There are a few things I want to discuss with you before you even consider taking a trade. Although right now you may consider the trading system to be accountable for 90% of your success I am afraid you are wrong! 50% of success is the system the other 50% is made up from money management and psychology.
Money Management
The importance of money management is highly underestimated amongst traders everywhere. It is almost like people are missing the whole point of trading. Too much time is devoted to finding the perfect trading system but any trading system without money management is doomed to failure, even the best one!
Every trader has to incorporate money management into there trading system with the objective of controlling risk.
Let's go over a simple conservative money management system using an account of $20,000 for this example.
Each lot traded on the EURUSD is $10 per pip so to risk 1.5% of the account we can risk $300 on each trade. In pips we would be risking 30 pips.
Now for every $2,000 the account increases we can add another mini lot to the trade size. If the account grew to $22,000 then we would be trading $11 a pip and risking $330 on each trade.
No matter what the size stop is on your trade even is it is 200 pips you must not risk more than 1.5% of you account. On the other hand if the account decreased from $20,000 TO $18,000 you would then have to reduce your risk per trade to $9 per pip to keep the risk of the account under 1.5%.
You could also reduce you trade size if you feel that you are not trading well during a certain period of time, I know of many traders who do this and I think this is a great way of protecting you account. Take a small sticky note and write "You must always protect your account" now stick it on your monitor.
Over Trading
I thought this deserved to be in here because it is a problem every trader is confronted with at some time or another. I'm sure you know the feeling of loosing a trade and wanting to get back into the market as soon as possible only to have it happen again and again. Over trading is addictive and can destroy a trader if it gets out of hand. It is a fact that 95% of traders would be more profitable if they took only 1 trade a month or none at all. Just one good trade, they would be forced to plan and perfectly execute a trade.
I suggest this to every trader I meet that is loosing consistently and you would be surprised how well it works! I set a maximum number of trades I can take per month, once I have reached that number I am no longer allowed to take any trades until the next month. This helps me focus on waiting for the very best setups.
Cutting losses and letting profits run
In my early trading years this was one of the main reasons I used to lose at trading overall, as soon as I saw any profits in my trade I could not resist to take them. Although this may not seem like a bad thing to do, if you are risking 50 pips and taking profit at 30 pips you have to maintain a huge win % to stay ahead in the long run.
For example if you risk 50 pips to get 25 pips you need to have a 66% winning trades just to break even not to make any money! Now if we risk 50 pips to get 150 we now only need to have winning trades 25% of the time to break even. Don’t you think that would be easier?
Can you see how important this can be to your success?
Make a trading plan
I have never come across a professional trader that does not have a trading plan, this could be the most important part of trading. Unless you are a robot you will need a trading plan to keep you from making silly mistakes throughout your trading day. I recommend creating a pre trade check list, an during trade check list
and a exit trade check list.
and a exit trade check list.
Your trading plan does not need to be complicated, simply state bullet points with your rules.
Below is an example of the kind of things you would expect in your check list.
Pre trade Check List
- If a news report is within 30mins do not trade.
- Are you trading with the trend?
- Have you determined your risk on the trade?
- Ect
- Ect
- Is my desired risk reward ratio met?
- Does the trade have more room to move?
- Am I letting greed take control?
- Ect
Recording your trading results
From the start of your trading career you should be recording every trade you make. This is the fastest way to fix your trading faults. What I want you to do is start a journal and make notes for every trade you make, state the reason for entering the trade and reason for exiting along with what you are felling throughout the trade.
After every week of trading I want you to read over your trades, I think you may be shocked by some of the trades you made. Put a green mark by every trade you feel that you traded according to your rules and place a red mark by the trades that you feel were a result of emotion and desperation of missing out on a move. After several weeks of this exercise you will start to see patterns in your behavior and will in the future be able to avoid them easily.
Be careful with winning
Winning is what we are trading for however almost all traders (even professional traders) will encounter a problem after having many consecutive wins.
The feeling of over confidence can be disastrous, this is when you are most likely to break your rules and over leverage your account resulting in a sever loss. I find that after a certain % gain in my account per week/month it is a great idea to take some time off and regain a sense of respect for the market. Remember it can be taken away as fast as it gave it. Try to keep level headed after a great streak of wins, getting cocky can ruin a trader.
Back testing
Another thing that I believe was the turning point for me into profitability was when I started back testing. I think of myself as a back tester who trades once in a while. Whatever system you decide to use you should be back testing and listing your results in spread sheets. Start from the beginning of the year and move forward on your specified time frame candle by candle making notes of your entries and exits.
This will give you an immense sense of confidence in your system and you will be able to recognize the setups far easier. I can not recommend this highly enough, I know it is some work but you will love the feel of knowing the exact odds of a trade being profitable. I must point out that back tested results are only a basis for your trading results. Highly profitable trading comes form experience and getting a feel for your trading system, these cannot be back tested and require time to learn.
For example, I have a system that I know is profitable in back testing but with the use of my candlestick formation knowledge for entries I can increase the win %.
I could go on with this section for 100's of pages but the fact remains that most people will not read it and jump straight to the system section. Therefore I wanted to keep this nice and short while still pointing out the main points that need to be considered in order for you to succeed in this business.
I would advise you to read through this section twice before proceeding and keep each point in mind while trading. If you don’t already then start a trading journal and make notes of every trade you take.
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