Protect Your Trading Profits

Simple Money Management Strategies

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Many traders focus on managing trade entries and exits, seeking alpha. Most traders learn the hard way after having trouble with pressure, impulses, and ego force them not to execute their trading plan. Risk management generally is learned last, after discovering the impact that lost capital can have on confidence. 

It takes increased effort to return to breakeven if you keep trading your base capital away. You need a +11.1% return if you're down -10% to get back to even. Throw yourself down -20%, and render yourself complete again with a return of +25%. When you lose -50% of your overall trading account you need to double your money with a return of +100% just to get back the way you came.

Returning +1% on your total capital ten times to get a return of +10% is better than trading big trying to get everything at once. When you lose 5 times in succession when risk 1%, you're down -5%. If you're going to risk 10% on each trade and lose 5 times in a row, you're going to be down -50%.

No trade should endanger your entire portfolio, and your first drawdown should not be able to wipe you out. Can your current position size withstand a losing streak of five trades?

Your risk/reward ratio is another key metric in money management. To risk $100 for the chance of earning $300 or $500 is a good trade, and you can will just half the time and still be profitable. To gamble $1,000 to gain $100 is a poor trade. One loss takes out ten winners profit, even if you lose money with a win rate of 90 percent. You want to gamble a little for the chance to make a ton.

Proper position sizing and stop-loss placement are two of the best tools for money management.

  • A trade risking 20% of your overall capital allows for a 5% stop loss, which equals 1% of the total trading capital.

  • A trade risking 10% of your overall capital allows for a 10% stop loss, which equals 1% of the total trading capital.

  • A trade risking 5% of your overall capital allows for a 20% stop loss, which equals 1% of the total trading capital.


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Bouncing Back From a Bad Loss

5 Easy Steps to Recovery

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Understanding the delicate balance between your level of comfort and uncertainty against a specified time period is the secret to any successful investment plan.

The balance between risk and reward will determine the type of investment strategy that you will take.

A more aggressive approach can be taken by those who start investing early on. This strategy seeks to beat the dollar inflation rate. Those who are investing later in life will follow a conservative approach to minimize the volatility of their portfolio.

Regardless of your risk and rewards profile, a good investment portfolio needs diversification. Even though this reduces volatility, no portfolio is protected against risk or loss.


Here are some wise steps to follow after suffering from a major loss or losing streak:

Admit Fault

Was your recent loss your largest? Is this your first major loss? If that is the case, make sure to own up to it. Losses happen to every trader regardless of the experience level.

Don't just brush it away. Learn from your mistakes and don't jump back in until you've reviewed the lesson.  Don't just blame your loss on market volatility, study what happened.

Evaluating your actions objectively and assessing the results of those actions will allow you to make smarter trading decisions. Learn from it, despite the difficulty of trying to counter the effect of this failure.  Doing so can prevent small losses from turning into a huge drawdown.

Take a Break

Stop trading when a bad trade with significant effects happens.  We will immediately begin to use ego and emotions to negate our significant loss. When you are emotionally involved, finding a better trade will only lead to more losses.

Step away from the trading screen instead. Find out how your problems can be fixed. This can be a quick run around the block for some, a yoga class for others. Determine the best method for removing negative emotions from your atmosphere.

Stop trading for a couple of days. Alternatively, do paper trading until you are profitable again. Doing so may clear up any mental and emotional barriers left behind from the bad trade.

Concentrate

Use the bad trade as motivation after you have cleared your negative emotions. Keep your position size small when you return to trading to prevent emotion from returning the next trade.

A disciplined measure is to get back to a trading performance similar to prior that of your bad trading day. After a bad loss, acquire safe steady gains and recreate a newly profitable investment strategy at a proper speed.

Make a Plan

Make a detailed action plan for future trades after finding your concentration and building your confidence.  Set limits in your detailed plan of action. Since most bad trades can be definable due to market activity, recognize the variables that can be measured. This can include technical patterns, fundamental events, or any dynamic price driver.

For instance, gold price increases when the stock market declines. In times of economic recession and inflation, many investors see precious metal trading as excellent insurance against the dollar's weakness.

Your new trading plan should benefit as a result of your bad trade.

Recognize The Context

Experienced traders know that losses are part of the routine in a market. Inexperienced traders, however, may trade because of the humiliation and the emotion of a bad prior trade.

Keeping this loss in perspective is essential. Recall that this is simply a bad trade, in a risky market. Moments like this are critical for self-reflection. Bad trades should remind you of the many-other successes you have had along the way through the volatile market.

There is a lesson in financial losses, much like other aspects of daily life. Your bad trade may just be the loss-lesson you need to hone your trading strategy.

Without risk, there is no trade. Quantifiable key market actions determine the outcome of a trade. Despite this, there will be a loss. It is how you learn from this failure and improve that decides your performance.


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Develop a Winning Trader's Mindset

6 Emotions to Watch

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Dealing with emotions can be the most difficult part of trading. It's not the math or the stock picking, but the stress from entering a trade and the fear of potential loss that usually ruins a good trading system.

First of all, to manage the emotions you need to make a long term trading plan. Confidence in a plan comes from back-testing experiments and historical chart research together with faith in yourself to perform with consistency.

Not every trade will win, so do not blame yourself for a drawdown. If you are trading with proper risk management techniques, there is nothing more you can do. Ensure correct position sizing such that a stop-loss triggering is no more than 3-5% of your total capital. Ensuring strict trading discipline is the best thing you can do for your stress level and risk of ruin. Never gamble your entire account on any one trade.

Here are 6 emotions you'll feel while trading:

Despair is triggered when you lose money and there is no progress in your trading strategy.

Do not panic, look at the drawdown as the cost of business, like educational fees from your broker. The outcome of your system is not to be the main focus, but the execution of a systemic signal. Hope can emerge as you grow discipline.

Disappointment arises when perceptions are much higher than reality.

Ground your initial expectations as a trader. What do you estimate your average capital gains to be based on comparable traders using your technique? Based on your win/loss and risk/reward ratio, what do you estimate your drawdown to be? Over the long term, dedicating yourself to a consistent trading system may be profitable and is likely to involve bends and turns along the way. Learning the dynamics of what to anticipate can help curve the disappointment.

Regret is triggered through disappointment from a loss created by a lack of control.

If you follow your trading plan into a loss, that is just part of doing business. If you veer from your plan and trade on emotions or ego, then you should feel regret and the need for discipline. Your job is to execute your trade system with uniformity and discipline on each entry and with each position size so that you have no regrets regardless of the outcome.

You're going to have fun trading when you're making trades that you're not scared to lose or have the potential for risk of ruin because of improper position sizing.

Trading is more fun if you gamble 1 percent of your capital in the expectation of making 3 percent with zero risk of ruin. It's not fun when you put a huge amount of your money on the table and are just a couple losing trades away from your portfolio sliding to zero.

Years of successful trading experience gives traders wisdom.

You have to trade in the real market to get good at trading. Back-testing and reading charts won't make you a successful trader who can execute on the dynamic market conditions while facing real market stressors. Wisdom comes from putting real money on the line for years and showing you can win in the long run.

Trust in your trading system derives from a trust in its success through backtesting and then years of winning with it.

Although you must have a view as to whether any general style of trading is profitable or not, every trader has their own edge with that method. Every trade may be unpredictable in nature, but the concepts of a successful trading system must extend over a sample size that is big enough to grow above the noise and catch patterns. You will overcome a lot of emotional trading if you have no uncertainties about your system. You will solve many of the interpersonal problems that arise in the heat of the action with many other traders, while you have a fanaticism for trusting in your system, method, risk management, and your own discipline.


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Day Trading with Maximum Power

5 Powerful Candlestick Chart Patterns

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Candlestick charts are an analytical technique that transforms data into single price bars over multiple time frames. It makes them more valuable than conventional open-high, low-close bars or lines that link the closing price points. When charted, candlesticks generate trends that forecast price action. Proper color codes add depth to this technical tool first built by Japanese rice traders in the 18th century.

In his popular 1991 book, the "Japanese candlestick charting techniques," Steve Nison brought candlestick patterns to the west. Now, many traders have the opportunity to identify dozens of these patterns, with names such as harami, spinning top, and three white soldiers. Single bar styles, including the Doji and the hammer, were integrated into hundreds of trading strategies in both long and short strategies.


Reliability

Not all types of candlesticks work really well. Their immense success has diminished efficiency, as hedge funds and their algorithms have deconstructed them. Many well-funded companies rely on high-speed execution to compete against retail investors and conventional fund managers who execute strategies from technical analysis found in traditional texts.

In other terms, operators of hedge funds employ algorithms to manipulate investors looking for bullish or bearish scenarios at high odds. Reliable trends continue to appear, however, creating incentives for the short and long-term.

Here are five examples of candlesticks doing extremely well as price guidance and momentum predictors. Each works in predicting higher or lower prices in the context of surrounding price bars. They are adaptive to time in two respects. First, they operate only in the boundaries of the chart, whether intraday, daily, weekly or monthly. Second, after completion of the pattern, their effectiveness declines steadily after three to five bars.


Top 5 Patterns

The study is based on the work of Thomas Bulkowski, who in his 2008 book, "Candlestick Charts Encyclopedia," created output rankings for candlestick patterns. He gives figures for two kinds of predicted trend results: reversal and continuation Candlestick reversal trends forecast price changes, while continuation patterns expect an extension of the current price path.

The hollow white candlestick corresponds to a closing print higher than the opening print in the following examples, whereas the black candlestick refers to a closing print lower than the opening print.

Three Line Strike

The reversal pattern of the bullish three-line strike throws out three black candles in a downtrend. Each bar is lower and closes close to the bottom of the intraday candle. The fourth bar opens much lower but reverses in a wide-range closing above the top of the series first high. The first print of the fourth candle should mark the bottom of the fourth candle. This reversal forecasts higher prices with an accuracy rate of 84 percent, according to Bulkowski.

Two Black Gapping

After a remarkable peak in an uptrend, the bearish two black gapping reversal pattern emerges, with a gap down which generates two black candles with lower lows. This trend suggests the downturn will continue lower, possibly triggering a broader downward trend. This pattern forecasts lower prices with an accuracy rate of 68 percent, according to Bulkowski.

Three Black Crows

The bearish three black crows reversal pattern begins at an uptrend's peak, with three black bars marking lower lows closing close to intrabar lows. This pattern suggests the fall will possibly trigger a larger downtrend. The most bearish iteration begins at a new high as it traps investors into pursuing momentum. This model forecasts lower prices with an accuracy rate of 78 percent, according to Bulkowski.

Evening Star

The reversal sequence of the bearish evening star begins with a tall white bar bringing an uptrend to new highs. The market gaps up, but fresh investors do not emerge, resulting in a candlestick with a narrow range. A break down on the third bar completes the sequence, suggesting that the downturn may continue lower, triggering a downtrend on a broader scale. This model forecasts lower prices with an accuracy rate of 72 percent, according to Bulkowski.

Abandoned Baby

Following a series of candles printing lower highs, the bullish abandoned baby reversal pattern emerges at the bottom of a downtrend. A small market gap occurs, but fresh sellers do not emerge, resulting in a small Doji candlestick. A gap up on the third candle suggesting the turnaround would proceed to be even bigger, potentially causing a larger uptrend. This model forecasts higher prices with a precision rate of 70 percent, according to Bulkowski. The bearish abandoned baby forecasts lower prices with a rate of 69%.


Conclusion

Chart patterns catch market players ' interest, but many reversal and continuation signals generated in the current electronic trading environment do not perform reliably. Luckily, Thomas Bulkowski's statistics show extraordinary precision for a narrow set of these trends, enabling traders to buy and sell on these indications.


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It's Beyond Your Control

As A Trader

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Regardless of how much a trader thinks they can predict the future, how powerful their confidence is, or how much they believe, no particular trader or investor can dictate the outcome of a market unless they have sufficient capital to push that particular market. Traders have an exceptional disappointment that few other professions have, a shortage of real market influence.

A trader is unable to control:

  1. Price movements

  2. How a trade works out

When a trader enters the market, any following price movement is based on market participants' collective actions not any individual's own opinions, hopes, and beliefs. While a trader can manage a trade via position size and exit strategies, he can not determine whether his stop loss or profit level is hit. A trader is at the market's mercy to choose the future of each of their trades.

But sometimes the trader does have some control...

A trader can control:

  1. When to enter a trade

  2. The use of a trailing stop if the trade goes their way

  3. When to hold all cash in the portfolio

  4. The technical indicators used for signals

  5. Price targets from which profit will be taken

  6. What lesson is to be learned from each trade

  7. Their watchlist and which markets and products they will trade

  8. The exit strategy and point of invalidation

  9. Position sizing for every trade

  10. How emotions are dealt with

You can't control what price action will be, but you can control what you will do in response to the price action and how each trade plays out. You control how your position size and entry before you're in the trade. You also control when and how you will exit the trade. 

You cannot control the markets, but you can build the discipline to control yourself.


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