Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 4 - Technical Analysis
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 5 - Psychology
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 6 - Risk and Money Management
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INTRODUCTION

Often, traders are good at making money, but bad at holding on to it. The question is when to bank it. Many traders make money on any given day but this, unfortunately, is not enough to ensure being a successful and profitable trader. There can be times when traders are doing well making money, only to give it back again just as fast.

The key to becoming a successful trader (definition: someone who makes and keeps money) is consistency – which is achieved by rigorously using loss management strategies. There are a lot of traders who can make money on one day and believe they are doing well (the human mind is very good at selective thinking and forgetting the bad days!) but give it all back, and some, the next day and yet still believe they are doing well – but the account says otherwise.

Make 2,000 today and lose 2,500 tomorrow, make 500 the next day – What have you achieved? Obviously, this comes down to simple maths. The idea is simply to relate your downside loss control to your historic profits and losses i.e. the realistic probability of making back what you have lost. It is all too easy for traders to create high downside risk – but with much smaller corresponding upside potential to get it back!

Obviously, this means you are digging a very big hole that you will struggle (and invest a tremendous amount of time and energy) to get out of another day. The amount of losses that any trader should sustain on any day (and at any point in the day) must be related to their ability to make it back – which is based not on hope and guesswork but on their historic profit levels. Sounds simple? Very few people do it.

So, the rule should be…“Worst down day” should be a function of limiting downside risk in relation to:

  • monthly P/L
  • average day profits (or loss) this month
  • worst day
  • best day

Making a hard and fast rule is difficult but if you thoroughly understand the principle at work and constantly think about it during your trading, it is a highly valuable strategy that should help you to increase your profits. Our experiences show that if we are down by our average daily win level, the best result likely is to struggle all day for a break-even but, unfortunately, the opposite often happens! As our anger and emotions take hold and we go into ‘catch up’ or revenge trading – and it is then that the losses really get out of control.

Managing your winning days…

In our experience, it is nearly always the right thing to do to put a trailing stop underneath our profits – perhaps about 1/3. This means that if we are up +1,500 (ticks plus RTs) and we fall to +1,000, it is best to stop.

Ultimately…

  • It comes down to having the DISICIPLINE to do what you know you ought to do.
  • To understand it will not help unless we implement it consistently on a daily basis.
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