Blog #5 - Advice I'd give myself

So this one’s going to bit of a hypothetical and it’s based on a recent post on Whirlpool where a new investor was seeking advice about starting out. It’s also inspired by a recent tweet by Steve Burns asking this very question.

The two questions got me thinking, what did I wish I knew when I first started trading, what were my key turning points and what would I do differently.

So first up, what do I wish I knew before I started trading:

1. I wish I knew that I didn’t need to win every trade, or even most trades to be successful. To me this is one of my key learnings. I spent far too long trying to make sure that each and every trade was right, when in the end that was just me trying to stoke my ego. Trying to be right in trading is a fast way to ensuring that your going to lose money.
2. I wish I understood risk management and how position sizing worked. As I’ve said previously, I used to take big positions to try and take advantage of small moves, this worked a lot of the time, until I didn’t. If any of you have traded using momentum of penny stocks you’ll know what I’m talking about here, these stocks can fall as quickly as they rise, sometimes within minutes and if you’ve got big positions, they can lose you money fast, particularly when combined with point 3.
3. I wish I really knew what cut your losses fast and let you winner run meant. My biggest trading losses were caused by a combination of points one and two. My ego wouldn’t allow me to accept that the trade was wrong and surely it would bounce back which when combined with a big position meant big losses.
4. You can’t predict the future movements, so don’t try to. I think this ties back to point two and maybe also to be me being a bit of optimist, I always bought stocks on the assumption they’d keep going up, this wasn’t always the case, particularly with penny stocks.

For me those are the three biggest lessons I wish I’d known before I started trading.  Had I know those I think I have had a shorter journey. However that being said, I’ve recently been listening to the Behavior Investor by Daniel Crosby (highly recommend it and I’ve added to the resources page) and Daniel talks about how the brain is more wired to learn from pain. Given I had some pretty painful experiences which taught me the three lessons above, maybe they wouldn’t have stuck if I just known them in advance…

So what was the turning point for me.
Really it was reading a post on Whirlpool where someone had asked for recommendations for trading books and one of the recommendations was a book called Trend Following by Michael Covel. I thought that sounded interesting and went out and got a audible version of it (I can speak highly enough of Audible, it’s made it much much easier for me to smash through trading books). This book really changed my approach to the markets and trading (and enabled me to make some more painful mistakes – but that’s probably a whole other blog post).

From trend following, the biggest shift for me was really point three above around cutting losses fast. After reading the book, I cut a couple of positions I’d been holding for months hoping they’d bounce back (3 years later and I think they are still about the same level they were when I sold out, if not lower) and freed up my capital to deploy else where. There’s a lesson there too I suspect 😊.

I think one of the key take-aways for me from Trend-Following, beyond the above, whilst buy and hold does work, it can be optimised (to an extend, you’ve got to be careful to not over optimise) to work better for the investor. I think Covel sums it up nicely when he calls buy and hold, buy and hope.

So the TLDR summary of what I’d tell myself if I had a time machine:

• Cut your losses and hold your winners.
• Truly understand risk management.
• Don’t be upset by losing trades.
• Accept that you have no idea on what’s going to happen next.

Cheers for now,
Nick the Trader Guy
​April 2021
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