ZF Capital

Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade 3 to 5 times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.

– John Percival, The Way of the Dollar

Confidence, in short, means knowing you’re going to win. It isn’t a magic quality which once possessed can never be lost. To be sure, regular winners will have an inner conviction that they must win over time, if they play to the rules. This is partly an inherent state of mind and partly the result of long experience of seeing the rules working. But no one but a fool is convinced they can win just by playing. You win by doing your homework better, following the rules more closely, and acting more consistently then the other players. Winning gives you confidence and confidence helps you win. The closer you get to only trading when you’re confident you’ll win, the higher your win rate and your confidence will be.

– John Percival, The Way of the Dollar

As we all know, the danger points in trading come when we’re under stress. The immediate source of stress is usually adverse price movement, and the danger is that we capitulate to internal promptings which are irrational.

It would doubtless be a worthy objective to work to vanquish stress- as much in our lives as in our trading. But in trading the more practical solution (in life too perhaps) is to take on a series of rules for action in all circumstances. This is not complicated: the only things we do in trading are to initiate positions and then close them. It’s a relatively simple matter to formulate rules for each proposition. For example, we only open positions when all the pieces fit and we only close them when the pieces cease to fit or when our stop is hit, whichever is first. OK, adhering to the rules is not as easy as formulating them. But we can get there, step by step, if we are committed to winning.

- John Percival, The Way of the Dollar

Overconfidence is no more destructive to trading than lack of confidence; but neither is helpful and both result from an intrusive ego.

– John Percival, The Way of the Dollar