1) Forget about performance and results numbers (i.e. P/L, Wins vs. Losses). These numbers only blur the plan and increase the anxiety on not losing on next trade. This aggravates the proper mindset to prepare to trade properly. Perfectionists will not execute well and will try to focus on buying low (bargain hunting to win) when the entry is not right.
2) Create the trading plan and write it into details to avoid ambiguity. This helps prevent loosely interpreted actions and end with too much leeway and perfect execution won’t be successful.
3) Focus on the charts and work toward identifying and preparing the entry and exits. Having these numbers in mind will keep the focus on the executing at the right prices.
4) Focus on the Risk:Reward ratio in mind. Having this ratio will keep the execution precise because any miscue will change the ratio in negative way. If the ratio is set, chances of the making the perfect entry and exits are higher. (more…)
Archives of “risk reward” tag
rssRisk Vs Reward
Risk is a part of trading. Every trade carries a certain level of risk. Every trader must know the amount of risk that is being assumed on each trade. Knowing the amount of risk on each trade is one way to limit it and to protect your trading account. The best way to know your risk is to determine the risk-reward ratio. It is one of the most effective risk management tools used in trading.
The risk-reward ratio is a parameter that helps a trader to determine the level of risk in a trade. It shows how much a trader is risking versus the potential reward (or profit) on a trade. While this may seem simplistic, many traders neglect taking this step and often find that their losses are very large.
The minimum risk vs reward ratio for a good forex system should be 1:2, however a larger ratio is always better.
How to determine the risk vs reward ratio?
<!–[if !supportLists]–>1. <!–[endif]–>Determine the amount of risk for the trade. This is equal to your entry price minus your stop loss price or potential exit price.
<!–[if !supportLists]–>2. <!–[endif]–>Determine the potential reward on the trade. Based on your analysis or system, the potential exit price minus your entry price is your reward.
The 10 Bad Habits of Unprofitable Traders
The 10 Bad Habits of Unprofitable Traders
- They trade too much. A major edge small traders have over institutions is that we can pick our trades carefully and only trade the best trends and entries. The less I trade the more money I make because being picky is an edge, over trading is a sure path to losses.
- Unprofitable traders tend to be trend fighters always wanting to try to call tops and bottoms, while they eventually will be right there account will likely be too small by then to really profit from the actual reversal. The money is made swimming with the flow of the river not paddling up stream the whole time.
- Taking small profits quickly and letting losing trades run in the hopes of a bounce back is a sure path to failure. The whole thing that makes traders profitable is their risk/reward ratio, big wins and small losses. Being quick to take profits but allowing losses to grow is a sure way to eventually blow up your trading account.
- Wanting to be right more than wanting to make money will be VERY expensive because the trader won’t want to take losses and he definitely will not want to reverse his position and get on the right side of the market because in his mind that is a failure, in a profitable trader’s mind that is a success if they start making money.
- Unprofitable traders trade too big and risk too much to make too little. The biggest key to profitability is to not to have BIG LOSSES. Your wins can be as big as you like but the downside has to be limited.
- Unprofitable traders watch BLUE CHANNELS for trading ideas. Just stop it. (more…)
Follow these 13 Rules
1. I will create game plans for all my trades. |
Words of Wisdom
These generally brief phrases often include such pearls of wisdom as:
“Buy low, sell high.”
This maxim describes profitable trading in a nutshell and represents what every successful trader aspires to do. Of course, this is much easier said than done.
“Let your profits run, but cut your losses short. “
Allowing a winning position to continue making profits while taking losses quickly can make up a solid trading strategy in itself, and it is a key element of just about any good money management plan.
Many successful traders apply this as a trading rule in their trading plans in one form or another, perhaps by having a minimum risk reward ratio where the anticipated reward on a trade is always greater than the risk taken.
“Sit on your hands when you don’t have a clue.”
Knowing when you do not know where the market is going and discerning when to stay out of the market because of difficult trading conditions or because of your individual portfolio situation can save a trader considerable money and frustration.
Remember, good trading opportunities eventually arise for those who wait for them patiently.
“No one ever went broke taking a profit.”
This seems a wise and yet somewhat limiting expression perhaps. Famous trader Jesse Livermore used to say this and then finish with “but no one ever got rich taking three or four points out of bull market”. Taking profits will always add to your account, but by “letting profits run”, a substantially higher profit can often be had.
“It’s never too low to sell or too high to buy.”
Typically, markets will continue moving in the direction of the general trend. When a high or low is made, often a sufficient amount of momentum will propel the price to an ever higher high or lower low.
“Price discounts all.”
The mantra of technical analysts, the saying refers to the belief that news about any event related to the trading instrument – whether it is related to current events or supply and demand – will already be included in the price of a currency.
“All news is old news.”
A variation on “Price discounts all”, this saying refers to the idea that the market has already moved to factor information into the currency pair’s exchange rate regardless of what the news that came out was.
“Buy the rumor, sell the fact.”
Buying the rumor means going long before a bullish news item ever makes it to the news wires for fundamental analysts to mull over. Trading activity then ensues based on this rumor indicating that an item of importance will soon be released. The trader wise to the rumor can take advantage of the release of this news by selling out their position once it becomes public.
“Plan your trade and trade your plan.”
Trading does not favor the scatterbrained over the long term, so having a comprehensive and objective trading plan which can be easily followed and implemented makes up a key component of any successful trader’s methods.
“The trend is your friend.”
Keeping abreast of the major trend in the market and following it by positioning according to its overall direction will tend to give a trader an edge.
“Markets go up the stairs and down the elevator.”
This saying refers to the slow and plodding nature with which markets often go up, whereas when prices decline, they tend to do it in a much faster and abrupt way. While less of a factor in the forex market, this is especially true of stock markets.
Basically, all of the above sayings contain valuable advice and trading wisdom that can be useful for just about anyone involved or thinking about getting involved in trading forex or any other market.
10 Essential Trading Words
1. Simplicity – have a simple, well defined way to generate trading ideas. Have a simple approach towards the market. You can’t take everything into account when you try to make an educated decision. Filter the noise and focus on several key market components. For me, they are relative strength and earnings’ growth.
2. Common sense – create a trading system that is designed on the basis of proven trading anomaly. For example, trend following in different time frames.
3. Flexibility – be open to opportunities in both directions of the market. Be ready to get long and short.
4. Selectivity – chose only trades with the best risk/reward ratio; stocks with the best set ups; it doesn’t make sense to risk a dollar to make a dollar.
5. Don’t overtrade – two or three well planned trades in a week (month) might be more than enough to achieve your income goals. Patiently wait fot the right set up to form and to offer good risk/reward ratio.
6. Exit strategy – Always, absolutelly always have an exit strategy before you initiate a trade. Know at which point the market is telling you that you are wrong and do not hesitate to cut your losses short immediatelly. Don’t be afraid or ashamed to take a trading loss. Everyone has them. Just make sure that you keep their size to a minimum.
7. Let’s profits run – one or two good trades might make your month. One or two good months might make your year. Letting profits run is as important as cutting losses short. Bigger winners will allow you the luxury to be right in less than half of the trades and still be profitable.
8. Consistency – Stick to your method of trading ideas’ generation.
9. Specialize – Specialize in one or two distinct setups. It could be a combination of technicals and fundamentals, certain timeframe or special event as a trading catalyst, certain sector or trading vehicle.
10. Have a plan – Which are the stocks that you will be paying special attention to – this week, today. Why those stocks? In which direction you expect them to continue their move? What will give you a clue for the beginning of the move? Follow them exclusivelly and enter without a hesitation when they give you a signal. Don’t just wake up and sit in front of your monitor without having a clue what you are going to trade today.
How many of these actions or beliefs apply to you?
| 1 | You do not believe in yourself. | If you do not think you can do it, how can you build the confidence you need to do battle with seasoned traders? |
| 2 | You do not trust in your ability. | If you do not have the proper education, how can you honestly think you can compete in the world’s largest playground, which is ruled by the two most powerful emotions: Fear and Greed. Lack of conviction manifests itself in many ways in this business (for example early exits or entries). |
| 3 | You fail to treat trading as if it were a business. | If you do not start thinking of this as a business and filling in your areas of weakness with solid reason and education, how can you achieve any level of success? You may hit a streak, but dumb luck runs out and then what? |
| 4 | You fail to plan. | Failure to define and achieve specific short-, medium- and long-term goals is a recipe for failure. |
| 5 | You are just lazy. | Your self-motivation and continued education are the lifeblood of your business. You must be eager to learn at all times regardless of past experiences or level of current knowledge. |
| 6 | You fail to equip your business properly. | You must have the proper tools. Do you think a doctor would perform surgery with a shank instead of a scalpel? How does a carpenter build without a saw or hammer? You get the idea. Use a reliable data and charting provider; get high-speed Internet access, and so forth. |
| 7 | You fail to understand how to accept a loss. | The markets do not know you. You do not exist to them in any other form than as the other side of a transaction. They do not care if it is your last dime, and your kids will not have shoes, and on, and on. We need losers to make money in this zero-minus-sum game, but taking an acceptable risk-reward ratio position and being wrong is not losing. |
| 8 | You fail to control your emotions. | Whether you win or lose, you should strive to remain at a comfortable emotional state while trading. Building the proper business plan for trading is enormously helpful in getting you to do just that. |
| 9 | You fail to learn and execute the fundamentals of trading. | Read, listen to CDs, attend seminars, read the Trade2win forums daily and practice your newfound knowledge. Everything you seek to know about trading has already been written or spoken about by successful traders. Try to learn something everyday. |
| 10 | You cannot cope with change. | There are three paradigms your mind should be a slave to: Patience, discipline and money management. The markets change everyday, and it is these three skills that allow us to be rigid and flexible at the same time in order to take consistent profits. Fight it and fail. |
| 11 | You cannot follow rules. | Losing traders often think that the rules of trading are made for others. Think that they are not for you? Think again. Fight them and you will have a very short trading career. |
| 12 | You are too greedy. | Thinking about trading profits instead of how you could better execute your plan is an obvious sign of greed. |
| 13 | You fail to do what you know. | Many people know what to do; yet very few people are able to do what they know. It is the rules of trading that force one to take action. |
| 14 | You fail to understand that hard work makes luck. | Some people think good traders are just lucky. Quite the contrary. They are studious, knowledge-seeking people who understand the paradigms they need to operate by. Take a close look at the traders you see as successful, and you will find years of education and hard work that created that “luck.” You can be just as “lucky.” |
| 15 | You blame others when the full responsibility is yours. | Accepting responsibility is the fulcrum point for succeeding in anything, especially trading. Doing something about it is the criterion. Execution is the reward, not the money. Money is the by-product of executing to plan. Do not blame the broker for a bad fill, when it was you who hesitated. This is just one example, but we are all aware of many others. |
| 16 | Your lack of persistence. | Be willing to take a stop loss at a particular price and time and just accept it without a fight. Be equally able to jump right back in at the same spot if the chart patterns and price action dictate that it is prudent. Or, even reverse your position if that is the prudent course to take. If your plan is drafted properly, you can be successful over time, but only if you are still around to be in business. |
| 17 | You fail to follow the first law of learning. | The first law of learning is repetition. Write it down and study it several times a day. Commit it to memory. Execute your plan. |
| 18 | You fail to establish and maintain a positive attitude. | This one is self-explanatory. |
| 19 | Yes, that’s right; this is the 19th reason for failure: BTNA (Big Talk No Action). | Many “traders” are not honest with themselves regarding the actual results of their trading; therefore, it is impossible to build the level of trust in themselves needed to act in the proper manner as situations arise. For example they put on a trade and then change their stop loss, or, even worse, they don’t place a stop order. This is a self-defeating cycle that is hard to break. However, if you are honest with yourself, you have a shot at improvement. |
Zero is Bottom
The markets have a clearly defined Zero-value. This has several important implications. First, traders often discount the possibility of something becoming absolutely worthless (i.e. going to zero), so the more the price goes down, the greater the traders’ tendency is to believe that it has a higher probability of going up again; therefore the temptation to catch the bottom and go long becomes compelling (despite its irrationality). Traders must realize that how they are hardwired to think as people is not necessarily the way they should think as a trader. There is a reason why 90% of people who attempt to make a living as a trader end up failing and it is not because of intelligence, information, technology or effort. In a nutshell, I believe failure in trading is because of a lack of self-awareness. The solution is to compartmentalize your thinking. When you are interacting in society or at home, let yourself think like a person; but when you sit down to trade, you need to think objectively by evaluating risk/reward as a trader should.
Risk Size Is Key
YOUR WINNERS CAN RUN….IF YOU LET THEM
The proponents of risk/reward ratios say that in order to be successful the trade must out produce the amount of money you have at risk by at least double or triple your risk amount but what they fail to take into consideration is that the reward side of any trade is unknown.
WHAT YOU CONTROL
You see the only part of the trading equation that you have any control over is the risk side of the trade. The reward side of any trade is a complete mystery. Oh sure, we all have our best guesses as to where the market might go next, but in the end it’s really just a crap shoot. Sometimes we’re right and sometimes we’re wrong and if we’re honest with ourselves we will admit that we really don’t know where the market is going next.
If we don’t really know where the market is going, namely the reward side of the trade, why would we even include it in our trade scenario never mind making it the deciding factor of whether to take a trade or not? Obvious, right? Yet in spite of this I continue to encounter traders who insist on only taking high risk/reward trades thinking that they are being smart investors by doing so. (more…)
Opinion no value at all
The market does not care about your opinion and what you think it ought to do. The market cannot be tamed, placed in a box, or coerced into your way of thinking. The market does not care about your technical analysis based on past history not does it care about your projections for the future. The market does not care about this edge or that one. The market does not care about what I think, about what the most popular flavor of the month guru thinks, or what the latest ANALyst on Blue Channel thinks. The market does not care about your dreams, goals, and aspirations no matter how well grounded and planned. The market does not care about the latest economic news. The market only cares about the present. Remember this the next time you get into a trade believing, hoping, and praying that it HAS TO WORK. The market does not care if it hurts you, so if you choose to believe, instead of see, what is right there in front of you, then that which you fear the most will come to be. I am not alone when I say this.
“Professional traders make good risk/reward trades and are not concerned with the outcome. Nor are they under the delusion that they really know where a stock or the market is headed. Those who will be pushing paper around at some dead end job in the near future are new traders who trade seeking to fulfill some narcissist need to be correct. Or smarter than the market. Or your trading neighbor. Or a friend. Get over yourself. You have no idea where the market or stocks are really going in six months. All there is are favorable risk/reward trades to make with the outcome uncertain and controlling your risk paramount.”
“This is one of the paradoxes of trading and investing: you need distinct views to put your money at risk, and you need to persist with these views in order to ride winners. At the same time, you can’t become married to these views; you need to quickly revise and even abandon your outlooks in order to limit losses. We can trade and invest for ego needs, and we can trade and invest to make money: over the long haul, we can’t do both. It takes a strong ego to formulate and act upon one’s ideas; an even stronger one to step back from those ideas in the face of non-confirmation.”
“Most people, let’s face it, must be right. They live to have other people know they’re right. They don’t even want success. They don’t even want to win. They don’t want money. They just want to be right. The winners, on the other hand, just want to win.”
“Life happens when you’re making other plans. This is true and no matter how much we visualize future success, set goals and create plans for achieving them, there will be things that happen over the course of the coming year beyond your control that will impede, slow, stop or even reverse your progress. This is to be expected and, if at all possible, planned for. Frequently the difference between success and failure is being able to accept those challenges head on as they occur and keep working toward your goals even when you experience complete failure and hardship. Anyone who has achieved anything worthwhile has failed in doing so, if not many times. But, that’s part of how we grow and get better.”
“The less I cared about whether or not I was wrong, the clearer things became, making it much easier to move in and out of positions, cutting my losses shot to make myself mentally available to take the next opportunity.”
If you enter a trade and the stock doesn’t go the way you predicted, go ahead and take that loss immediately. Don’t sit their like a twit and try to justify a bad trade as you lose more money, dump it. Move on. Forget the need to be right.”
“In reality, the market puts us in a contest with ourselves. Until we let go of the false ideas of what makes the market tick and simply respond as the market unfolds, we will continue to be punished.”
The degree by which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader.