reaches this point. This point is last, because it is likely that points 1-19 have all been executed in various forms before a trader reaches a state of abandon and actively sabotages their account. Yet if 1-19 are possible, then 20 is possible.

The strategy for avoiding self-destruction is to dissipate the emotion. Squeezing a stress ball, chopping wood, or treating yourself to something fun are bad ideas. The reason is that they are stimuli: they promote emotion. Even cathartic activities don’t dissipate emotion. Punching pillows transfers emotion, merely converting anger into something else, like euphoria or elation.

The only method is meditation. The goal is to meditate with closed eyes, without moving, until you have a clear idea of what it means for you to be dead. This doesn’t mean visualizing your funeral. It means coming to terms with the inevitable moment that you will not be. No trading, no sleep, no fun. Just nothing. This understanding might take an hour, it might take days. The point is to return to trading with new awareness.

5 Know What Action Makes Money

Only trade what I know and love, and think offers a unique opportunity

– I love trading markets with clean chart patterns: young assets that form patterns taken from a trading book, with few false moves and clear touches of support and resistance.

– I love trading no-brainers: markets that are so technically and fundamentally undervalued or overvalued that even with a mediocre entry still generate a lot of profit over a few weeks.

– I love trading clean, explosive breakouts: from long, narrow consolidations, on all timeframes, with very little support or resistance in the way.

– I love trading fast trends: breakouts or fast reversals that get far away from my entry in a matter of minutes.

– I love trades that ride a fundamental paradigm shift: new Renaissance, new awareness, freedom, new era.

– I love trading a trend for 3 months in a year, and then doing nothing: I’m built to focus intensely for 3 months, and then do whatever I want to do, away from the computer. This is my ideal trading environment. The 3 months can happen at any time during the year, so I trust that it will come. I love markets that trend for a few weeks, to 3 months. This offers me the best opportunity for profit.

– I love trading markets with a lot of pre-existing available charting: I like to utilize all technical tools available and don’t like to rely on one platform. If there is not available charting, the investment better be a no-brainer or a fundamental buy.

When what I do – trading or otherwise – comes from a place of confidence, positivity, clarity, accountability, and trust, then Conviction is automatic.

Confidence, positivity, clarity, accountability and trust comes from knowing, loving, and a motivation based on uniqueness of opportunity. These are high and mighty criteria that cut through the insistence of impulse and the noise of the market. Time is precious, and time shouldn’t be wasted on monitoring things that may or may not work. Only the things that you know will work are worth the time, effort and capital. Opportunities like those are clear as day, you know them, you know you love them, and you know they’re not common enough to ignore, so they must be acted upon.

If a specific market moment is anything less than something I know, love and think is unique, then I cannot trade it, because I know I won’t have the Conviction to turn analysis into profit. Big words, but the truth is that Conviction comes half from knowing what doesn’t work, and half from knowing what does work. What I know, love and think is unique, works by definition.

Every right action in trading comes from this, which is why it is the only way I’ve found to sum up what money-making action is. Every wrong action comes from not trading what I know, love and think is unique.

The fact is, the technical aspects of trading successfully can be taught in a day. Everyone knows to buy low and sell high. But without knowing the conditions that you know you can make money in, you’re vulnerable to acting on impulse. By clearly and simply stating what you’re prepared to spend your Conviction on, it nixes out the over-thinking that seeks to compensate for not knowing; it nixes out the need to state the technicalities of what to do and what not to do in every situation – you don’t need to know. You only need to define the situations you know and love, and what to do becomes automatic.

It’s very easy to determine where a trader is in their career. A newbie might be purely technical – everything is all about the external. When a trader becomes more developed, they seek to define what to do in every situation. But what’s missing is the core, which is their Conviction. Conviction is built on knowing, loving, and being able to perceive uniqueness of opportunity, which is built on repeated experience, introspection, and analysis. Conviction is also ephemeral and often undetected by outsiders. It is how a trader relates to themselves and the market, which cannot be perceived in anything other than their trade history.


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