Strategy is ‘key’: why traders need to be ‘behavioural specialists’

By Lucy Dean

November 20 2017
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Knowing when to enter the market can be straightforward but knowing when to exit often isn’t, an educational consultant has said, highlighting the importance of strategy.

Strategy, chess piece, market strategy, behavioural specialists

Trading floor manager at Learn to Trade, Adam Truelove told Nest Egg that a strategy comes down to knowing when to get in and get out.

He explained that while “everyone’s an expert getting in”, many equally “completely fall to pieces” getting out.

“This is where a strategy is really key… You have to look at historic things, historic behaviour of the market around these news items.”

Speaking on the Nest Egg podcast this month, Mr Truelove said traders can “never predict”. However, by tracking past behaviour, traders can analyse the “fear and greed” that is driving the market.

“You really need to become a behavioural specialist with these things and learn how to technically look at the chart, execute the strategy, and hey presto, you get profits.

“You get the occasional loss, but you keep those to a minimum.”

Continuing, Mr Truelove said that as an educator, the first thing he teaches people is the importance of “very strict” risk management guidelines and then strategy.

That’s because a strategy that recognises its entry and exit point “defuses the fear” that can come with investing; “Which makes it much easier to then make money and stay in as the long game.”

He added: “In order to understand the market, you need to, as I was explaining earlier, you need to have a nod to the fundamentals which is the news, to pay attention to what drives things.”

Once a trader understands how to “trade properly” and has the ability to read a technical chart and understand the market’s patterns, the technical skills will align with the fundamental, he argued.

“So, you might as well have just looked at the technical [side of things] anyway,” he said.

“It's a bit like saying: ‘Right, I want to get to a certain destination,’ and you have a look at your roadmap first. You would always do that to pick a journey, otherwise you're just going to aimlessly bowl around the country and you might not even get there.”

He contended that trading should be destination-driven. By understanding how to get there and what is required to make the journey, “the rest falls into place”.

So how much risk is too much?

The most Mr Truelove would risk on a trade is 2 per cent of the entire capital of an account, he revealed, noting that the “age-old adage of cut your losses early and let your profits run… still applies”.

He explained that by keeping to this limit while trading on a one-to-one basis, traders would gain 2 per cent. A risk-reward ratio five times bigger would see returns of 10 per cent.

At the same time: “If it goes against you, you only lose your 2 per cent. Then it's a numbers game. Trading less is actually more.

“Trading just because you can trade, doesn't necessarily mean you should.”

With this in mind, Mr Truelove pointed to a coaching experience he had where the client was “massively overtraded” and “didn’t… listen to a word I said in the beginning. He’s suffered that consequence”.

Noting that this was a decision that the client had made, Mr Truelove said it showed the importance of risk management.

However: “We can turn that round in absolutely no time and get it all back shipshape.”

Learning from mistakes is a critical element of learning, he continued. He said when babies are learning to walk they need to have a few accidents “and then all of a sudden that doesn’t happen anymore”.

Even with education, it’s possible to do it, he said, relating that he had bought houses which had later turned out be a “complete disaster”.

“Put all the money in and then something happens with the market, or you just pick the wrong location…Whoops.”

Nevertheless, with a solid strategy: “Something else in your portfolio will massively overtake the loss you had there… diversification is key.”

Here more from Adam Truelove on the Nest Egg podcast here:

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