1. Managing the risk of ruin. Do not risk so much on any one trade that 10 losing trades in a row will destroy your account. risking 1% to 2% of your trading capital per trade is a great baseline for eliminating the risk of ruin. 2. Only trade with a positive risk/reward ratio. Only take trades where your possible reward is at least two or three times the amount of capital you are risking in the trade. 3. Always trade in the direction of the prevailing trend. Always trade in the direction of the flow of capital for your specific time frame. Shorting rockets and catching falling knives is not profitable in the long run. 4. Trade a robust system. Back test and study your trading method, system, or style to ensure it is a winning system historically. The key is that it had bigger winners than losers over the long run in the past. 5. You must have the discipline to take your entries and exits as they are triggered. You must take your entries when they trigger, your losses when they are hit, and your profits when a run is over to be a successful trader. 6. You must persevere through losing periods. All successful traders were able to overcome their losing periods to come back and make the big money. If you quit you will not be around for the opportunity to win big. 7. If you want to be a winning trader you must follow your trading plan not your fear and greed. Emotions will undo a trader more than anything else. Trading too big is due to greed, missing a winning trade due to no entry is a sign of fear, traders must trade the math and probabilities not their own opinions or emotions. |
Archives of “robust system” tag
rssTen Ways to Trade With an Edge
An edge is an advantage that a trader has over his competitors, allowing him to generate and retain profits from other traders . There can be many types of trading edges through risk management, psychological management, and through better trading methods.
Here are a few:
- A selective trader that only trades the best set ups, trends, and stocks has the advantage of waiting for the fat pitch and not just swinging at every ball thrown his way.
- Simply using correct position sizing can put you in the top 10% of traders simply by not blowing out your account and staying in the game by maximizing winners and minimizing losers..
- Risking no more than 1% of your capital per trade brings your risk of ruin down to almost zero and allows the trader to survive losing streaks. You have the edge of being around to have a winning streak later on.
- Only taking trades with a risk-to-reward of 3 to 1 or better gives the opportunity to have bigger winners than losers in the long run which is needed to be profitable.
- Trading in the direction of the trend in your time frame gives you an edge over those losing money by fighting the trend.
- Having the discipline to follow a trading plan gives you an edge over those that trade based on fear and greed. (more…)
Surviving the Trading Game
Trading coach Van Tharp has a trading game he lets his students play. In a class of 20 to 30 people he will pull different color marbles out of a bag to determine whether the classes trades are winners or losers and by what multiple. There are overall more winning marbles than losers marbles in the bag making this hypothetical trading system a robust system. In the long term the traders playing the game should make money. While the class all receives the same win and loss results during the game some players blow up their account to zero very quickly and others end up with great returns during the game. What is going on? What makes the difference? Each individual traders bet size and the amount of capital at risk determines whether they win or lose even though they are all getting the same trading results in wins and losses. The traders that bet too much and lose at the beginning of the game blow up quickly, the ones that bet big and win in the beginning start in the lead but blow up their accounts later. The best risk managers in the game win primarily by simply surviving their first consecutive string of losses while others do not. The winners also are able to grow their bet size during winning streaks as their capital grows. They bet more as they win and less as they lose by defining a percent of their total capital as a risk multiple that they can expose to losses.
So you see in the trading game, after a trader has a robust system it is still the best risk managers that win in the long term. (more…)
5 Steps for Traders
- STAY DISCIPLINED AND ONLY TRADE YOUR METHOD. If you do not have a robust system, method, or strategy do not trade again until you have one.
- ONLY TAKE TRADES WITH IN THE PARAMETERS OF YOUR TRADING PLAN. Trade your plan not your emotions. If you do not have a plan that defines entries, exits, and position sizing do not trade again until you have one.
- YOUR FIRST LOSS IS YOUR BEST LOSS. When your planned stop is first hit just get out. In trading hoping is a very expensive emotion
- UNDERSTAND THE MARKET ENVIRONMENT. There are times to be short, times to be long, and times to be out. Volatility is many traders kryptonite. If the market itself is not conducive to your strategy wait until it is.
- CHOOSE YOUR SPOTS CAREFULLY. Do not rush trades, wait until you get the right set up, trend, or break out you are waiting for, the market isn’t going anywhere, wait for the fat pitch.
Ten Ingredients to become A Great Trader
It is all a game of risk management, mind, and a robust system. Everything else is just noise.
- Passion for trading, only passion can fuel the work ethic needed to do the hard work that leads to success.
- Goal oriented traders succeed, if you know why you are trading and where it leads you may just get there.
- Perseverance: It is hard to lose if you never quit.
- Resiliency: The ability to come back from losses may be the secret to trading success.
- Back testing systems and methods before trading them speeds up the learning curve and side steps a lot of learning through real losses. (more…)
The Top Ten Similiarities of Winning Traders
You can read trading, books until you are red-eyed, you can spend thousands of dollars on seminars, you can try to get successful traders to give you the secret sauce of trading or the Holy Grail. But, in the end it is simply you versus the markets. You have to pick your system, your risk tolerance, and take the heat in your own account, it will be your own money you lose.
No one can tell you the right system and method for you. If you can take draw downs in equity mixed with long term capital growth then trend following may be for you. If you love playing the hottest stocks in the market then CAN-SLIM or the Darvas System may be the right systems for you. If you just have little patience and love action then you can join the few who have mastered day trading. There really is no right system for everyone, it depends on what you can handle. However here is what all winning traders must have to win in the markets regardless of time frame and system:
Trading System
- They trade a robust system or method that wins more money over time than it loses.
- Their system gives them a reward to risk ratio that is in their favor.
- Their system or method is proven to work with a live trading record over many markets and trades or has historical back testing. (more…)
Key to winning at trading
The real secret to making money in the markets is simply by having bigger winners than losses. A robust system may only have a 50/50 win rate but the half that are winners are much bigger than the other half that are losers. That is the key to winning at trading, not stock picking, not some secret formula that will get you in at the bottom and out at the top. Winning traders simply have small losses when they are wrong and big wins when they are right. They don’t have to be right every time they just have to be right big and wrong small. It makes no difference what method you use to achieve this you just have to be consistent in your method once you have found a winning one.
Ten Questions to ask Yourself Before Every Trade
If you are just randomly trading what you like with no real underlying system, method or planning then unfortunately your odds of success in the long term are slim. Trading a winning methodology is what creates an edge in trading.
Consistently trading a robust system or methodology enables you to trade in a way that historically wins, controls risk, and does not bring your ego and your emotions into your trading in a destructive way.
Ten questions to ask yourself before every trade:
- Does this trade fit my chosen trading style? Whether it is: swing trading, momentum, break out, trend following, reversion to the mean, or day trading?
- How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital?
- What is my risk of ruin based on my capital at risk?
- Why am I entering the trade here? What is the trigger to trade?
- How will I exit with a profit? A price target or trailing stop? (more…)