Ever wonder what the secret levers to maximizing and optimizing your trading game are? A tiny tweak on each can turn a losing trader into a double- or triple-digit ROI producing trader. Their simplicity is their power, and no matter where your trading game is at, you can always bump your score up a bit and put more money in your pockets.
There is a reason why this is first on the list. Most people have everything in place to be successful, and some are even brilliant chart analysts. However, it takes discipline, patience, and humility to master keeping losers small. Before you get into a trade, set a stop and stick to it. That stop should expose you to a risk of no more than 5% of your total portfolio. Because here is a truth that many do not consider: To undo a 10% portfolio loss, it takes an 11% gain to get back even. The more you lose, the harder your fight back will be.
Common Mistake: Losing more than you make
Simple Solution: Use stops; Risk no more than 5% of total portfolio; Do not trade over earnings
Another big factor determining your profitability is your average winner. The same principles of discipline and patience apply, as countless traders sell either too soon out of fear, or watch their winning profits vaporize, in the hopes of making even more. The best way to keep your emotions in check is to always have a target at a previous resistance point or projection. Use a stop adjustment system to avoid panic and decrease pressure.
Common Mistakes: Winners match losers; Cutting winners short; Watching big profits dwindle away
Simple Solution: Set a Target; Only enter trades where Risk/Reward potential is 1:3 or higher; use a system for stop adjustment; sell at your target; sell at warning signs (e.g. Doji at major resistance)
Here is where the levers get interesting. Some traders are profitable even though their W/L ratio is 3/7, because they mastered step 1 and 2. To see explosive growth, master 1-3 and your returns will reach the three digits. Do not improve your W/L at the cost of 1 or 2, but rather find a way to bump the ratio without affecting your averages.
Common Mistake: Having more losers than winners
Simple Solution: (This is personal) Look at your losers. Did you choose them all because of the same pattern? If so drop that pattern. Adapt your analysis. Make it your goal to turn one loser into a winner the next month; Also recognize serious warning signals and sell before the trade turns against you.
Number of Trades
Master 1-3 first with a small amount (3-4) of trades a month/day (depending on your style). Once your score is good, bump your amount of trades up a little. This does not mean you HAVE to take this many trades. Rather it means that if you see great opportunity, you allow yourself to take this many trades. What you will see is that initially your overall profits will benefit from lowering the amount of trades, and later can be multiplied by expanding them again.
Common Mistakes: Overtrading; Undertrading
Simple Solution: If you are not doing well in 1-3, then you are most likely overtrading. Cut the amount of trades you allow yourself; If you are performing well in 1-3, bump up your trades a bit and see if you can sustain it.
While it certainly is the smallest of the above, this is still something that can make the difference between a break-even trader and a profitable one. If you make 5 trades a month, and break even, switching brokers could allow you to make at least 50$ a month more. Many brokers charge around $10 per trade. That is over $20 roundtrip. I on the other hand only pay $3.95 for one of the best brokers out there. Doing a little research when choosing a brokerage helps.
Common Mistakes: Choosing an expensive broker because they advertise a lot
Simple Solution: Sign up with OptionsHouse for cheap rates and 150 free trades
Putting it all together over 10 trades:
Losing trader: 4 Winners*$100 – 6 Losers*$60 – Commissions 200$= $-160
A few tiny changes:
Winning trader: 5 Winners*$125-5Losers*$50 – Commissions 95$= $280
As always: Happy trading. Email me with any questions, subscribe to my newsletter, and follow me on Twitter, Stocktwits, Profit.ly, Traderplanet, LinkedIn and all that good stuff for free tips and tricks.