John Piper’s tips to overcome psychological challenges of trading to fetch superior returns

Noted market analyst John Piper says one of the difficulties with trading is that the rules change as one progresses in his trading journey.

He believes a novice trader must learn to cut losses, and nothing much matters at this stage. But once that rule is ingrained, it is down to running profits.

“But if you try to run profits at the cut losses stage, you will have a lot of problems,” he wrote in his book ‘The Way to Trade‘.

According to Piper, another difficulty is that many traders break the rules and win, but this can be disastrous because the market is bound to catch you out if you follow the wrong rules.

“Trading has a logic of its own. If you allow losses to run, the logic is that you’ll be wiped out. Over many different trades, the market will exploit any weaknesses in either the trader or his/her system. Statistically, a few ‘bad’ traders will do well for a while – but not in the long run,” he writes.

Who is John Piper?
John Piper is the founder and editor of The Technical Trader, a leading newsletter in the UK for traders.

Piper writes for several trading websites and speaks at trading conferences and seminars in Europe and the USA, with a particular emphasis on the psychological challenges of successful trading.He offered a few tips to investors in his book to deal with and overcome the psychological challenges of trading to amass solid returns. Let’s look at these tips-

1. Reduce position size to the point where you are comfortable
Piper says many traders put themselves under excess pressure, and by doing so, they are prone to making bad decisions and losing money. So, he suggests reducing position size and making more money.

2. Consider using option strategies – don’t limit your options!
Piper says options have many plus points and play a vital part in a trading strategy.

3. Finding a trading mentor
According to Piper, trading is a difficult business, and not the least because it is a zero-sum game.

“It is a negative sum game because every time you enter the game, you pay a commission, not to mention all the other expenses involved, price feeds, computers, software, etc. With futures, the amount every winner wins is paid for by all the losers, but all participants pay commissions and other costs. So, in aggregate, it’s a negative pot. It’s no surprise so many lose,” he says.

He says if investors need help with trading, they should find someone who has the experience.

“Ideally, a local trader – many are prepared to help because trading is a fairly dry business with little meaningful human contact. Otherwise, you may need to find a professional who is willing to help, but he may well expect to charge a fee. I do this myself, but your best bet is to try and find someone who is local to you,” writes Piper.

4. Use stops that have some meaning
Piper says not all traders use stops, and by not using stops, everything becomes simpler because investors get wiped out fairly quickly.

“If you are using an approach that utilises stops, then try and ensure your stops have some significance. Otherwise, you tend to be throwing money away,” he says.

5. Understand the logic of your trading approach
Piper says every approach to the market involves risk. As a trader, one must control risk, just as a tightrope walker learns to live with imbalance.

“Understand the logic of your approach and the risks you are taking because that risk will come home to roost. In one sense, the market is a generator of random sequences, especially if you follow a precise algorithm. If you or your approach has a weakness, the market will find it in one of those random sequences,” he says.

6. Let profits run – wait for the second marshmallow!
Piper says unless investors let their profits run, they will never cover their losses, let alone come out on top.

“You must also cut your losses. Most traders learn to cut losses quite easily but have trouble learning to run profits. This is not surprising. Cutting losses is an active function requiring careful monitoring of what is happening – it requires action. Running profits, in contrast, requires inaction, and doing nothing can be tough. In modern society, we are used to quick gratification. We want our goodies, and we want them now. The same goes for trading profits: once you see them, you want them – but you cannot have them if you want to let profits run,” he says.

7. Be selective
According to Piper, there are so many keys to success, but he feels being selective is the one that separates those who make lots of money from those who just get by.

8. Don’t predict
Piper says market action is not predictable, and a trader does not predict action – he takes calculated risks. He risks a little to make a lot.

9. Don’t panic
Piper says investors should learn not to panic as it is a critical part of being a successful investor.

“Panic is mother to losses. Part of this is not putting yourself under undue pressure. The more relaxed you are, the less likely you are to panic,” he suggests.

10. Be humble – big egos cost a lot to run!
Piper says a person who’s full of himself has no room for anything else: he will not listen or learn.

“A trader who is not humble may not listen to the market and will get wiped out. I suspect we have all heard stories of macho traders who take on the market and get turned into mincemeat. I believe humility is essential for trading success,” he adds.

(This article is based on John Piper’s book, “The Way to Trade”.)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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