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It’s just not enough to limit your trading ability to determining where to enter a trade or where to exit a trade. Suffice it to say there are many, many approaches of where and when to enter a trade. What happens after that is at the crux of what is called money management. This is where you divide the amateur from the professional. This is where you determine whether you are going to be successful or where you are going to be like 95% of the traders – looking in from the outside and wondering how you got into this financial mess in the first place. Just say that you have decided on a successful entry/exit strategy. Then you have a few very important decisions to make:
First, you have to decide just how many contracts you are going to begin trading. Not only that, but you have to decide if you are going to trade the same number each trade or if you are going to implement some strategy that incorporates increasing or decreasing that number as your equity balance changes.
Second, if you are day trading or swing trading, how much are you willing to lose on each trade? In other words, where are you going to place your stop loss? And remember, you must place a stop loss after each trade entry, else you’re not going to be around for long. Guaranteed.
Third, there is the question that if you are going to start to trade more than one contract per trade, are you going to exit those contracts at one particular price or are you going to stagger your exits at different prices?
Lastly, do you have the discipline to stick to the rules that your system dictates, or are you going to make changes as either fear or greed raise their ugly heads? Believe me when I say that a disciplined trader has a thousand percent more chance of making it than the “fly by the seat of your pants” trader.
First: all the professionals commit to trading a small percentage of their trading account each trade – 1-2%. They usually start out trading with much larger trading accounts than the typical amateur so can commit small %’s and still trade on a larger scale than the amateur. For the amateur I believe you can commit to a 4% risk to you trading account. You would have to lose 12 trades in a row to lose 50% of your trading account – at which point you would then step back and re-evaluate your lousy trading system.
Second: your stop-loss dictates how much you are willing to lose on each trade. If you are trading a one contract per trade system, your stop loss should be about half your target exit profit. If you are trading a 2 contract per trade system (like my Trendway systems) then your stop loss would be about two thirds of your target exit profits. If you are profitable on more than 60% of your trades, you are guaranteed to have a successful trading system. You should never have your stop loss values larger than your target exit profit values.
Third: I have found out that after being in the business since the 80’s, that it is more profitable exiting a trade using fixed target exits, rather than using a trailing stop procedure. Yes, trailing stops sometime produce exceptional profits, but suddenly reversing markets also delete a lot of those profits and you end up either even for the trade (if you are lucky), or your results are in the negative side of the balance sheet. With highly volatile markets, ending up with a bird in the hand is preferable to no bird in the hand at all.
Lastly: I can’t stress enough the necessity of being disciplined in your trading habits. You should have a list of trading rules that you have back-checked thoroughly and know that they have functioned satisfactorily over a reasonable length of time. Then you should print out those rules, go over them until you are completely comfortable with them, and then make your trades only according to those rules. You should not try to out think them, or change them in any way. After all, they worked over a period of time in the past, so why should you try to re-invent the wheel on a spur of the moment? This means that during periods of drawdowns (which every system known to man undergoes) you just know that you will recover and end up on the positive side of the ledger eventually.
ALL THE TRENDWAY TRADING SYSTEMS ON THE FIRST PAGE OF THE WEB SITE INCLUDE RULES THAT ANSWER THE ABOVE IMPORTANT DECISIONS THAT YOU HAVE TO MAKE, AND ALL THOSE SYSTEMS SHOWN ARE VERY PROFITABLE.
WHY TRY TO DISCOVER SOMETHING THAT HAS ALREADY BEEN DISCOVERED?
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