Why Being Right Is Not Important For Making Money In The Market

When we trade or starting trading we think that we have to find good trades and have a high percentage of winning trades. But it is farther from the truth you can make money even when if you are wrong 60% of the time.

Let me explain it with an example this is your trading plan for capital of $10,000 in any given market

  1. You will risk $100 on every trade which will include commission and slippage.
  2. You will take only those trades which will give you profit of $200 after all expenses.
  3. You will use position sizing for determining number of securities you wish to trade.

What will happen after 100 trades?

Profit = $200 * 40 = $8000

Loss = $100 * 60 = $ 6000

Balance = $ 2000

If this trades happen in year you would have made 20% return on your capital which pretty great right.

It is the return with 2:1 Reward risk ratio. And if you find a method with which you can find trades you can find trades what will give you 3:1 reward risk ratio you have to be right even less.

You can make the above return with 3:1 reward risk ratio even if you right only 30% of the time.

What will happen after 100 trades?

Profit = $300 * 30 = $9000

Loss = $100 * 70 = $ 7000

Balance = $ 2000

You are thinking it is just a high ratio of profit compared to risk. If you want to make long term profits only take trades that give you more then 2:1 reward risk ratio.

 

Money Management The Holy Grail Of Trading Success

 

If you want to make long term consistent profit the most important thing for you is money management and risk reward. Money management and risk reward will make you consistent profit you will have consistent result in the market.

The many reason for failure of people in the market there inability to manage their risk. Because if anybody is trading in the market for some time he gets some idea how the market works.

Your winning percentage is not that important in making money in the market. The most important thing you need to learn first is to manage your money.

So how to make long term consistent profit in the market

 

Small loss big profits

Keep your loss small and keep your profit large. Make trades which will give you at least twice the reward then the money you are risking in the market.

 

Cut your loss let your profit run

It is age old philosophy of the market but there is little percentage of individual that actually follow it that cut your loss short and let your profit run.

You should make a trading plan in which you will let your profit become large and you should protect those profits by trailing your stop in the direction of the trend so that when the trend changes you will have a portion of profit covered.

 

Preserve your capital

If you follow proper money management it will preserve your capital and for long term returns it is very important that you have capital the trade with where good trading opportunity present themselves.

You have learn about money management first if you are thinking of making consistent profit in the market you will only resvive in the market for long if you apply proper risk management to every trade you take.

You have to understand when you trade in the market you will not make money on every trade you make so for keeping your loss small on those trades become crucial.

Money Management Rule

 

Money management is number one reason for failure of people in the market. If you do not know how to probably manage your money in the market you will suffer loss even after a high winning percentage. So here are some points that I learn from my trading.

Decide your stop and profit target before entering trade

You have to decide your stop if your trade goes against you what is the level was you will get out of your trade. At which level you are going to take profit.

Calculate your risk reward

After you have decided what is your stop and profit level the next thing that you have to check is the reward exceeds your risk. Minimum risk reward ratio should be 1:2.

Decide the risk percentage

Decide the percentage of your capital that you are willing to risk on any given trade. The maximum level is 2%.

Calculate your risk in dollar amount

You should always calculate your risk in dollar amount which mean that if you have $10000 account the amount of risk per trade will be $100 if you decide to take a 1% risk on your trade.

Risk same amount of money on every trade

If you have decided that you want to risk $ 100 per trade you should not adjust according to your winning or losing trade you should always make the new trade with $100 risk.

Does not change risk level very often

It means that your $100 should not change in month. If you had make profits in two month only then you should change it according to the capital.

Take high probability trades

You should only take trades that give you at least twice the reward on the risk. In the above example when you risk $100 you should at least make $200 on the trade after expenses.

You should follow above principles to make profits from start of your trading. You will not make profit on every trade but if you follow the above principles you will make profit over all.

25 Rules Of Profitable Trading

25 Rules Of Profitable Trading

So what are rules of profitable trading there are rules which some of the best traders in world find about after decades of trading. So do you want to become a great trader or you just doing it have some fun.

Are you really serious about your trading career and want to life of your trading income in coming two years. Then you should start with following rules. So that you can become a professional trader fast as possible.

 

1% of capital

You should never risk more than 1% of your capital on any given trade. For example your capital is Rs. 10000 so the maximum risk that you can take on a trade will be Rs. 100.

For example you have a share which you want to buy whose current price is Rs.50 and stop loss is at Rs. 45. Then the risk per trade will be Rs.5.

= 100/ 5 = 20 shares of that stock.

You should never buy more than 20 shares of that company.

 

Place stop loss first

You need to place your stop loss first and then the trade that you want to make. So that when the stock or security that you are trading will be stopped out if the trade goes against you.

Even the greatest trader did not make profit on all trades so you should always keep your  losses small and profits big at least 1:2 which mean that if you risk as in the previous example Rs.100 you should make at least Rs 200 from the given trader after expenses.

 

1 profit / loss trade stop trading

This is my rule which works best for my so that I do not over trade. Over trading is one of the reasons why so many people cannot make in market. So protect yourself from it.

There will be another day you can find better trade tomorrow do not worry. If you have a losing trade get up from where you are trading and do something else. Always have something else to do beside trading.

 

Master one method at a time

Don’t try to be a jack of all investments. Stick to the field you know best. If you keep changing your trading style and method you will never be able to master any method so focus on one method one market till you become really good at trading that.

Know everything there is to know about that method of trading and practice.

 

50 % of profit out of the market

Whenever you make any money in the market make a rule to take 50% of that amount out of the market. Even if you make Rs. 100 take Rs. 50 out. Even the greatest trader in the world had some time of lag in the market when he was not able to make money. So it is good idea to have reserves.

Accumulate the amount which you can invest in risk free and  tax free government bond have interest amount equal to what you will need for your living expenses.

For example your living expense per month is Rs. 50000 and current rate of risk free interest is 7.5 % so you will need Rs 80,00,000 to make that much interest. I know that amount is large but you can make this money if you follow the method of taking 50% of your profit out of the market.

 

Trade with long term trend

Always trade with the main trend and when you cannot tell what is the main trend do not tread at all. You will make a lot of money if you follow this principle.

 

Always move the stop loss with the trend

You should always move your stop in the direction of you trade, which mean if you are long on a trade you should move your stop loss up never down and when you’re short you should always move your stop down never up.

 

Never take advice

Taking advice in other parts of you life can be helpful but not in trading you should make you decision yourself and take full responsibility of it.

You should always make a trade according to your analysis and never according to advice given to you by others.

 

Ignore the news media

The media is there to report the news to give you what had already happened so what you see on the news have no future implications.

 

Know everything about the security that you trade

When you are trading you should know everything that you can find about that market and security so and keep learning about it.

 

Don’t try to buy at the bottom and sell at the top.

Selling top and buying bottoms is not possible. This can’t be done – except by liars.

This is pretty self explanatory that you should not try to take out highs or lows you should focus on high probability. Mean you should be focusing on getting the best return by taking the least risk.

 

Don’t buy too many different securities.

It is not a good idea to buy too many securities. It is better have only a few investments which can be watched.

Know your trading style and time you can give to the market and accordingly you should select the number of securities that you should trade in. The maximum limit is 20.

 

Check your investments periodically.

If you’re a intraday day trader who focus on 1 hr chart you should check the market every 4 hrs for new setups and what your old set ups have done. If you’re a short term trader you should check your trade daily. If you’re a long term trader you should check your trades weekly.

 

Keep it cash

Always keep a good part of your capital in a cash reserve. Never invest all your funds.
You never know then a good trade is going to show up so having sufficit capital to trade will come in handy at the time like this.

 

Ask yourself what you really want.

Most people trade the market for fun and excitement what they get from trading that is why most of them fail. If you want to make money in market your first focus should to make trades which are high on risk reward ratio more than 1:2.

 

Keep it simple and consistent.

Long term profits are made and kept by those who have a simple system that they understand and master by following it in long term. Consistency to follow the system in the long term so that you can get returns.

 

Have realistic expectations.

When trading markets you should have realistic expectations. When you start to trade do not think that you can double or triple your money every month that is not possible. Even the greatest trader in world George Soros have a annual return of 35 %.

 

Learn to wait.

Patience is a virtue that will make you rich in long term. That do I mean by “learn to wait” is when you do not see a trade according to your trading setup you should not trade just for sake of trading.

 

Clearly understand the risk/reward Ratio.

Before entering any trade you should always know what is your risk on the given trade and who much you are going to earn if the trade goes in your direction. If you risk Rs. 100 on a given trade you should make at least Rs. 200 or more on that trade.

Never trade with serious personal problems.

If you have any serious personal problem you should not trade because you will not be able to give your 100% on the trade and you will lose your edge. Always remember there will be other day and you should wait.

 

When in doubt reduce the amount of investment

If when in a trade and your previous analysis of the trade is not make sense anymore you should reduce your position.

 

Average Up

If want to average, average up with 10% profit if the position reverse after investment.
If you have been trading for less than 1 year and you profit is less than 20% annually you should not think about averaging at all you should first get to or above the level of 20% annual return level.

If you are above that level you should only average when you have profit in trade is more than 10% of current investment.

You should only add new position when even after adding a new position if the trend reverse you will lock in 10 % of profit at your stop loss level.

 

Cut your loss with stop loss and let your profit run

The golden rule of trading your profit must always be bigger than your losses. If you are able to achieve a bigger profit than your loss you will always be profitable in the end.

 

When in doubt stay out

When you do not have clear reason to sell or buy do not trade there will be another day and you can make money then.

Look after the losses and the profit will take care of themselves.

If you focus on keeping your losses under control and never let them go above the predefined level. Your profits will take care for themselves.

This are some of the rules that you should follow when trading if you follow them every day in your trading and read them before you trading and make sure after the trading that you have followed them all in less than 2 years you will become a professional trader. You can read more this rules by great trader in Investment Psychology Explained: Classic Strategies to Beat the Markets by Martin J. Pring in the chapter “Classic Trading Rules”. I love this book if you haven’t read it you should read before you start trading.

Reference:  Investment Psychology Explained: Classic Strategies to Beat the Markets
Martin J. Pring

Image Source: investopedia.com