Thursday, September 27, 2007

You will want to minimize all of you trading business costs

Some trading systems can offer you only marginal profitability, and trading implementation costs (commission, spread, and slippage) can be the difference between making a profit and making a loss.

With the simple availability of modern electronic brokers, and fully-automated trade processing and execution, it is definitely worth the effort in looking for a very low cost way to implement your trading system.

High commission, wide spreads, and large amounts of slippage can be lowered drastically and easily by carefully choosing the right broker. This can be the difference between a system being useable or not. Paying too much for trade implementation is a way to lose money that you can actually avoid.

Educate yourself

In order for you to be able to compete at the highest level in the trading business and be a successful player, you must be well-educated about what you are doing. Being well-educated means that you have thoroughly researched and tested your trading ideas and know why your trading system worked in the past and is still working.

It means that you understand all the technology and applications that your system needs to perform with accuracy. It means understanding your goal and objectives and how trading will help you achieve them. It means understanding yourself and how your personality will affect your results.

In order to succeed as a forex trader, you really need to become an expert in your own trading business to understand how it the dots are all connected, when it is broken, and how it can be improved. This takes commitment, hard work, dedication, and more hard work.

Avoid trading scared money

No one ever made any money trading when they had to do it to pay their bills at the end of the month. Having a requirement to make a certain amount of dollars per month or you will be financially in trouble is the best way I know to completely mess up all trading discipline, rules, objectives, and leads faster than you’d expect to disaster.

Trading is about taking a reasonable amount of risk in order to achieve a good reward. The markets and how and when they give up their profits is nothing that you can control. You should never trade if you need the money to pay bills. Do not trade if your business and personal expenses are not covered by another income stream or cash reserve. This is how hasty decisions are made.

Dealing with your losses

One of the most important rules of Forex trading is to keep your losses as small as possible. With small Forex trading losses, you can outlast those times when the market moves against you, and be well positioned for when the trend turns around.

The one proven method to keeping your losses small is to set your maximum loss before you even open a Forex trading position.

The maximum loss is the greatest amount of capital that you are comfortable losing on any one trade. With your maximum loss set as a small percentage of your Forex trading effort, a string of losses won’t stop you from trading for any particular amount of time. Unlike the 95% of Forex traders out there who lose money because they haven’t implemented wise money management rules to their Forex trading system, you will be ok with this money management rule.

To use as an example... If I had a Forex trading float of $2000, and I began trading with $200 a trade, it would be reasonable for me to experience three losses in a row. This would reduce my Forex trading capital to $800. It would then be decided that they’re going to bet $400 on the next trade because they think they have a higher chance of winning after having lost three times already.

If that trader did bet $200 dollars on the next trade because they thought they were going to win, their capital could be reduced to $500 dollars. The chances of making money now are practically nil because I would need to make 150% on the next trade just to break even. If the maximum loss had been determined, and stuck to, they
would not be in this position.

In this case, the reason for failure was because the trader risked too much money, and didn’t apply good money management to the play.

Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits and minimize losses. With your money management rules in place, in your Forex trading system, you will always be able to do this.

Cut your losses short

This is actually the sister rule to the one mentioned above, and is usually just as difficult to do (even if it is very easy to define). In the same way that profitability comes from a few large winning trades, capital preservation so comes from avoiding the few large losers that the market will see fit to send you each year.

Setting a maximum loss point before you enter the trade so you know ahead of time approximately how much you are risking on this position is pretty straight up.

You just have to have an exit price that tells you that your trade is a losing one you should exit before it gets any bigger. Because of gaps at the open, or limit moves in futures we can never be 100% sure that we can get out with our maximum loss, but simply having the rules, and always sticking to them will save us from the nasty trades that just keep on going against our position until we have lost more than many winning trades can make back.

If you have a losing position that is at your maximum loss point, you should just get out right away. You can’t hope that it will turn around for as it isn’t common sense.

Being that trades are either winners or losers, and this one is shouting ‘Loser’ at you, the chances that it will turn around and become a large winner is decidedly small.

Why would you want to risk any more money on a trade that has already shown itself to be a loser when you could simply close it out (accept the loss) and move on. This will leave you in a much better place financially and mentally, than holding on to your position and hoping it will go back your way.

Even if it did do this, the mental energy and negative feelings from holding the losing position are just not worth it. this is why you should always stick to your rules and exit a position if it hits your stop point.

Never add to a losing trade

One of the few trade management rules that you should never break is ‘Never add to a losing trade’. Trades are split into winners and losers, and if a trade is a loser, the chances of it turning right around and becoming a winner are too small for you to want to risk more money on. If it actually is a winner disguised as a loser, why not wait until it shows it is a winner before you add to it.

If you do this you will notice that nearly every time the trade ends up hitting your stop loss and does not change direction. Sometimes the trade turns around before it hits your stop and becomes a winner and you can count yourself very lucky if it does.

Sometimes the trade hits your stop loss and then turns around and becomes a winner and you can count yourself unlucky. Whatever happens, it is never worth adding to a loser, hoping that it will eventually be a winner. The odds of success are just too low to risk more capital in addition to the initial risk.

Don’t take too much risk

One of the most devastating mistakes that any trader can make is in risking too much of their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game indefinitely. Why should you risk so much when you could be prevented from continuing?

There is a useful saying in poker than going all-in works every time but once. It is the same thing in trading. If you risk all of your account on every trade it only takes one loser to wipe you out, so you will be out of the game at some point as it is only a question of time.

In general, you should only risk 1-3% of the available capital allocated to a system on any individual trade. This is calculated using the size and, the difference between our entry price and our maximum stop
price, and the amount of capital that is allocated to the system.

With these things combined we are almost certain never to lose all of our trading capital. In fact, the chance of us hitting our maximum drawdown for the year is extremely low.

All trades that you make should be of a size that almost seems pointless to your future fortune. If you are worried about the size of a trade then it is too big and you should use a lower amount immediately.

Remember that longevity in any trading market is the key to making money by trading. You should trade slowly over a long time with minimal risk, is always preferable to rapidly with too much risk.

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