5 Quick Tips For Risk Management

Days like today really see who is managing risk and who isn’t. Always remember if you have big winning days and trades that are disproportionally large percentage wise then the odds are that you are also exposed to the downside risk of an equal magnitude. Here are five quick tips for risk management for traders.

For Traders: 5 Quick Tips For Risk Management

1. Structure your position sizing and stops so that you try to never lose more than 1% on any of your trades.
2. My maximum risk exposure is a total of three trades on at once risking 1% per trade each for a total possible drawdown of 3% in one day if all three go against me at the same time.
3. I do not trade individual stocks that are highly volatile. I prefer my alpha to come from leveraged index ETFs or option trades for a smoother equity curve.
4. I trade in the direction of the trend on the daily chart so my biggest risks and losses come from big whips saw reversal days. (Like today).
5. I honor my stops when they are hit. I do not hold and hope. I get out and get back in later.

20 Reasons 90% Don’t Make It Trading

Ten Reasons Why 90% of New Traders Don’t Make It

1. They risk too much to try to make so little.
2. They trade with the probabilities against them.
3. They think trading is easy money.
4. Instead of focusing on learning how to trade they focus on getting rich.
5. They blow up due to improper position sizing.
6. With no understanding of the mathematical risk of ruin they are doomed after the first long string of losing trades.
7. Blindly following a guru that leads them down the road of destruction.
8. They don’t do their homework.
9. They trade opinions not robust systems.
10. They go looking for ‘trades’ instead of a methodology.
11. They have no trading plan.
12. They attempt to piggy back on the trades another trader but don’t understand the risks.
13. Most new traders quit when they realized how much work is involved in trading successfully.
14. Most traders quit when they learn how many losing trades they will have to have to get to the winners.
15. New traders quit if they do not have a passion for trading itself.
16. Many new traders will give up the moment they realize that trading does not have guaranteed income, you are an entrepreneur.
17. They are not willing to pay the tuition to learn to trade in time, study, and losing trades.
18. They are crushed by the learning curve that they do not work hard enough to get through.
19. We lose a lot of new traders when they realize that trading is actually harder than their job.
20. The traders that don’t make it quit when they were tired, frustrated, and stressed out, the winning traders quit after they had figured trading out.

7 Ways to Trade With An Edge

“If you diversify, control your risk, and go with the trend, it just has to work.” -Larry Hite.

We often hear of trading with an edge, but how do we know for sure we have an edge? How do we know that the odds are in our favor, and that the more we trade, the more our accounts will grow? Are we really the casino and not the gambler, or are our short term winning the result of luck?

1. One edge is in trading entry points in chart patterns that historically play out as a winning trade more times than a losing trade. Even taking entries that play out as winners only 60% to 70% of the time is much better odds than a random 50/50 entry point. The key is to do your homework and know the odds of each entry from specific chart patterns. Cups with Handles, candles sticks, and triangles are just some of these patterns. Thomas Bulkowski has done some amazing work around quantifying these patterns.
2. Another edge is in the use of historical price action backtesting.Using software, historical price data, and technical indicators, a trader can see how a system would have done over an extended period of time across multiple markets. Moving averages and breakouts in different time-frames are used to measure the equity curve in a system.  This is the realm of the mechanical system trader. Price history gives the edge. Programming knowledge required.
3. Another edge is to trade a method that has been proven historically as a winning one. The method should have rules on what to buy based on fundamental or technical criteria , when to buy, how much to risk per trade, when to exit at a loss or when to exit to lock in profits. One example of such a method is the CAN SLIM system by William O’Neil while the system is very robust it is more of an investing system than a trading system due to the time frames of the recommended buying and holding of stocks.
4. Technical Analysis applied correctly can give a trader an edge. By trading what the chart is saying with support, resistance, trend lines and volume it will give a trader an edge over someone who enters randomly or based on opinions.
5. Experienced discretionary traders can be their own edge through intuition which is developed through market experience and exposure to market behavior and what makes and loses money over many years of trading. Successful discretionary traders are like seasoned athletes who began to just know what to do in different circumstances based on past experience and learning through repetitive action. They are also like professional poker players that can instantly size up the odds of their hand and the possible actions of their competitors.
6. An Emotional Edge can be gained by traders who make buy and sell signals based on systems and methods instead of fear and greed, they can step in and buy in a bear market when a reversal begins with a new trend upwards with out being clouded by fear and they can allow winners to run in a bull market not selling to soon out of fear of giving back profits. Traders not affected by their ego can sell quickly when they are wrong to avoid taking a bigger loss than is necessary. Much of trading is a mind game and do not underestimate the edge of having the discipline to follow your trading plan instead of your own fear and greed over taking you during market hours.
7. Asymmetric Risk Edge is really THE edge that produces profits in the long term. The only way to make money in the long term is to have all your winners be bigger than all your losers. This can only happen by cutting losers short and letting winners run or having a very big win percentage. A good ground rule is to only take trades that can profit $3 for every $1 at risk. Only risk $1,000 if you believe you can make $3,000 on a specific trade. Of course a day trader with a 60% win rate may be able to get by with a $2 profit for a $1 risk if they stay disciplined in cutting losses and a trend following may have amazing returns with only a 30% win rate if there wins are 5 to 10 times their risk.

30 Of The World’s Best Trading Rules

Here is the inconvenient truth about successful trading. It’s work.

Trading is more than just numbers — it is a three dimensional fight that rages primarily inside the traders themselves. Missing any crucial element can ruin a trader quickly. The trader must first develop a robust trading system that fits their own personality and risk tolerance. Then they must trade it with discipline and faith consistently through ups and downs.  But that’s not all. Risk exposure must also be managed carefully through position sizing and limiting open positions. The risk management has to be able to carry the trader through the losing streaks and enable survival for the chance to even make it to the winning side.

Here are thirty rules that can help the new trader survive that first year in the trading the markets or take the unprofitable trader much closer to profitability.

Trade with the right mind set.

TRADER PSYCHOLOGY

1.    Be flexible and go with the flow of the markets price action, stubbornness, egos, and emotions are the worst indicators for entries and exits.
2.    Understand that the trader only chooses their entries, exits, position size, and risk and the market chooses whether they are profitable or not.
3.    You must have a trading plan before you start to trade, that has to be your anchor in decision making.
4.    You have to let go of wanting to always be right about your trade and exchange it for wanting to make money. The first step of making money is to cut a loser short the   moment it is confirmed that you are wrong.
5.    Never trade position sizes so big that your emotions take over from your trading plan.
6.    “If it feels good, don’t do it.” – Richard Weissman
7.    Trade your biggest position sizes during winning streaks and your smallest position sizes during losing streaks. Not too big and trade your smallest when in a losing streak.
8.    Do not worry about losing money that can be made back worry about losing your trading discipline.
9.    A losing trade costs you money but letting a big losing trade get too far out of hand can cause you to lose your nerve. Cut losses for the sake of your nerves as much as for the sake of capital preservation.
10.    A trader can only go on to success after they have faith in themselves as a trader, their trading system  as a winner, and know that they will stay disciplined in their trading journey.

Bring your risk of ruin down to almost zero.

RISK MANAGEMENT

1.    Never enter a trade before you know where you will exit if proven wrong.
2.    First find the right stop loss level that will show you that you’re wrong about a trade then set your positions size based on that price level.
3.    Focus like a laser on how much capital can be lost on any trade first before you enter not on how much profit you could make.
4.    Structure your trades through position sizing and stop losses so you never lose more than 1% of your trading capital on one losing trade.
5.    Never expose your trading account to more than 5% total risk at any one time.
6.    Understand the nature of volatility and adjust your position size for the increased risk with volatility spikes.
7.    Never, ever, ever, add to a losing trade. Eventually that will destroy your trading account when you eventually fight the wrong trend.
8.    All your trades should end in one of four ways: a small win, a big win, a small loss, or break even, but never a big loss. If you can get rid of big losses you have a great chance of eventually trading success.
9.    Be incredibly stubborn in your risk management rules don’t give up an inch. Defense wins championships in sports and profits in trading.
10.    Most of the time trailing stops are more profitable than profit targets. We need the big wins to pay for the losing trades. Trends tend to go farther than anyone anticipates.

Develop a winning trading system that fits your personality.

YOUR ROBUST METHOD

1.    “Trade What’s Happening…Not What You Think Is Gonna Happen.” – Doug Gregory
2.    Go long strength; sell weakness short in your time frame.
3.    Find your edge over other traders.
4.    Your trading system must be built on quantifiable facts not opinions.
5.    Trade the chart not the news.
6.    A robust trading system must either be designed to have a large winning percentage of trades or big wins and small losses.
7.    Only take trades that have a skewed risk reward in your favor.
8.    The answer to the question, “What’s the trend?” is the question, “What’s your timeframe?” – Richard Weissman. Trade primarily in the direction that a market is trending in on your time frame until the end when it bends.
9.    Only take real entries that have an edge, avoid being caught up in the meaningless noise.
10.    Place your stop losses outside the range of noise so you are only stopped out when you are likely wrong.

7 Times Traders Lose Money

Bernard Goldbach

Profit making in trading is a function of the market matching your methodology. We trade with a philosophy and we profit when it correlates with the current market environment. We make money when our winning percentage is high and our losses are kept small, or when or wins are big and are losses are small. If we have the discipline to follow a system consistently and manage our risk, then the profits will come when the market is conducive to our method. Until then it is our job to keep our losses and drawdowns under control.

1. Day traders have trouble making money in markets that lack intra-day volatility.
2. Trend followers can’t make money when markets don’t trend in one direction for any length of time.
3. Momentum traders lose money when stocks fail to breakout over resistance and trend.
4. Traders that use chart patterns don’t make money when trend line breaks don’t lead to sustained trends.
5. Swing traders don’t make money when support levels fail and stop losses are hit before a reversal.
6. Dip buyers don’t make money when downtrends begin and lows get lower.
7. Option trades lose money when markets fail to trend before the option expires.
8. Option sellers lose money when parabolic moves put the sold options in the money.
9. Investors lose money in bear markets.
10. Perma-bears lose money in bull markets.

10 Steps to Profitable Trading

1. First you stop trading until you do some homework and learn what leads to profitability in the financial markets.
2. Once you start to understand what makes traders money then you begin to build a trading system that fits your personality and is profitable over the long term.
3. You have to test your system across historical price action to see its win-rate, drawdowns, and risk of ruin during years like 1987 and 2008.
4. You then have to take your theoretical trading system and convert it to an actionable trading plan that had be executed in real time with real money.
5. Your money management has to be right with your position sizing and stop losses to eliminate the risk of ruin during a losing streak.
6. You must develop the discipline to take your entry and exit signals regardless of how you feel about the market price action.
7. You have to be able to mentally handle losing streaks and losing money.
8. You can not try to curve fit your system as you go through the current market price action.
9. Winning streaks should not make you arrogant and losing streaks should not make you depressed. Your goal is following your system, you can not control the market price action.
10. Trade in a way that you will keep your capital safe and grow it. Don’t trade overly aggressively in the hopes of getting rich quick. Get rich slow through proper trading and avoid going broke quick through excessive risk in the hopes of big gains.

Things I like in a Trading System

1. I need to make money on the long and short side so I have both long and short entries. My goal is to be profitable in both bull and bear markets.
2. Options that I trade need to be highly liquid. I do not want to lose money in the bid/ask spread when trading options.
3. I need both swing trading entries and trend trading entries so I can both buy dips and trade momentum. I try to be profitable in both range bound and trending markets.
4. My trading system attempts to go with the path of least resistance in my trading time frame.
5. I like to have a technical oscillator indicator for oversold and overbought levels to show where the risk/reward ratio has become unfavorable for a trade. The RSI and $NYMO are two that are valid.
6. I like using moving averages as a trend following indicator. Moving averages can be used for all time frames.
7. Chart patterns can help identify breakouts and present price in a visual manner.
8. The Average True Range is a great way to set stop losses and trailing stops.
9. I like to use end of day signals primarily for entries and opening gaps to take profits late in trends.
10. I prefer the clarity of the daily chart time frame versus the noise of the intra-day chart. I like to see how a day finishes to see what signals are triggered.

22 Bad Trading Habits

Here are the best answers from my Facebook trading group when I posted the following question:

What is one of your bad trading habits that causes you to lose money?

1. Underestimating the possibility of volatility expansion at times and taking too big a position size.
2. Overly optimistic that the market will trend well… only to reverse.
3. Averaging in on losing positions.
4. Not studying more.
5. Not following the trend and trying to predict the top or bottom.
6. Following other’s trades.
7. Deviating from positive expectancy models.
8. “Fighting” back instead of taking the loss/killing a bad trade (bad trade = against the plan)…
9. Trading too large for my account size.
10. Overtrading.
11. Starting the day “looking” for something to trade like a trading addict.
12. Wishful thinking for big profits.
13. Taking trades that aren’t “my” trades.
14. Focusing on returns instead of risk-adjusted returns.
15. Closing trades too soon.
16. Not being consistent in daily activity but being inconsistent is not something I do consistently.
17. Going all in.
18. Probably tweaking my strategy too much during drawdowns.
19. Moving my stop up too quickly.
20. Not being patient.
21. Feeling like I have to do something.
22. All of the above.

4 Types of Trading Signals

Quantified trading signals can be based on different types of strategies. Some buy high in the hopes of selling higher, while  others try to create a great risk/reward ratio by buying low hoping to sell on rebounds or reversals in price action. Here are four different types of trading signals.

1. Momentum signals are based on buying strength. Momentum traders wait for a strong move in a stock and then buy and get on-board for a short amount of time. Momentum traders usually trade short time frames of days. These work primarily in bull markets.
2. Breakout signals are based on buying all-time highs or 52 week highs, trying to buy high and sell higher. Breakouts are bought trying to catch a parabolic move where a stock could double or even triple over weeks and months. These work primarily in strong bull markets when indexes break to all-time highs.
3. Buying oversold dips are based on buying a long term price support level or an oversold oscillator like the 30 RSI, a price extension far from the 10 day EMA, or a -80 to -100 $NYMO. This signal tries to create a great risk/reward ratio based on buying a deep dip of a historical price range. These work best in range-bound markets.
4. Trend following signals try to go in the direction of the long term trend by using long term moving averages like the 200 day SMA breaks as buy or sell signals, or all-time highs or lows to enter longs or shorts. These work in trends with higher highs or lower lows.

A Traders Quick Guide to Position Sizing

I base my position sizing in my trades on the fact that I never want to lose more than 1% on any one trade. If I am trading with a $100,000 account, I don’t want to lose more than $1,000 in a losing trade. A stop loss level has to start at the price level that you know you are wrong, and work back to position sizing. If the support level on your trade is $105 for your entry and you set your stop at $100, then you can trade 200 shares with a stop at the $100 price level. 200 X $105 = $21,000 position size for 200 shares. This is about 20% of your total trading capital with about a 5% stop loss on your position that equals a 1% loss of your total trading capital.

1. A 20% position of your total trading capital gives you a potential 5% stop loss on your position to equal 1% of total trading capital.
2. A 10% position of your total trading capital gives you a potential 10% stop loss on your position to equal 1% of total trading capital.
3. A 5% position of your total trading capital gives you a potential 20% stop loss on your position to equal 1% of total trading capital.

The average true range (ATR) can give you the daily range of price movement and help you position size based on your time frame and your stocks volatility. If your entry is $105, your stop is $100, and the ATR is $1, then you have a five days worth of movement against you as a stop.

Start with your stop loss level and volatility to give yourself your position size. The more room you want on your stop determines how big of a position size you can take.

If you only risk losing 1% of your trading capital when you are wrong, then every trade can become just one of the next 100 with little emotional impact. Ultimately, you can survive losing streaks and increase your odds of prosperity.

Extract

1. Your stop loss that results in a small loss is your insurance policy against large losses.
2. Risk is always managed because the future is always unknowable.
3. Highs, lows, and moving averages are not signals they are simply tools to create price trading systems with.
4. Overbought & oversold indicators are not stand alone signals to fade a move.They primarily show how a risk/reward ratio is starting to shift
5. Just because a market is overbought doesn't mean it is a short selling opportunity. It can just go sideways. Markets don't always trend.
6. Never trade so big that you can hurt yourself. Small & steady can still win the trading race.
7. Positive thinking won't make you a profitable trader but it will make you better at doing the things that do make you a profitable trader.
8. "you should wait for a trade and not look for a trade"
9. "Stock trading is rocket science, you find a rocket & ride it.” -Steve Burns
10. Focus on great trades not perfect trades.
11. Trend trading profits come from the magnitude of the wins not the accuracy of the signals.
12. The single most important advice I can give anybody is: Learn from your mistakes.That is the only way to become a successful trader.
13. “Your true wealth is a direct reflection of how much value you give others”
14. “The secret of change is to focus all of your energy not on fighting the old, but on building the new.”
15. “Bear markets have no supports and bull markets have no resistance.”  -William Eng
16. “Monster stocks have no long term resistance and  stocks in a death spiral have no long term support.” -Steve Burns
17. There is no 'secret' to trading success. You just have to create a trading system & follow it with discipline consistently.
18. Always remember: Your most dangerous trade is the one that you think you can’t lose. It makes you trade too big, be overconfident, sloppy, greedy, and not use stops.
19. Many times the trade you are the most confident in is also the most dangerous due to your conviction & difficulty in taking your stop loss.
20. Different types of signals work in different market cycles.Momentum signals fail in choppy markets.Trend signals fail with rangebound prices.
21. I have come to believe that successful trading is simply putting on good risk/reward scenarios with the right position size.

22. Profitable trading is built through big wins & small losses or on a high winning percentage, not perfection.

23. Drawdowns in trading capital will be temporary if your position sizing is right.

Ed Seykota's trading rules: Cut losses Ride winners Keep bets small Follow the rules without question Know when to break the rules


Good trading is usually just a waiting game.
Waiting for an entry signal Waiting for a break out Waiting for a trend Waiting for a move


I Am A Profitable Trader Because....
I have an Edge I Define Risk I Accept losses I Trade With Discipline I Trade Price Action I Persevere

Trading steps from 1. Believe in Yourself 2. Control Risk 3. Patience 4. Humility 5. Reward


10 reasons most traders lose money:
Greed Ego Fear Stubbornness Hope Ignorance Trend Fighting No Plan No System No Homework



10 reasons traders make money:


Winning system Trading Plan Entry signals Disciplined Position sizing Stop loss Exit signals Repeat


Trading Plan = Lots of Study

A watch-list Correct position sizing Stop losses Entries Trailing stops Price target Exits Records Discipline


Fastest ways to go broke trading
Trade too big Trade too much Trade with no plan Trade emotionally Trade with ego Fight trends


This market has: No momentum No follow through No trend Danger Lots of chop Lots of risk Little reward No rhyme or reason


Hallmark of a Pro Trader: Follow your plan Keep bets small Journal your trades Stay disciplined Know when you're wrong


What causes you to lose:


1) too high expectations 
2) daily & weekly monetary goals 
3) being glued to P/L 
4) not reviewing trades 



be happy: have a sense of wonder help others read books do things you're good at face your fears

Path to happiness:

Small debts Good cash flow Right life partner Eat healthy Inner peace Goals Work on what you love Learning

Patience pays: Waiting for an entry signal Waiting for a break out Waiting for a trend Waiting for a move
I know people like trading to be an exciting but often, great trading is a slow waiting game that pays massive returns with patience.