This month's theme is "Trading Setups", and one of the most important aspects of any trading setup is how one manages a trade once a position has been entered into.
We've all heard the old adage that we need to "cut our losers short, and let our winners run", and in a previous Weekly Perspectives, we've written about the importance of how this plays into risk management.
However just as challenging for some traders is what to do when faced with a winning trade. How does one balance the desire to keep hard earned profits versus taking the sure winner then sitting on the sideline and missing out on the big move?
Unfortunately, there is no right or wrong with regard to this aspect of trade management but simply tradeoffs.
There are many ways to construct profitable trading systems that can involve either taking quick profits or letting winners ride.
The emotional temptation, however, is to flutter back in forth between both approaches and in the end being consistently wrong with every...
While traders like to make the difference between intraday and swing trading and sticking to one, I have had a hard time picking the trading style that worked for me.
In the end, I developed an interest in a method that falls in the middle of those two trading styles previously mentioned - multiple time-frame trading. It consists, in my case, of looking for trade locations on a bigger picture (higher timeframe) and entering the market on a lower timeframe based on a defined trade setup.
In comparison to intraday and swing, multi-timeframe trading usually produces trades with a higher reward. That is due to the fact that the take-profit can usually be placed according to price targets on the higher timeframe.
I, however, like to take partial profits on my multi-time frame trades. A first take-profit is placed at R = 1 and a second take-profit is placed according the a price target on the chart. That usually results in a higher win rate and keeps the reward fairly high.
One of the most profound changes in the recent markets has been the acceleration in the rate of change. Trends and regime changes that used to play out in weeks or months are now occurring in days or hours.
As a discretionary trader, one of the keys to being able to keep up and adapt to this ever changing and evolving environment is to have a solid understanding of how you best learn and a developed set of skill acquisition strategies.
I've written about and presented on this topic in the past about the importance of deliberate practice in trading as well as the necessity of developing a practice and skills based mindset and you can find a related webinar here -
In this week's lesson, we discuss -
In last week’s lesson, we introduced 2 extremely important measures that all traders need to track and monitor.
Now that we've set that baseline, in this week’s lesson we will build upon the 2 measures we introduced last week and launch into the topic of position sizing.
As it pertains to this month's theme of risk management proper position sizing is key in the practice of risk and loss prevention.
Entire books are dedicated to the topic of position sizing so for the purposes of this lesson I will introduce a very common method for position sizing called Fixed Fractional position sizing.
For those interested in other position sizing methods, here's a brief primer.
In this lesson, we'll discuss -
· What the Reward for Risk ratio is
· How to calculate Risk
· How to calculate Reward
This week’s lesson we will be brief however it will cover an essential risk management concept.
If you are new to risk management concepts then understanding this lesson will allow you to objectively understand the strengths of your trading system, how and where you can improve your results, and gain an appreciation for how much risk you should be taking on.
There are 2 measures which all traders need to be tracking regardless of your chosen method or timeframe.
Those 2 measures are:
The win percentage (W) is the probability that a trade will have a positive return.
W is calculated by taking the total number of winning trades and dividing it by the total number of trades.
For instance, let's say you took 50 trades last year and 25 of those trades are winners, then your W would be 50% (25 / 50).
The win to loss ratio (R) is equal to your total trading profits divided by your total trading losses.
It is calculated by taking the total...
It’s often the 800 lb. gorilla in the room.
The topic we traders mention constantly but more times than not we would rather discuss our dental visit than divulge our risk management plans.
Most traders appreciate the importance of risk management however where educators often fall short is in the scoping of risk management. Bottom line; most traders focus on just stop management and protecting trade loss.
One approach that I find gains more traction is to have the trader take an ‘enterprise’ risk management path to understanding risk and its application to trading.
The concept of ERM takes more of a holistic improvement approach to the topic and in essence widens the sandbox to what traders need to consider under the risk management umbrella. Core ERM plans should address both profitability as well as loss management.
The best way I have found for traders to grasp ERM and to buy into the value it offers is with this simple statement:
You will have...
Continuing this month's theme of "Trading Systems", in this week’s video lesson, you’ll get a ‘checklist’ of sorts of the considerations you should keep in mind during trading strategy and system selection - to filter through the hundreds of choices you have available to you, and help you find a good fit.
These are the areas which can affect both your direct results and your subconscious’s decision to support or sabotage your efforts.
In conclusion, the process of choosing a trading strategy and system selection can be summarized as follows.
Continuing this month's theme of "Trading Systems", in this week’s lesson we discuss why your trading system doesn't exist in a vacuum and examine the “psychology of trading systems”, and how this relates to, but is quite different from the standard ‘trading psychology’.
Spend some time now and simply reflect on your experiences so far with trading, and note specific instances when you’ve felt a great deal of discomfort.
Briefly note what happened, what led to it and what particular feeling you experienced at the time.
Once you’ve exhausted say 10 or more instances, see if you can identify the possible reason why your subconscious would be creating resistance to success for you in these situations, based on what we discussed in the lesson.
These are areas in your trading and trading system that are not at the level they need to be for you to act with full trust and certainty. What steps can you take to shore up these...
In this week's lesson certified risk manager and frequent contributor, Michael Toma shares the discrepancies between real trading and backtested results.
There were times where I spent more effort backtesting than I would sleep. As traders, we’ve all done it. Waking up at 4 am with a strategy you heard about and simply can’t get it out of your head.
The mission; backtest, backtest and more backtest. Some of the popular trading platforms now have pretty cool backtesting tools but for me, if the strategy didn’t seem too complicated, I would dive in with pen and pad and backtest it old school. I can’t tell you how many times I witnessed a successful backtest only to quickly fail in a live environment.
How can that be? We’re talking the holy grail of setups only to make its way to the trash bin along with the backtesting scribble.
So how do risk managers play a role in the system building process?
Since the process can ultimately be the supporting...
Once again it was great to see everyone who came out to this month's meetup where we talked about "Trading Essentials".
Now it's time to shift gears and move on to a new theme for this upcoming month's Meetup.
This month's theme will be "Trading Systems".
For the next several weeks until May's Meetup, we will be discussing everything around "Trading Systems" including how to craft your own playbook, backtesting, setups, and more.
To kick off this month's theme, in this week’s lesson as we alluded we’re going to cover the important task of developing your own "Trading Playbook".
In this video, we will discuss one of the most important ongoing tasks in a successful trading business and that is the ongoing research, development, and execution of your Trading Playbook.
Tune into the video and learn about these 6 key must-do action items: