As well as pointing you towards trading strategies that are doing well, I also like to look at ways in which you can develop and adapt your own ideas in order to perfect your trading strategy.
We’ve looked at lots of technical analysis that can help you with set-ups.
And in recent weeks, we’ve looked at honing your entry criteria and being a bit more sophisticated with your exit strategies to boost success rates – and reduce risk.
Perfect your trading strategy in 4 steps
Today, I want to look at the “trimmings” – this is the peripheral stuff. But that doesn’t mean it isn’t vital to the functioning of your strategy.
It’s the stuff that goes on behind the scenes – but without it, things will quickly start to unravel.
1. 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 doubt 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 percent 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 this in a moment).
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 just £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.
So, how will you protect yourself from losing runs?
A good way is to use a draw-down limit – this means that if you’ve lost a certain percentage of your pot in one day… one week… one month… you stop trading for the rest of that period.
This kind of strategy allows you a “cooling off” period, and means that you won’t suddenly find yourself 50% down. Big draw-downs like this will knock your confidence – and give you a serious uphill struggle to get back on your feet. (Consider that a 50% draw-down means that you’re looking to make 100% gains just to get yourself back to breakeven.)
The same philosophy can also be applied to winning runs.
If you set yourself a daily profit target, you can stop trading once you’ve hit this. A trader heady with success is very likely to start making stupid mistakes, and to start giving back those profits.
2. Record keeping
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, 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 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 compiling 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. Discipline
If you’ve got your money management and record keeping under control – chances are that you’re already on top of your trading discipline.
If you struggle with maintaining disciplined trading, a great way to keep yourself on track is to trade with explicit, structured rules that you can follow without variation or any need for discretion.
If this doesn’t help you, then you might need to look at other areas of your trading that could be causing problems.
A very likely culprit is position sizing. Large position sizes can cause erratic behaviour (I speak for myself here!)
While the process of trading and creating an income from trading is one of the most exciting things I know, individual trades should be boring. In fact, so much so, that I’m going to say that again …
Individual trades should be boring. If you are day trading, there’s no need for position sizes to be large enough to cause you fear or excitement. It is easier to be consistent and disciplined when you’re not getting emotional.
4. Keeping costs down
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 way to improve your chances of winning…
What spread is your spreadbet 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 time well spent.
