If you want to win in trading you must have an edge. What is your edge?
Trading Method Edge:
You first have to have a method with a positive expectancy. This is not necessarily just a winning percentage. You simple want to win more money when you are right than you lose when you are wrong over the long term.
If you have an 80% win rate that looks like this:
- Win $100
- Win $100
- Win $100
- Win $100
- Lose $500
The above is still a losing system even with an 80% win rate.
However a very robust winning system that looks like this:
- Lose $100
- Lose $100
- Lose $100
- Lose $100
- Win $1000
The above is a very robust winning system even with just a 20% win rate.
You need at least 25 trades with rules for entries and exits and position sizing to establish a record to verify your system and method with wins and losses to see if your system has a positive expectancy.
An Edge in a Trader’s Psychology
To have an edge in the markets you must follow the rules of your system with complete discipline. If you do not act on the impulses of greed and fear you will have an edge over other traders. If you can ignore your ego and trade your plan you can win. If you can ignore your ego about not wanting to be wrong and cut your loss you can save yourself a lot of money. If you can ignore your greed during a big win and take your exit when it is time you will have an edge.
Risk Management
What separates winners from losers in trading? The size of their bets on each trade. When a new trader bets randomly for each trade based on how certain they are about it being a winner, they will lose over the long term. This is how MOST new traders handle their accounts because they greatly overestimate the importance of picking stocks and timing trade entries, while underestimating the importance of risk management. Even though a new trader has a winning setup, his arbitrary method of betting will keep working against him as he bets too large on losing plays and gives back previous winning trades.
Many times new traders do not even understand the risk of ruin. Based on how much you risk per trade, how many trades can you be wrong on before blowing up your account? If you bet 10% of your total account capital per trade and lose five times in a row, you are basically ruined, a 50% draw down in your account needs a 100% return to just get back to even. One of the biggest things that will determine whether you win or lose in trading is your position sizing and where you put your stop losses, not your stock picks.
If you limit your risk to 1% to 2% of total equity per trade with a winning method that you follow with great discipline you will find your edge in the markets and win.
Here is an excellent article. Click for: The winning edge in risk management.