Archive for category: Money management

Successful Trading: How to Put it All Together

14 Jun
June 14, 2013


What trips up the vast majority of traders so they never quite make the transition from new trader to good trader?

Not being able to deal with the stress of trading: this is caused primarily from a lack of faith in themselves and or their method.

They lack the ability to pull the trigger when it is time to enter a trade or cut a loss.

Some people just can’t overcome the fear of losing money both in the entry and exit.

Many traders just do not have the discipline or work ethic to create a trading plan through proper homework.

Most traders have no trouble over analyzing the markets to death with enough indicators to make someone go cross-eyed. Many traders read enough books to know how to trade, many follow enough different people online that they get so confused they do not know what to do. Most traders spend far to much time in front of the computer all day watching the prices tick. The majority of traders would really quit trading if they added up the amount of time they spent for the privilege of losing money.

What is the key to over coming the barriers to success in trading. A GOOD TRADING PLAN, not a few rules I mean a complete plan. A plan that you 100% believe in based on your own studies and back testing. Your own personal plan that YOU created, not someone’s opinions.

What needs to be in there?

The Trading Plan comes first and should account for the following parameters:

1.  Entering a trade. Quantified approved entries.

2.  Exiting a trade. Predetermined Exit point BEFORE you enter a trade.

3.  Stop Placement. How will you know you were wrong about a trade? A stop loss, trailing stop, chart signal, volatility stop, time stop, or target price.

4.  Money Management. How much capital will you risk on any one trade? This is the key to position sizing.

5. Position Sizing. How much capital will you put on any one trade? Do you have rules that tell you to trade bigger or smaller based on the odds?

6.  What to Trade. What qualifies stocks to be on your watch list?

7.  Trading Time Frames. Are you going to day trade or position trade and hold for a week or more? or will you be a short term or long term trend follower?

8.  Back Testing. You need back testing either with a computer, by reviewing charts, or others research to show that your system is a winner.

9.  Performance Review. You must keep a detailed log of your trades and watch your performance to understand the wins and losses and their causes.

10.  Risk vs. Reward. Each trade must begin with the potential of winning more money than you are risking.

This is a very basic outline, I suggest expanding this to include 30 rules minimum; 10 each covering the areas of risk management, psychology, and method. If you can write this, believe it, and follow it, you will win in trading the only question that remains is when?

Why Apple Bulls Got Hurt

09 Nov
November 9, 2012






Ever have that day when you were 100% sure about a trade. You just could not lose, the stock was a real buy, it had already fallen a great deal and it could not possibly fall any farther. So you waited and then plunged in, you couldn’t lose so why not just go big? You bought in and sat back with dreams of what you would do when the stock rose back up to its past glorious price high. You had almost spent the money in your mind when the weirdest thing happened, the stock went down even farther after you bought it. But you were not concerned the stock was an excellent company so it would get back to its highs, you just had to be patient, you would just buy more at these prices, how could you lose? The next day it dropped even more, okay you bought more and felt good about it. You imagined it was another opportunity, you were the next Warren Buffett buying value. You patted yourself on the back and waited. But it kept falling, you started to feel the heat, your account was much lower than when you started on this can’t lose adventure into the abyss. You reasoned “It is only a paper loss, I still own the stock as long as I do not sell I  can just wait for it to go back up.”

This story never ends well. What we don’t realize is that either the P/E was contracting because the future growth in the company no longer met analysts expectations so it was being distributed by institutions not bought. Or the market was entering into a bear stage and growth stocks were being sold off to raise capital for cash withdrawals from mutual funds by smart investors selling their mutual fund shares. Or the stock simply peaked out and had gone as far as it could with everyone owning it that wanted to and no buyers really left to come in and push it higher.

What ever the reason this is why you always must have an exit plan and the price that it needs to go to that will mean you were wrong and it is time to sell. Many times the more obvious a trade looks the worse the odds of it being a winner. Most the time the hardest trades to take are the ones that are the winners. The sad thing is while the new trader is losing his account and sitting in a puddle of sweat having a stress attack there is some mellow rich trader who shorted the same stock and is out by the pool with a drink and a cigar counting his winnings. .

Always remember: the most dangerous trade is the one that you think you can’t lose. It makes you trade too big, be over confident, sloppy, greedy, and not use stops.


The Top Ten Scariest Things A Trader Can Do…..

31 Oct
October 31, 2012


On this scary holiday of ghouls and goblins, trick or treating, and haunted houses it made me think of what is really scary for traders to do. Emotions sometimes are sending traders messages, fear can mean that you have not done enough homework or that you are trading too big. Fear can be screaming at you to cut your losses as they become bigger and bigger.

The majority of the time you should be greedy when you are winning and let your winner run to a logical resistance point but be fearful and ready to exit when you are losing afraid that you loser will grow bigger.

The Top Ten Scariest Things A Trader Can Do…..

  1. When risking 5% of you account on any one trade, 10 losers in a row and BAM! 50% draw down and you need a 100% return to get back to even. If you don’t think that you will have ten losses in a row this year then that is SPOOKY!

  2. Buying far out of the money options with a .10 delta. Generally this trade will lose 9 out of 10  times, only being profitable from the strongest trend within your time frame. Spooky that traders want to buy lottery tickets with those odds.

  3. Taking a trade with NO EXIT STRATEGY that is a horror movie. It is dangerous to not have a stop loss when you enter a trade becasue if a trader thinks they bought in at a great price the price starts looking better the lower it goes, and terror of all terrors the trader adds more to the trade! It only takes one mistake letting one trade run into a huge loss and add to it to blow up an account.

  4. Shorting the strongest stocks in the market during a bull market is scary as they continue to go up.

  5. Going long a stock in a death spiral due to a business misstep or earnings decline is like riding a roller coast that generally ends up much lower when the trade is finally closed.

  6. “Going all in” on one trade, with this plan all it takes is one bad trade to blow up your account, those are scary odds.

  7. When you are losing you go from your trading plan to “plan B” “hoping” maybe even praying for a reversal. When a trade turns you religious and leads you to pray it is definitely time to get out!

  8. Asking for others opinions instead of following your trading plan or methodology is very scary, time for homework not tips.

  9. It is terrifying to watch someone fight a trend instead of follow it. The bigger they go against the trend the scarier it gets. They are trying to stand in front of an elephant walking and tell it where it should be going.

  10. When you find out you are in a trade that is 100% the opposite position of the best traders you know, it should be a wake up call to reassess your thinking process, I know that is always an uh oh moment for me, I usually lose in those situations.

Happy Halloween Everyone! Be Safe My Friends!

The 7 Skills A Trader Must Have To Win

26 Oct
October 26, 2012






There are seven skills you will need to survive in trading without discipline no system will work because it will not be followed. With out risk management it is a 100% probability that the trader will blow up their account. Without passion trader’s will not have enough energy and drive to  get from new trader to rich trader. Without perseverance new traders  become quitters after meeting with resistance, failure, and monetary losses. No work ethic = no edge over other traders. Without flexibility a rigid trader will be broken by the markets. Without a focus a new trader becomes the jack of all trades and the master of none.

  1. DISCIPLINE: The trader must have the ability to control themselves and follow a plan. Discipline is a required skill in trading without it there is no edge, you are either a gambler or simply trading off fear and greed. You will not be successful, instead you will be gamed by those in control of their emotions.

  2. RISK MANAGEMENT: Risk management must be a top skill for a trader to even survive in the markets. You must structure your risk per trade to be no more than risking 1% or 2% of your trading capital. You have to be able to survive 10 losses in a row. These strings of losses come around more often than a new trader would suspect. If you lose just 5% of your trading capital in each of ten trades you will be down almost 50% and need a 100% return just to get back to even. At this point you are ruined.

  3. PASSION: A trader must love to trade, without a passion for the markets and trading the new trader will not survive the learning process because anyone with common sense would believe that it was not worth the struggle. Passion will be needed to bring a trader through the learning curve and later the losing streak.

  4. PERSEVERANCE: A top skill of a trader is not quitting. A trader will have many bad days, bad weeks, bad months, and in the beginning, even bad years. The ability to keep going anyway because you have a goal in mind can not be underestimated.

  5. WORK ETHIC: There is no easy money in trading it is work. Even the ‘easy’ money in bull markets is usually taken back from newbies in the next bear market cycle as they continue to fish for support and just know their stock will ‘come back to even and let them out’. Being a trader is probably equivalent to getting a bachelor degree in a college and in some ways it is like getting a law or medical degree. New traders should expect to pay tuition costs as they start out not just in books, tapes, videos, seminars, and newsletters but also trading losses. There is no professional field where you can just start it and make money from day one. Expecting to start making money trading from day one is like some one going up to a doctor and saying “Hey, how can I make some quick bucks in the medical field, just tell me how you do it.”

  6. FLEXIBILITY:A trader must have the skill to both quickly realize they are wrong and act on that by taking a small loss before it becomes big. There are no crystal balls good traders play probabilities and try to go with the flow. Most new traders will never accept that trading is not about being right every time it is losing small when wrong and winning big when right. Expect a 50%-60% win rate and understand that your wins have to pay for your losses so make them as small as possible.

  7. FOCUS:In trading being an expert on your specific markets: currencies, commodities, futures, options, or stocks will lead to more success than dividing your attention into too many parts. A small watch list allows you to not miss anything and understand your own trading vehicles better than the majority of others you are trading against. Also being an expert on your own systems, methods, or styles will give you an edge over others that drift between methodology.

Surprisingly I have found that these seven skills are primary and the winning trading system itself is secondary. There are many, many, robust systems, methods, and styles but none of those work if you are missing one of these.

Trading:The Secret Sauce

19 Oct
October 19, 2012






“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” -George Soros

One element of trading that is over looked as traders chase hot stocks, trends, and chart patterns is the importance of taking trades that have the potential to be big wins OR small losses. Big losses will kill your account quickly and small wins will do little to pay for those losses. Our trades have to be asymmetric where our downside is carefully planned and managed but our upside is open ended. This is a crucial element for trading success and has to be understood and planned for.

The risk/reward ratio is used by more experienced traders to compare the expected profits of a trade to the amount of money risked to capture the profits. This ratio is calculated mathematically by dividing the amount of profit the trader expects to have made when the position is closed (the reward) by the amount the trader could lose if price moves in the unprofitable direction and the trader is stopped out.  

A big secret that many rich traders know that new traders do not is that the winning percentage for even the best traders is only about 50%-60% one type of trading edge comes in having bigger winners than losers. A great formula to use is a 3:1 risk/reward ratio, with this ratio a trader is risking $100 to make $300. If 100 shares of stock are bought for $100 a share and the stop is at $99 then the stock should only be purchased if it is probable that the stock could run to $103. At a $103 share price profits could be taken or ideally if it runs to $104 a trailing stop could be set at $103 to give the stock an opportunity to be an even bigger winner. After ten trades your account could look like this:

Lose $100
Make $300
Lose $100
Make $300
Lose $100
Make $300
Lose $100
Make $300
Lose $100
Make $300
Profit $1,000 with only a 50% win rate!

However if you allow losers to run hoping they will come back and take profits quickly while they are there you can get into trouble fast.

Lose $1000
Make $100
Lose $500
Make $200
Make $100
Make $100
Make $200
Make $100
Make $100
Make $100
Lost $500 even with an 80% win rate!

Other ways to measure the ratio:
In trades you can also plan to cut your losses if the stock drops 5% while taking entries on stocks that can run 15% of more.
Another way to measure a 3:1 ratio is that you can risk 1% of your trading capital for the possibility of making 3% of your trading capital in profits.

Remember that you can cut losses even shorter if you are proven wrong before your stop is hit, but at the same time you have to allow enough room for normal fluctuations and volatility in your stop and use position sizing that you are comfortable with for your trading account size. I also recommend you to allow winners to run as far as possible, you never know when you could have a huge win with the right entry and trend.

First know how much you will risk on any one trade then do not enter a trade where the upside is not at least two or three times your risk of loss.