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The following 10 reasons may be why the 10% of long term profitable traders take the money from the 90% that are unprofitable. I see these differences in real life all the time. There is a big difference between profitable and unprofitable traders that usually comes down to homework, mental discipline, and risk management.
- Winning traders let winning trades get as big as possible before exiting. They have the really big winners to pay for all the losers.
- Winning traders have no patience for losing trades, they keep losses small. They know how not to give back their profits with big losing trades.
- They are focusing on trading actual price action not their own opinions or beliefs.
- They are experts on the trading vehicles that they trade.
- The trade with the trend in their time frame.
- Good traders know that their trailing stops are smarter than they are.
- Profitable traders know that it is their robust methodology that makes them profitable not any one trade.
- Winning traders are great risk managers. Their #1 concern is how much they can lose, their #2 concern is how much they can make.
- Profitable traders have put in the time, usually years and thousands of hours to learn what really makes money in the markets.
Profitably traders have studied historical price data, chart patterns, trends, and price action.
Brandt uses high/low/close bar charts as his primary trading (not, he stresses, forecasting) tools. He is for the most part a longer-term discretionary pattern trader who enters on breakouts that meet his stringent requirements. Since he knows that only 30 to 35% of his trades will be profitable over an extended period of time and up to 80% will be unprofitable over a shorter time frame, he is exceedingly cautious about leverage. For instance, his trading assets committed to margin requirements rarely exceed 15%.
In the first two parts of the book Brandt offers the reader a thorough course in identifying and categorizing trading signals, placing initial protective stops and subsequent trailing stops, pyramiding, and taking profits. The course addresses traders at all skill levels. For instance, he describes his own trading plan as simple, but some of its elements require a degree of judgment and sophistication that can only come with extensive practice. One example: “time phasing is a hurdle all traders must clear in order to be consistently successful.” (p. 88)
The third part of the book is Brandt’s five-month trading diary, and it’s a fascinating read. Not only does it describe individual trades but it shows how good traders evolve. Take month four, where the author is in a drawdown period. He writes that he has always known that there were flaws in his trading plan but that “good times provide cover for the deficiencies of a trading plan.” During tough times “markets have a way of exploiting flaws in a trading plan. … The challenge is to find the fundamental flaws, not just to make changes that would have optimized trading during the drawdown phase. … Almost always the changes [the author has made to his own plan] have dealt with trade and risk management, not with trade identification.” (p. 189) (more…)
I wonder how would you rank order market selection, setup/entry timing, protective stop, trailing stops/exit and position sizing in terms of overall importance to the success of a trading system?
A: Each are important, but in analyzing numerous strategies I have not seen a tried-and-true ranking system that fits everything.
The reason I think (and my research proves out) that why strategies fail are directly related to three main things: 1) user error (i.e. failure to act on the signals provided by your system in a consistent manner without trying to outsmart the system, 2) over optimization and use of extensive leverage, and 3) the most important of all – little to no risk management through proper position sizing and stops. All in all, if you really are focused on improving yourself in 2010, the first place to look is risk management as it has more of an impact over your eventual success or failure than anything else.
- Winning system-Only trade tested systems with a positive expectancy in the long term.
- Faith– Your system has to allow you to trade your beliefs about the market.
- Risk/Reward-Never trade unless your profit expectations are greater than your capital at risk.
- Discipline-You have to keep trading your method even when it doesn’t work for a given time period.
- Ego-Admit when you are wrong.
- Emotions-Trade the math not your emotions.
- Risk of Ruin-Never risk more than 1% of your total account capital on any one trade.
- Position Sizing-Use your capital at risk to understand the right amount to trade based on the securities volatility.
- Capital at risk: Never put more than 6% of your total capital at risk at any given time on all positions.
- Trailing stops- Always have an exit strategy to lock in your winners.
1. High probability setups with short profit targets
If you are not winning more than 75% of the time you’ll never make it as a professional trader. Whilst there are other components to success, he does make a very good point. The most common trading strategy employed by successful trader is to identify a high probability set up and couple that with an aggressive profit exit strategy that captures short term gains. For example, you might have a entry criteria that easily captures 15 points on average but you set your profit target at 6 points.
2. Adding to winning positions
Many people think all trades should lead to profit but you’ll find the most successful medium term traders on win 40-55% of the time. The difference between an amateur and a professional, when trading short to medium term trading systems, is their ability to maximum their cash on a trade when it’s winning. The Turtles, under the watchful eye o f Richard Dennis and Bill Eckardt, had a way to add to their huge winners up to 4 times. Very powerful. In order to maximize this strategy you will need to identify your R multiples which will be saved for another article.
3. Mechanical trailing profit stops
Knowing when to take profits can be the most mentally draining part of any trading system. Its not unusual to start trying to let profits run that the markets starts retracing and wiping out all your open profits. The way to overcome this emotional rollercoaster is to build mechanical trailing stops that maximize your profits on winning trades whilst minimizing giving back to much in open profits. (more…)
RULE 1 – Keep losses small. I am more concerned about protecting my capital and ensuring any losses are small, than I am about making money. I’m going to have losses, but I control them and let the winners take care of themselves. The hardest job of any trader is to get out of a losing trade, believe it.
RULE 2 – Do not forget Rule 1.
RULE 4 – Position size every bet in relation to your bank.
RULE 5 – Always use stops, not as a trading tool, but as a disaster avoidance technique.
RULE 6 – Give your trade room to breathe, don’t place stops too close, most beginners lose because of this. Remember, the wider the stop the smaller the trade size. This is also dependent on the timeframe you are in, simple tip if you are trading on the 5 min. chart. Check the 10 min one as well. Stops should be placed visually in my opinion.
RULE 7 – Don’t be greedy, appreciate small and consistent gains. Once you’re in a profitable position, consider moving your stops – especially to break even – and then you are using the broker’s money. If your software has the facility, then trailing stops could the answer.
RULE 8 – Accept that the markets are totally random and unpredictable and practice makes perfect – give yourself time before trading ‘live’.
RULE 9 – Control REVENGE, after a loser take a break, always. Never strike right back, never, and never double up to recover your losses.
RULE 10 – Never HOPE that you will win, trade only when you see a good trading opportunity, and remember live trading is different mentally from demo trading.
RULE 11 – Keep accurate records of each and every trade, winners and losers, even on a demo account, you must learn the correct habits.
RULE 12 – Eliminate fear, fear of failure and fear of trading. If you suffer from fear then trading is not for you.
RULE 13 – You do not have to trade, if there are no good trading opportunities then do not trade, there is always tomorrow. You can always spend the time practicing new techniques on a demo account.
RULE 14 – Take full responsibility 100% for your own trading – only you can win at trading, do not rely on any external crutch to blame.
RULE 15 – All markets are bearish, they will eventually reverse, prepare and profit from them.
RULE 16 – If you lose, bet smaller. If you win, bet bigger. (more…)
- I am a trend hunter I want a stock that has the potential to move 10-20 points in my favor.
- My top pivot points for trades is the 5 day EMA (3 & 7DEMA for NF )
- I play the long side in bull markets primarily and the short side in bear markets primarily.
- I go long the top monster stocks in up trending markets.
- I never short a monster stock above the 50 day moving average.
- I short the biggest junk stocks in down trends, the ones that are unprofitable and made major missteps with customers and investors.
- I like to trade with all time highs or all time lows in stocks with in striking distance.
- Moving averages are my best indicators.
- I never have targets, I let a trend run until it reverses.
- My watch list for longs is the Investor’s Business Daily IBD50.
- I use Darvas Boxes at times to trade stocks.
- I am not trying to prove anything about myself I am only trying to make money.
- I will quickly admit when I am wrong when a stock moves against me enough to show me I am wrong.
- I trade my own method, I do not trade others advice.
- If I am losing and very unconformable with a trade I get out of it.
- I trade position sizes I am mentally comfortable with.
- I do not try to predict the future I look for what the chart is telling me.
- I trade the chart not my personal opinions.
- I am not afraid to chase a trending stock.
- I understand that I chose my entries, exits, risk, and position size and the market chooses when I am profitable.
- I do not worry about losing money I worry about losing my trading discipline.
- I have faith in myself and my method.
- I do not blame myself for losses.
- I do not blame myself for losses where I followed my rules.
- I attempt to never lose more than X % of my total capital on any one trade.
- I NEVER add to a losing trade.
- I use trailing stops to get out of winning trades.
- I use mental stop losses to get out of losing trades.
- I use position size to limit my risk.
- I use stock options to limit my risk.
- I know my biggest advantage in trading is small losses and big profits.
- I never expose more than X % of my capital to risk at any one time.
- I understand the market environment I am trading in.
- I understand the volatility of the stock I am trading.
Trading with no stop losses. You can’t control your profits but you can control and limit your losses with a planned exit. Not having an exit plan can be very expensive when a trend takes off against you and you start hoping instead of just cutting your losses and moving on.
- Your opinion can be very expensive. Trading your opinion against all other market participants can be very expensive. The market goes where it wants and when you disagree with where it is going it will cost you.
- “Egos are expensive things.” – Ray C. Freeman. Inflated egos cause a trader’s #1 priority to be proving they are right and refusing to admit when they are wrong. It is very expensive for ego gratification to be above making money.
- Trading off predictions can cost a lot of money when they are wrong. There is more to be made by reacting to what the market is doing instead of predicting what you think it will do later.
- Stubbornness causes small losses to become big losses. It causes a trader to make the same mistake over and over becasue they do not assimilate feedback they keep doing the same thing over and over and getting the same results.
- Not having an exit strategy for a winning trade can be very expensive, it is possible to ride a big winning trade into being a big loser if you do not have a set way to take profits. Trailing stops and targets can put the profits in the bank.
Trading too big of position sizes for your account size can be very costly because no manner how good your winning trades are you are set up to give back the profits with a few big losing trades.
- Think for myself
- Stay focused on the reasons why I bought a stock and sell when those reasons are no longer compelling
- Don’t let successful trades turn into losses
- Be ruled less by emotion and fear and more by logic and knowledge
- Read some good books on trading
- To avoid being whipsawed, I will give myself more room for the trade to work
- Follow my own rules
- Be easier on myself when I screw up and don’t let my ego inflate when I’m right
- Don’t force trades – there will always be another opportunity
- Honor thy stops!
- Stop chasing hot and popular stocks
- Do my own research
- Keep learning
- Learn to be less nervous and take more risks
- Remember that lost opportunity is better than lost capital
- Trade less – don’t overtrade
- To try and limit the number of opinions I allow to affect my trading. Paralysis by analysis has hurt me
- Avoid any trade where I use the word “hope” in my reasoning process
- To follow my logical, well-conceived, long-term game plan, without making irrational changes due to short-term market conditions
- Tune out the daily noise and useless banter
- Reduce the number of positions currently held
- Have more faith in my own abilities
- In trading, learn to be fearless
- Don’t be too greedy
- Slow down!
- Incorporate the use of smart trailing stops
- Use ETFs to properly diversify
- Remove my ego from my trading decisions
- Avoid getting easily frustrated or impatient
- Control and limit my losses
- Focus on making the next trade, instead of the last one
- I will not average down into losing positions
- Create more careful and detailed records with a commitment to review them regularly
- Learn to incorporate a systematic screening method like you
- Use emotions (both personal and market) to my own advantage
- Know my exits before making any trade
- Don’t be swayed by the latest and greatest strategy I hear about
- Keep it simple. Complex strategies are no better
- Avoid crowded trades
- Take time to look for reasons NOT to buy
- Let profits run longer. take losses quicker
- Trade what I see, not what I want to see
- Be more proactive and react faster to situations I find
- Make bigger, but less frequent trades
- Stay patient
- Focus on value of companies and not on the temporary market emotions
- Be more nimble
- Keep better notes
- Adopt an opportunistic versus a rigid bull or bear bias toward the market
- Enjoy the game more
- To quit counting the value of my account on a daily basis
- Stop looking for the holy grail
- Figure out what trade related information to consume on a daily basis and keep what is useful and leave out that which is not
- Avoid information overload by limiting what I read
- Don’t read stock blogs
- Turn off the TV and dedicate more of my time to become a better trader
- Set up a lazy portfolio
- Focus on proper asset allocation
- Never forget that “when you are through learning you are through”
- Recognize mistakes early, exit, and move on
- Take partial profits routinely, but keep money on high-performing stocks
- Follow my system
- To screen & scan my watchlist in a consistent manner each and every time
- Take routine breaks away from the market to refresh and gain more perspective
- Add more fundamental research to my technical research
- Concentrate on finding just one really good idea per year like Warren Buffett
- Stop searching for shortcuts or quick fixes – take baby steps
- Read at least 3 more trading books in next 3 months
- Focus, focus, focus – ignore all outside distractions
- When a strategy works, have the courage to follow it through, when it does not work, to have the wisdom to stop trading
- Find and exploit long-range sector themes
- Open my ears and keep my mouth shut
- Never panic
- Be humble