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[Here’s why you need proper risk management in trading]
Imagine:
There are two traders, John and Sally.
They both start with a $1,000 account
John is an aggressive trader and he risks $250 on each trade.
Sally is a conservative trader and she risks $20 on each trade.
Both adopt a trading strategy that wins 50% of the time with an average of 1:2 risk to reward.
Over the next 8 trades, the outcomes are Lose Lose Lose Lose Win Win Win Win.
Here’s the outcome for John:
-$250 -$250 -$250 -$250 = BLOW UP
Here’s the outcome for Sally:
-$20 -$20 -$20 -$20 +$40 +$40 +$40 +$40 = +$80
Do you see the power of risk management?
So here’s the deal:
As a trader, you’ll encounter losses regularly.
But with proper risk management, you can contain these losses till it feels like an “ant bite”.
The goal is to survive long enough in this game so you can learn the ropes and eventually—profit from it.
Читать полностью…
[The most important formula in trading…]
You’re probably wondering:
“How do I know if I’ve got an edge?”
That’s a good question.
You can’t tell if you have an edge based on chart analysis, risk management, psychology, etc.
Instead, you must be able to quantify your edge.
Here’s the formula…
E = (average gain x winning rate) – (average loss x losing rate)
Now, don’t panic because the formula is easy to understand that even a 10-year-old can do it.
Let me explain…
Let’s assume you have the following metrics from your trading…
Average gain = $500
Average loss = $400
Winning rate = 60%
Losing rate = 40%
Next, plug those numbers into the formula and you’ll get…
E = ($500 x 0.6) – ($400 x 0.4)
= $300 – $160
= $140
Now, what does $140 mean?
Two things…
#1: It means your trading strategy has a positive expectancy (otherwise known as an edge).
#2: In the long-run, you can expect to make an average of $140 per trade.
Now…
Your expectancy will vary from one trading strategy to the next (and from trader to trader).
It’s possible to have an edge with a low winning rate because your average gain is much higher than average loss.
Likewise, it’s also possible to have an edge with a higher average loss than gain because your winning rate is high.
“Losing trades is like diarrhea. It's a pain in the ass but eventually, you have to let it go." – Unknown
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Gravestone Doji: The Definitive Guide
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The Best Indicators for Swing Trading (Profit From Different Market & Timeframe)
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Discover Professional Price Action Trading Strategies To Profit In Bull And Bear Markets
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A Complete Guide To Creating And Using A Forex Trading Journal
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Price Action Trading Didn’t Work Till I Discovered These 3 Strategies
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The Definitive Guide To Candlestick Reversal Patterns
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Happy new year my friends!
I wish you great health and happiness in 2024.
Once those are taken care of, I believe your finance will take care of itself.
Cheers
That was fast!
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6 Trading Habits Which Keep You Poor (Without You Realizing It)
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A Simple Trading Strategy with a winning rate of 88.89%
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The Definitive Guide to Trading The Bull Pennant Pattern
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A Bull Flag Pattern Trading Strategy - A Complete Guide
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The Trend Line Breakout Trading Strategy
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[Your trading strategy must have an edge]
Now, being consistent with your actions is important in trading.
But that’s not all because you must also have an edge in the markets.
You’re probably wondering:
“What does it mean?”
Simple.
This means your trading strategy must yield a positive result in the long-run.
If it doesn’t, then no amount of consistency will save you because you’ll end up a consistent loser.
Don’t believe me?
Then go down to the nearest casino and bet consistently.
You can be consistent with your risk management, bet size, games you place, etc.
In the long-run, you’ll still lose consistently because you don’t have an edge over the casino.
Agree?
And it’s the same for trading!
You must have an edge in the markets because without it, no amount of consistency, risk management, trading psychology, etc. will save you.
I tried chart patterns and failed.
I tried trading indicators and failed.
I tried harmonic patterns and failed.
I tried candlestick patterns and failed.
Eventually, I realized it was not the tools—but me.
And everything clicked.
[Consistent actions lead to consistent results]
I remembered my first trading system.
It was a Bollinger Band mean reversion strategy.
You buy when the price is at the lower band and sell when it’s at the upper band.
The first few trades I did were winners, then the losses came and I figured this trading strategy doesn’t work.
So, I moved on.
Next, I chanced upon harmonic patterns.
I spent half a year learning how to draw these patterns (guess I’m a slower learner).
At the start, I had some wins but slowly, the losses kicked in and eroded all my profits.
Again, I told myself…
“This trading strategy doesn’t work. Let’s try something else.”
This brought me to the world of price action trading, support and resistance, candlestick patterns, etc.
Again, the same pattern repeated itself.
I had some winners, some losers, and I gave up the strategy.
One day, I asked myself…
“Why does this always happen?”
“Why am I not getting any consistency in my trading?”
“It’s always a few winners and then the losses pile up and take everything away.”
Do you know what I realized?
The problem was me.
I was hopping from one trading strategy to the next.
My actions were inconsistent. And because my actions were inconsistent, I got inconsistent results (duh).
So, don’t make my mistakes.
If you want consistent results from trading, you must have consistent actions.
Stick to one trading strategy, master it—and then move on.
Stop forcing trades when there’s nothing.
Instead, pick a level to trade where you’ll lose small when wrong—and earn big when right.
You pay less commissions, make less mistakes, and have less stress.
[How to set proper profit targets (hint: it’s not about your risk-reward ratio)]
I laugh to myself whenever I hear traders comment:
“You must have a minimum of 1:2 risk-reward ratio if you want to be a profitable trader.”
Now let me ask you…
What’s so special about having a 1:2 risk-reward ratio?
Why not have a 1:10? Or even a 1:100?
So here’s the truth…
The market doesn’t care about your risk-reward ratio—it goes where it wants to go.
The only thing you can do is, observe what the market has done previously, and use it as a clue to where it might go in the future.
For example:
If the market previously collapsed at $100, then the next time it approaches $100, there’s a possibility of selling pressure coming in at that level.
As a swing trader, you don’t want to set your target at $105, $100, or $110 because the market might not get to that level due to selling pressure.
Instead, you want to exit your trade before opposing pressure steps in which is before $100 (around $99 or so).
This means if you’re in a long trade, you’ll want to exit your trade before:
•Swing high
•Resistance
•Downward trendline
(And it’s just the opposite for a short trade)
Big moves = trading opportunities
Here's why...
Usually, after a big move, the market will "rest".
Then, it'll pick up again and continue the existing move.
Thus, you want to enter during a period of "rest" for the next big move.
The big money is made by sitting on your positions—not forcing trades out of boredom.
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[Don’t quit your job, yet]
Let me share with you a true story…
John (not his real name) just started trading the Forex market.
He funded a live account and made a $1,000 profit after a few trades.
So he thought to himself…
“If I can make $1,000 trading part-time, then I’ll make even more money trading full-time.”
So, John quitted his job to trade full-time.
The first few days were good as he was making consistent profits from the markets.
Then the market changed and the losses crept in.
Eventually, he gave back all his profits and bust his account.
Now, he’s back in the job market looking for work.
So, what’s the lesson?
Don’t quit your job, yet.
Just because you’ve made some money from the financial markets doesn’t mean you can do it full-time—it might be beginner’s luck.
Also, full-time trading requires a different mindset, account size, expectations, etc.
The outcome of a trade doesn't reflect your trading ability.
Your process, mindset, and attitude will.
[Learn everything about trading, then pick what you need]
As a new trader, there are things you know that you don’t know.
And then, there are things you don’t know that you don’t know (which are even more).
So, don’t focus on one technique or strategy too early because it might not be a good fit.
Instead, explore your options out there.
Learn as much as you can about trading, anything you can get your hands on.
Things like day trading, swing trading, RSI, MACD, stochastic, moving average, counter-trend trading, trend following, etc.
Now here’s the thing:
Not every trading tool you learn will be useful to you.
But the key is to understand what it is, how it works, and the purpose of it.
For example:
The moving average is a trend following indicator (what it is).
It works by calculating the average price over a given period and is plotted as a line on the chart (how it works).
You can use moving average to trail your stop loss, identify the area of value, and filter for trending market conditions (the purpose of it).
Now…
Once you know the different tools out there, you can pick the right ones to fit your needs—and not blindly follow the herd.