WHY ARE YOU LOSING MONEY TRADING?
Let’s see if we can help!!
This is a very simple question but just not a so simple answer.
Firstly, the most important thing when beginning ones trading journey is to have a methodology to trade. It doesn’t matter what this methodology is but as long as you have one.
Within a trading methodology you not only need a method of having “Buy” or “Sell” signals but also a method of knowing when you are “Wrong”.
The secret to long term trading success is very much down to money management. If you do not know when the trading signal you took is wrong on a technical basis you are destined for trading failure.
Let us assume one is using a 20k trading account and risking 2% per trade. That means each trade your maximum risk is going to be 400. If it was not known at what place your trade was technically wrong how can you place a proper protective “Stop” in the technically correct place.
Yes, you could say I will place my stop at the 400 risk level. Very fine but this could be in the middle of no man’s land. In other words a trade could reverse a little but not to where the stop should have been placed, take you out, and then go in the direction you had previously thought. This would be bad trade and money management and should be avoided at all costs.
It is important to know where your trade is wrong, (REMEMBER RISK IS THE ONLY THING THAT YOU CAN CONTROL AT THE TIME OF ENTERING A TRADE) because it allows you to assess if you should be entering the trade in the first place.
Let me explain.
Using the above example where your risk should be no greater than 400. Based on your methodology your trade signal is indicating that the risk with this trade would be say 600. It is quite obvious this would be a trade to pass on. The risk is too great. The thing to do if a scenario like this arose, which often does happen, is to wait on the next trade that is within your allowed risk factor. This is not always easy to do because as members of the human race we are all afraid of missing a money making opportunity. “This could be the big one”. This could be a big trade that is being left behind but at the time of the trade entry all you as a trader can control is the risk. Never worry. Be disciplined because as I have already stated there are always more opportunities in the not so distant future that will be within your risk factors.
CUT YOUR LOSES AND LET YOUR PROFITS RUN.
Cutting your losses and letting your profits run is also key to trading success.
This is a statement much easier said than done but is a must for success.
Knowing ones risk is one thing (and very important at that) but also letting your profits run is also very, very important.
Let’s continue to use the previous example of a 400 risk. If one was stopped out a few times and each time losing 400 (£,$) but when a trade then went in your favour to say 200/250 open profit and was then closed it would mean that the loss to gain ratio was greater than the gain to loss ratio. This happens to many private traders and perhaps can be tempting to do especially if there have been a few losses in a row but it is certainly not the correct thing to do. It is imperative that one’s gain to loss ratio is correct. Having a plan in place that has an overall gain ratio greater than its loss ratio is very important.
A professional trader might only have a 50% strike rate in relation to winning trades compared to losing trades but overall they are making substantial money. In fact some of the large trading house traders have a strike rate less than 50%. This is because their losing trades are much smaller than their winning trades. They do let their profits run. This is a very important factor to grasp from a retail traders point of view and a very necessary one to implement.
Another key point to trading success is the position sizing.
Position sizing whether it be in Forex, options futures or stocks is also a very key part of being a successful Financial trader.
Position sizing is often not considered but when properly understood and implemented into a trading plan it completes the picture that is called “Money Management”.
We will discuss position sizing in a later article but first grasp the two factors we have discussed here.
That is to know your risk amount and then having a proper risk to reward ratio.
Consistently use these two factors coupled with a good trading signal methodology and losing money should be a thing of the past,