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SIMON BROWN: I’m chatting with Fred Razak, chief strategist at CMTrading. Fred, appreciate the time today. It’s a new year. A lot of folks are either going to be considering getting into trading, or perhaps they’ve been doing it for a couple of years or however long, and they’re looking to improve their trading, their profitability, their skillset. You sent out a note recently around some of the errors we can avoid.
The first one is really emphasising strategy over emotion, getting rid of that emotion – which is easy for you and me to say, but hugely important.
FRED RAZAK: Oh, absolutely. We are human beings, We’re not computers. But nevertheless it doesn’t mean completely suppressing, disassociating from emotion. It just means managing the emotions. There’s a difference. And I feel that in trading you can’t completely alienate yourself from the emotions. There’s that six sense that a trader has when they’re trading the financial markets, but those emotions actually work towards their favour. I’m talking about when those emotions, the anger the frustration, the revenging – you miss a trade, you called it and then it didn’t go. It went and you could’ve made the money and then you revenge trade.
I’m talking about those type of scenarios where you have to keep it in check because it’s one of those type of things that could self-destruct.
SIMON BROWN: Yes, that’s a good point. I remember when I first started trading and I was reading Mark Douglas’s Trading in the Zone – we’re going back 20-plus years. I always tried to get rid of all emotion. To your point, you can’t. We are human beings. It is there. But what surprised me in the early days of trading was how it is such a psychological endeavour. It’s not just a chart and numbers. There is so much psychology, so much emotion involved in the process, and managing that is huge.
FRED RAZAK: Absolutely. You quoted the psychological guru of trading, Mark Douglas. I’ve read his books, I don’t know, two or three or four times and taken some fanatic notes on it. And he’s true. He is completely one hundred percent true. It’s going into the psyche, it’s understanding this. And if you think about it, okay, if you really think about it in any industry that you’re in, it’s more psychology than it is skill. Anything that it is, think about it. Athletes talk about it. I remember back in the day when Tiger Woods faced some tremendous odds, was talking about being in the zone and getting into that head space and being in that zone, and Michael Jordan as being the phenomenal athlete that he was. But any amazing athlete that you’ve kind of interviewed, you know and you see how much psychology and how much mental preparedness and mental strength allows the person to really prevail and galvanise, despite the crises.
And a lot of times people look at crises as ‘let me avoid it’, but these people [are] actually relevant because what ends up is that they only become better because of it.
SIMON BROWN: Yeah. I like your point on that, absolutely.
The other one, and it ties into that, you talk around balance between ambition and contentment. And as much as this is again ‘don’t be greedy’, it again comes back to the psychology, to finding a place where you’re comfortable and understanding that good profit is a good profit. Let’s not get totally crazy and get overly greedy about this, because it can turn on a dime.
FRED RAZAK: Absolutely. It kind of reminds me of when I was a kid and my parents always told me, ‘Don’t take more food than you can finish’. You built up this plate and then you didn’t finish it, and they give you the guilt conscience that you didn’t finish it.
But it’s the same idea because if you are aiming too high and you don’t have the mechanism, the stamina, in order to carry that load, it’s like winning the lottery overnight. [For] that person really sustaining depends. You have to be mentally ready for it. It has to be a preparedness that you have to absorb. And I think that that’s more important than anything else.
SIMON BROWN: Yes, and we see – I think the number is 75% of Lotto winners don’t have the money in five years, [and] simply weren’t ready.
The last one you look around is calculation error. This comes into mishandling leverage, taking on too much leverage potentially, but it boils down ultimately to money management and having really strong management, which is position size as well as stop-loss strategies.
FRED RAZAK: Trading the financial markets doesn’t take a genius. It just takes common sense. That’s all it is. You use the principles; you apply the principles. Not every day you’re going to hit that big home run that you’re looking for, but also you’ve got to think defensive and thinking defensive is just part of the game. It’s part of the strategy.
And so, yes, money management, I would say. It’s money management [and] psychology, and those are the two most important elements of trading. You could do technical analysis from today until doomsday, but the markets will do what the markets will do. But if you have money management in place and you have your mental health in place when you’re trading the financial markets, you’re one up against the markets.
SIMON BROWN: I like that point. It’s money management, it’s psychology. Trade analysis is a point, but it’s not the end of it.
We’ll leave it there. Fred Raza, chief strategist at CMTrading, I appreciate the time.
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