This week, I’d like to take a look at some very simple fixes… These are basic behind-the-scenes errors that are all too easy to miss in your own trading.
But they could be having a devastating effect on your results…
1. Sloppy money management
I can almost hear traders yawn and collectively hit their ‘delete’ button when I write the words ‘money management’.
I don’t expect it to set your heart racing. But if you don’t practise sound money management, there is absolutely no question that your career as a trader will be very short-lived.
Good management means that you’ll never be risking more than 1 or 2% of your trading fund in any one trade.
This way, a losing trade won’t make a nasty dent in your trading fund. Even a losing run (as you know – they will happen) shouldn’t worry you too much.
With a 1–2% risk profile, you’ll need over 50 or over 100 losing trades to wipe out your trading fund.
Of course, we won’t be letting it come to that, because our money-management strategy will also include draw-down limits (more on draw-downs another time).
Once you’ve established what percentage you’re going to risk, calculating your stakes should be second nature.
If your risk is 1% of a £10k pot, then you’ll be risking £100 on a trade.
If your stop loss is 40 points away from your open price, your stakes will be £2.50. (100/40 = £2.50)
You should be making this calculation automatically every time you place a trade.
This is the most basic money management – and the part that no trader can afford to overlook.
Ensure it’s second-nature in your trading practice.
2. Unkept records
I can’t stress how important it is to keep a record of your trades. For most traders, this takes the form of a simple spreadsheet that records entry levels, exit levels, profit and loss, and risk levels, along with a few other pertinent facts.
But before you embark on creating your trading journal, it’s important to be realistic about the kind of person you are.
A beautifully planned journal is useless if you don’t have the discipline to keep it and – just as important – to learn from it.
If your trading has a tendency to be intuitive or impulsive, then a facts-and-figures spreadsheet won’t tell the whole story – make sure you log your thoughts and feelings at the time of each trade.
And if you broke your own trading rules – explain why. It may turn out that your intuition is leading you in a positive direction, but as with all things in trading – it should be tested, tested, tested.
But, remember, your trading journal isn’t some dusty piece of paper locked in a file – it’s something that you refer back to, learn lessons from and apply to your trading tomorrow, and the next day.
Here are a few points to consider when keeping your journal:
- Read through yesterday’s notes – is there a lesson you should be carrying through to today?
- Make a note of major world events and economic numbers that are happening today.
- What’s my plan for today?
- How am I feeling today? Am I feeling focused? Am I harbouring a grudge about failed trades – ‘revenge trading’ can be very destructive.
- What is my trading timetable for the day? (ie GBP/USD until 11am, then…)
- How will I log each trade I make?
- Which trades worked, which didn’t?
- What are today’s market conditions? (Range-bound, trending…)
- How did I perform today?
- What have I learned today that I can apply tomorrow?
3. Making trades hard to win
It’s a frustration that all traders know too well – getting knocked out of trades by the spread… missing a profit target by just a point…
I’m afraid I can’t offer an instant fix to the problem. But there is a very simple way to improve your chances of winning on every trade…
What spread is your spread-bet firm charging you?
Every extra point you’re paying on your spread, is a point further from winning a trade – and a point closer to getting stopped out.
Shopping around for the best deals is one of the most powerful ways to boost your success rate.
I’m hoping to return to this subject in the coming weeks, with some guidance on how to get the best deals out there.
