Archive for category: Risk Management

Capital Preservation: 10 Trading Tips

21 Nov
November 21, 2014

 

As a trader, your #1 goal is to keep your current trading capital safe and secure. Your goal as a a trader is to make money and not lose money. Many new traders lose their trading capital in the first year, but these ten tips will help you keep your capital intact so you can make it grow.

  1. Do not start trading until you have fully educated yourself. Trading tuition is expensive when you trade first and learn later.
  2. Do not trade an account so small that commissions will end up being a big drag on your returns.
  3. Do not trade until you have a well developed trading plan.
  4. Trade a position size that does not cause your emotions to become so loud you can’t hear your trading plan.
  5. Only trade in markets you fully understand.
  6. Only take valid entry signals and do not chase. Let your entry point trigger first.
  7. Only trade in liquid markets so bid/ask spreads do not devour your account.
  8. Never risk losing more than 1% of your total trading capital on any one trade through proper position sizing, and by placing stop losses at the correct price levels.
  9. Never expose your total trading account to more than a 3% loss of total trading capital at any one time, on one day.
  10. Never move a stop loss. Take the exit the first time it is triggered.

Starting a Trading Business

20 Nov
November 20, 2014

 

If a new trader wants to be a successful, they will need to treat their trading like they would operate a profitable business. Many traders lose a lot of money by approaching trading like it is a hobby. In trading, making money is the goal, and must be kept at the forefront of a trader’s mind if they are to be successful. Fun and excitement in trading can be expensive entertainment. The reality is that most of the time, trading is boring. A trader must treat the market like they would any other business, utilizing discipline and great care to grow their capital and be successful.

  1. You can’t open your trading business until you have a full business plan.
  2. Your inventory is your current positions; you have to buy them for less than you intend to sell them.
  3. Your customers are who you sell to; they have to be willing to pay more than you bought your positions for.
  4. Your mind is the manager of your business; you can’t let pride, fear, or greed lead to an unprofitable mistake.
  5. Your business must have insurance to manage risk. Stop losses and hedges are your insurance against big losses.
  6. Location is everything. You must conduct your business where there are ample buyers and sellers so you don’t get stuck with positions that no one wants.
  7. Your current positions are your employees. You have to keep the ones that produce gains, and fire the ones that lose. 
  8. Expansion of your business can only happen after your first location is successful. Once you have mastered a system of entries and exits you can add new markets and systems.
  9. Your trading capital and your positions are your inventory. Lose that and you are out of business.
  10. The only reason to be in business is to make money. If you don’t make money, you need a new business plan.

8 Easy Ways to Blow Up Your Account

23 Oct
October 23, 2014

 

Almost everyone has read the statistic that 90% of active traders are not profitable and eventually quit trading. While I don’t have the exact numbers, I suspect that a lot of those traders blow their entire trading account before they quit. Even many legendary traders like Dan Zanger, Nicolas Darvas, and Alexander Elder lost a lot of money before they were millionaires. A new trader is like a 16 year old with a car; you know that eventually mistakes will be made, and you just hope that the mistakes are not too dangerous, or that they don’t cause any long term discomfort.

During the first year, the new trader needs to focus on learning and not trading. Why would you trade before you know what you are doing? When a new trader begins to trade, they should start small to avoid letting their decisions become influenced by emotion. When the trader gets up to speed, the focus should be on what can be lost more than what can be made. The new trader must learn what they should be looking for before launching directly into trading. Their focus should be on methodology, entries, exits, risk management, and a well researched trading plan.

Of course there is also a quick and easy way to just blow up a trading account. I do not recommend these paths to destruction.

  1. A losing trade? No Problem just keep adding to it until it comes back. It will eventually come back, right?
  2. The bigger the better; if you are right, you can make a lot of money, as long as you are never wrong.
  3. Short bull markets and go long in bear markets. You can pick all the right reversals, right?
  4. You are smarter than the market. You are so special you can predict the future. Trade your predictions, they have an edge, right?
  5. Be stubborn with losing trades. The losses can’t get too big, can they?
  6. Cut winning trades short while the profits are there. Can big losses and small wins lead to profitability?
  7. Follow someone else in their trades, not knowing their position size or stop losses. What could go wrong? 
  8. Spend a ton of money on snake oil salesmen that promise you the Holy Grail of trading. I wonder why these can’t lose money machines are so affordable?

10 Trading Mistakes: Are You Guilty?

07 Oct
October 7, 2014

 

  1. Are you trading without a plan? Trading without a plan makes you emotional and a gambler.
  2. Do you ever trade too big for your trading account size? Big trades are bad trades for the emotional engagement and risk of ruin that they entail over the long term.
  3. Do you risk losing more if you are wrong than you will make if you are right? The biggest driver of profitability in your trading will be big wins and small losses. Big losses and small wins is a sure path to losing your trading capital.
  4. Have you traded without studying charts to see what has happened historically with similiar price patterns? If you do your homework you can make money understanding possibilities and probabilities from past patterns. Trading your own opinions will usually put you on the wrong side of the market. 
  5. Did you trade a system before you back-tested it?Or are you just trading blindly?
  6. Have you ever exited a trade due to fear instead of due to hitting your stop loss or trailing stop? The right exit is what determines your profitability and whether your win is a big one or your loss is a big one.
  7. Have you ever entered a trade becasue of greed without an entry signal? Chasing a trade after the trend is over is a great way to lose money consistently and quickly.
  8. Have you ever copied someone else’s trade not knowing their time frame or position size? Ultimately you have to trade your own system and your own method that matches your own personality and risk tolerance. Only you can make yourself profitable with faith in yourself and your method.
  9. Are you that person that loves to short during market up trends and miss a whole up move?The easy money is on the side of the trend in your time frame going against the trend is a great way to lose money.
  10. Are you that knife catcher that keeps going long at the worn time in a down trend? When everyone is exiting a market that is the worst time to be getting long as wave after wave of holders are leaving. 

5 Quick Tips For Risk Management

25 Sep
September 25, 2014

 

Days like today really see who is managing risk and who isn’t. Always remember if you have big winning days and trades that are disproportionally large percentage wise then the odds are that you are also exposed to the downside risk of an equal magnitude. Here are five quick tips for risk management for traders.

For Traders: 5 Quick Tips For Risk Management

  1. Structure your position sizing and stops so that you try to never lose more than 1% on any of your trades.
  2. My maximum risk exposure is a total of three trades on at once risking 1% per trade each for a total possible drawdown of 3% in one day if all three go against me at the same time.
  3. I do not trade individual stocks that are highly volatile. I prefer my alpha to come from leveraged index ETFs or option trades for a smoother equity curve.
  4. I trade in the direction of the trend on the daily chart so my biggest risks and losses come from big whips saw reversal days. (Like today).
  5. I honor my stops when they are hit. I do not hold and hope. I get out and get back in later.
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