Just like in football, trader’s must play great offense and defense in trading to be successful in the long run.
In trading we must be able to do two things: manage our winners and manage our losers. If we can’t play both good offense and defense then we will not win over the long term in trading no matter how well we do with one but then fail at the other.
It does no good to make $10,000 in January if you lose $11,000 in February! Hopefully you will have learned many lessons on how to make that $10,000 again but this time how not to lose the $11,000: if you were paying attention to why you were winning and what was the causes of the losses. This is equivalent to a football team’s score ending up 42 to 43 but they still lose. Like a football team you must both be able to score points and also keep the other team from scoring. You have to make profits and keep them. What is the point of making big returns if you are just going to give back those profits with later big losses?
Offense:
You need big winners to pay for all your little losses. When the opportunity of a high probability entry happens you must take it. Or if you are trading a trend following system and are in a draw down you must keep trading in the direction of the trend so you will catch the big wave when it hits.
- Let your winners run until you are stopped out with a trailing stop or a candle stick signal of an eminent reversal. You need big winners.
- Do not exit a winner until it stops moving in your direction.
- Enter a trade only with the a minimum 2:1 risk to reward ratio, the potential upside has to always be bigger than the downside you are risking.
- Only trend trade trending equities and markets, swing trade range bound stocks and markets. Remember that they only fit these classifications until they don’t.
- Do not marry a trade, only date it. When it quits making money get out.
- Only trade a method or system that is a proven winner over the long term.
- Do not fight the market go with the directional flow, until the flow changes.
- Go long the best stocks and the best up trending markets, short junk stocks and down trending markets. Picking tops and bottoms before they reverse is trading suicide. This is Trading 101, play in the direction of the trend, don’t try to be a hero.
Defense
- First define your risk, then your position size.
- Never risk more than 1% of your capital on any one trade. (2% maximum)
- Never expose more than 6% of your capital to risk at any one time.
- Always follow your predetermined stop loss.
- Always follow a predetermined trading plan that was written before the market opened.
- Account for volatility in your position size.
- Admit being wrong quickly and exit a trade when it does not act as needed.
As a trader you are both the quarterback throwing the touchdowns and the lineman blocking the run down the middle. Play hard while on both sides of the ball. It takes both big profits and small losses to win this game.