Many traders focus on managing trade entries and exits, seeking alpha. Most traders learn the hard way after having trouble with pressure, impulses, and ego force them not to execute their trading plan. Risk management generally is learned last, after discovering the impact that lost capital can have on confidence.
It takes increased effort to return to breakeven if you keep trading your base capital away. You need a +11.1% return if you’re down -10% to get back to even. Throw yourself down -20%, and render yourself complete again with a return of +25%. When you lose -50% of your overall trading account you need to double your money with a return of +100% just to get back the way you came.
Returning +1% on your total capital ten times to get a return of +10% is better than trading big trying to get everything at once. When you lose 5 times in succession when risk 1%, you’re down -5%. If you’re going to risk 10% on each trade and lose 5 times in a row, you’re going to be down -50%.
No trade should endanger your entire portfolio, and your first drawdown should not be able to wipe you out. Can your current position size withstand a losing streak of five trades?
Your risk/reward ratio is another key metric in money management. To risk $100 for the chance of earning $300 or $500 is a good trade, and you can will just half the time and still be profitable. To gamble $1,000 to gain $100 is a poor trade. One loss takes out ten winners profit, even if you lose money with a win rate of 90 percent. You want to gamble a little for the chance to make a ton.
Proper position sizing and stop-loss placement are two of the best tools for money management.
A trade risking 20% of your overall capital allows for a 5% stop loss, which equals 1% of the total trading capital.
A trade risking 10% of your overall capital allows for a 10% stop loss, which equals 1% of the total trading capital.
A trade risking 5% of your overall capital allows for a 20% stop loss, which equals 1% of the total trading capital.
Understanding the delicate balance between your level of comfort and uncertainty against a specified time period is the secret to any successful investment plan.
The balance between risk and reward will determine the type of investment strategy that you will take.
A more aggressive approach can be taken by those who start investing early on. This strategy seeks to beat the dollar inflation rate. Those who are investing later in life will follow a conservative approach to minimize the volatility of their portfolio.
Regardless of your risk and rewards profile, a good investment portfolio needs diversification. Even though this reduces volatility, no portfolio is protected against risk or loss.
Here are some wise steps to follow after suffering from a major loss or losing streak:
Was your recent loss your largest? Is this your first major loss? If that is the case, make sure to own up to it. Losses happen to every trader regardless of the experience level.
Don’t just brush it away. Learn from your mistakes and don’t jump back in until you’ve reviewed the lesson. Don’t just blame your loss on market volatility, study what happened.
Evaluating your actions objectively and assessing the results of those actions will allow you to make smarter trading decisions. Learn from it, despite the difficulty of trying to counter the effect of this failure. Doing so can prevent small losses from turning into a huge drawdown.
Take a Break
Stop trading when a bad trade with significant effects happens. We will immediately begin to use ego and emotions to negate our significant loss. When you are emotionally involved, finding a better trade will only lead to more losses.
Step away from the trading screen instead. Find out how your problems can be fixed. This can be a quick run around the block for some, a yoga class for others. Determine the best method for removing negative emotions from your atmosphere.
Stop trading for a couple of days. Alternatively, do paper trading until you are profitable again. Doing so may clear up any mental and emotional barriers left behind from the bad trade.
Use the bad trade as motivation after you have cleared your negative emotions. Keep your position size small when you return to trading to prevent emotion from returning the next trade.
A disciplined measure is to get back to a trading performance similar to prior that of your bad trading day. After a bad loss, acquire safe steady gains and recreate a newly profitable investment strategy at a proper speed.
Make a Plan
Make a detailed action plan for future trades after finding your concentration and building your confidence. Set limits in your detailed plan of action. Since most bad trades can be definable due to market activity, recognize the variables that can be measured. This can include technical patterns, fundamental events, or any dynamic price driver.
For instance, gold price increases when the stock market declines. In times of economic recession and inflation, many investors see precious metal trading as excellent insurance against the dollar’s weakness.
Your new trading plan should benefit as a result of your bad trade.
Recognize The Context
Experienced traders know that losses are part of the routine in a market. Inexperienced traders, however, may trade because of the humiliation and the emotion of a bad prior trade.
Keeping this loss in perspective is essential. Recall that this is simply a bad trade, in a risky market. Moments like this are critical for self-reflection. Bad trades should remind you of the many-other successes you have had along the way through the volatile market.
There is a lesson in financial losses, much like other aspects of daily life. Your bad trade may just be the loss-lesson you need to hone your trading strategy.
Without risk, there is no trade. Quantifiable key market actions determine the outcome of a trade. Despite this, there will be a loss. It is how you learn from this failure and improve that decides your performance.
Candlestick charts are an analytical technique that transforms data into single price bars over multiple time frames. It makes them more valuable than conventional open-high, low-close bars or lines that link the closing price points. When charted, candlesticks generate trends that forecast price action. Proper color codes add depth to this technical tool first built by Japanese rice traders in the 18th century.
In his popular 1991 book, the “Japanese candlestick charting techniques,” Steve Nison brought candlestick patterns to the west. Now, many traders have the opportunity to identify dozens of these patterns, with names such as harami, spinning top, and three white soldiers. Single bar styles, including the Doji and the hammer, were integrated into hundreds of trading strategies in both long and short strategies.
Not all types of candlesticks work really well. Their immense success has diminished efficiency, as hedge funds and their algorithms have deconstructed them. Many well-funded companies rely on high-speed execution to compete against retail investors and conventional fund managers who execute strategies from technical analysis found in traditional texts.
In other terms, operators of hedge funds employ algorithms to manipulate investors looking for bullish or bearish scenarios at high odds. Reliable trends continue to appear, however, creating incentives for the short and long-term.
Here are five examples of candlesticks doing extremely well as price guidance and momentum predictors. Each works in predicting higher or lower prices in the context of surrounding price bars. They are adaptive to time in two respects. First, they operate only in the boundaries of the chart, whether intraday, daily, weekly or monthly. Second, after completion of the pattern, their effectiveness declines steadily after three to five bars.
Top 5 Patterns
The study is based on the work of Thomas Bulkowski, who in his 2008 book, “Candlestick Charts Encyclopedia,” created output rankings for candlestick patterns. He gives figures for two kinds of predicted trend results: reversal and continuation Candlestick reversal trends forecast price changes, while continuation patterns expect an extension of the current price path.
The hollow white candlestick corresponds to a closing print higher than the opening print in the following examples, whereas the black candlestick refers to a closing print lower than the opening print.
Three Line Strike
The reversal pattern of the bullish three-line strike throws out three black candles in a downtrend. Each bar is lower and closes close to the bottom of the intraday candle. The fourth bar opens much lower but reverses in a wide-range closing above the top of the series first high. The first print of the fourth candle should mark the bottom of the fourth candle. This reversal forecasts higher prices with an accuracy rate of 84 percent, according to Bulkowski.
Two Black Gapping
After a remarkable peak in an uptrend, the bearish two black gapping reversal pattern emerges, with a gap down which generates two black candles with lower lows. This trend suggests the downturn will continue lower, possibly triggering a broader downward trend. This pattern forecasts lower prices with an accuracy rate of 68 percent, according to Bulkowski.
Three Black Crows
The bearish three black crows reversal pattern begins at an uptrend’s peak, with three black bars marking lower lows closing close to intrabar lows. This pattern suggests the fall will possibly trigger a larger downtrend. The most bearish iteration begins at a new high as it traps investors into pursuing momentum. This model forecasts lower prices with an accuracy rate of 78 percent, according to Bulkowski.
The reversal sequence of the bearish evening star begins with a tall white bar bringing an uptrend to new highs. The market gaps up, but fresh investors do not emerge, resulting in a candlestick with a narrow range. A break down on the third bar completes the sequence, suggesting that the downturn may continue lower, triggering a downtrend on a broader scale. This model forecasts lower prices with an accuracy rate of 72 percent, according to Bulkowski.
Following a series of candles printing lower highs, the bullish abandoned baby reversal pattern emerges at the bottom of a downtrend. A small market gap occurs, but fresh sellers do not emerge, resulting in a small Doji candlestick. A gap up on the third candle suggesting the turnaround would proceed to be even bigger, potentially causing a larger uptrend. This model forecasts higher prices with a precision rate of 70 percent, according to Bulkowski. The bearish abandoned baby forecasts lower prices with a rate of 69%.
Chart patterns catch market players ‘ interest, but many reversal and continuation signals generated in the current electronic trading environment do not perform reliably. Luckily, Thomas Bulkowski’s statistics show extraordinary precision for a narrow set of these trends, enabling traders to buy and sell on these indications.
Regardless of how much a trader thinks they can predict the future, how powerful their confidence is, or how much they believe, no particular trader or investor can dictate the outcome of a market unless they have sufficient capital to push that particular market. Traders have an exceptional disappointment that few other professions have, a shortage of real market influence.
A trader is unable to control:
How a trade works out
When a trader enters the market, any following price movement is based on market participants’ collective actions not any individual’s own opinions, hopes, and beliefs. While a trader can manage a trade via position size and exit strategies, he can not determine whether his stop loss or profit level is hit. A trader is at the market’s mercy to choose the future of each of their trades.
But sometimes the trader does have some control…
A trader can control:
When to enter a trade
The use of a trailing stop if the trade goes their way
When to hold all cash in the portfolio
The technical indicators used for signals
Price targets from which profit will be taken
What lesson is to be learned from each trade
Their watchlist and which markets and products they will trade
The exit strategy and point of invalidation
Position sizing for every trade
How emotions are dealt with
You can’t control what price action will be, but you can control what you will do in response to the price action and how each trade plays out. You control how your position size and entry before you’re in the trade. You also control when and how you will exit the trade.
You cannot control the markets, but you can build the discipline to control yourself.
Maintaining a trading journal is a smart strategy to increase efficiency and build trust in actions. Day trading performance requires high coordination and preparation level. Day traders need to go through a rigorous educational process to be consistently successful in trading.
The best tool for directing and managing the framework of a day trader is by using a trading journal. When you intend to become a successful trader by efficiency, trading journals will lead you to a lucrative future sooner.
Here’s some of what your trading journal should document:
Before you start trading:
Your expectations for return.
Your requirements for position sizing.
Your per trade risk tolerance and tolerable drawdown.
Overall risk tolerance and correlation rules related to total portfolio positioning.
What are the results of your backtested signals or fractals in this situation?
The risk/reward ratio for each setup.
Your watch list and the reasoning for each asset.
Your entries, exits, and stop-loss levels per potential trade.
The average trading volume of each asset for the relevant time period. (add’l Screenshot of Level 2)
Calculate your risk of ruin.
During/After each trade:
Record your chart on entry.
Your entries and why, at that point, you chose to enter.
Position size and reasoning.
The stop-loss plan in case of trade invalidation.
How will you take a profit? At what level?
Did you believe in your long-term signals to make money?
Is your risk/reward ratio consistent to original? Update it now.
Record your chart on exit.
Is your trading system in line with the current market trend or your beliefs about it?
How did you feel after entering the trade? Are your expectations consistent with your original?
What did you feel when you exited the trade?
Were you happy with your trading execution?
What execution mistakes have you made?
Anything else you could have done to mitigate risk?
Anything else you could have done to maximize your trade profit?
Have you trusted in yourself to execute your plan?
Are you trading in a timeframe that is psychologically comfortable?
What was your level of stress throughout the trade?
During each point of the trade, what were your thoughts?
Go look and see what you’ve done at the end of each week and month, recognize common issues, and identify your strengths. Such findings will help you take advantage of your abilities and demonstrate the places where you need to focus on.
There are a lot of decisions people make going into a trade. We will trade on our interpretations of the strength of businesses or macroeconomic patterns of a country. Individuals can do trades on the basis of their own opinions, forecasts, estimates or personal views. Psychological mistakes, such as fear of missing out on a move, envy, or pride, can also contribute to trading decisions.
But there’s a better way of doing business.
With a price action strategy, the trader’s decision is made up through the current price movement.
The market is in an uptrend with higher highs and lows. A downward trend is characterized by lower highs and lower lows. Trading is considered range-bound when price trades within a specified price bracket. Defining which market category you are in will allow you to reduce friction when trading.
The current trend can be shown through how market price reacts to the moving averages of appropriate time frames.
If the market is showing movement in one direction, the MACD will quantify it based on the direction of the crossover signal.
Typically a breach of a previous trading range implies the price will move in that direction.
An entry is positioned where the price reaches a fixed trigger signal. To have any sort of market edge, It must depend on a historical pattern that generates bigger wins than losses.
A market is generally heading towards a price gap.
The best-case scenario is a profit target where the price will trend before the chances of additional profits decline. In your trades, your profit target sets your reward level.
A stop-loss reflects a price level not to be achieved if the trade works for you. You admit to being wrong at this price level and taking a small loss before it becomes a huge loss and the chances of profitability turn against you. The stop loss of your position together with position size represents the risk of the trade.
If a market has moved too quickly in either direction, the RSI will signal it. The risk/reward ratio of long positions at the 70 RSI can be decreased and a short position can be similar to reversal higher back at a 30 RSI.
It is a sign of high volatility thus increased risk when the price range expands twice as much as it has been trading. Trading smaller positions is usually the proper move.
The reality is that everything pretends to know something but the current price action is the truth.
Every year on December 1st, we start hearing a lot about a Santa Claus Rally but when exactly is it going to take place?
Historically, stock market prices tend to rise in the month of December, most of the time it’s a positive month. No other month has reported an average return higher than December since 1950. The Dow has added an average of 1.55% in December over the last 100 years, rising 74% percent of the time.
In general, the Santa Rally is typically seen only during the last business week of the last 5 days of December and the first two days of January in the New Year. It is a form of seasonal calendar effect on the market. Yale Hirsch first documented the idea of the Santa Rally in his Stock Traders Almanac in 1972.
Why Does This Happen?
The nature of this bullish trend does not have a generally accepted explanation. Sometimes the surge is due to accelerated investor interest based on an expectation of a bullish January. One alternative is to pump additional funds into the stock market for tax reasons that have to be done before the end of each year, such as investing money into a tax-differed IRA or 401K. Additional reasons for the Santa Rally may be attributed to “window dressing” of institutional investors ‘ portfolios by adding money for accounting purposes to winning securities and sectors.
Additional reasons for the Santa Rally may be attributed to “window dressing” of institutional investors ‘ portfolios by adding money for accounting purposes to winning securities and sectors. Also, when bigger institutional investors and professional traders spend the remainder of the year on holiday after Christmas and the New Year, smaller retailers can turn the market upside down because so few can sell in volume to bring down the market.
According to a recent Stock Traders Almanac, since 1969, 34 of the last 45 holiday seasons, have shown positive gains from the Santa Claus rally, the last five trading days of the year and two trading days in the first two days after the new year. The estimated aggregate return over these 7 trading days is 1.4%, and the returns are positive on average all 7 days of the rally.
A failure of the Santa Claus rally to take place is quite bearish and usually suggests a bad economic outlook for the coming year; an absence of the rally has often signaled a warning of the New Year’s flat or bearish market trend.
Do you think the crypto markets will follow suit? Let me know below
Risk management, a successful trading system, determination, self-control, and ambition are the best friends of a trader.
Here are the biggest threats to a trader:
Stubbornness: Failure to cut losses and a continued pattern of staying in trades past their invalidation point.
Trading too big: Once you take on large positions, it’s not a question of whether major trading goes wrong, but when. If your risk size is too high, a losing streak will easily empty your balance and create a large drawdown that is difficult to climb out of.
Arrogance: Believing that, for no apparent reason, you are smarter than most market participants. Expertise has to come before confidence.
Euphoria: The riskiest phase in your trading journey is the time you feel like an unstoppable god. Remain grounded in your trading plan. Some major losses are attributed to over-confidence and neglect of proper position sizing.
Opinion: Individual perspectives are irrelevant unless you have a fully functional flux capacitor or magic wand. The core factor that contributes to a profitable trader is their reaction to the price action.
Anger: An upset trader is a poor trader. Anger skews the expectation of a trader and leads to greater activity while you are poorly operating. Do not act forcefully, remain emotionally cool and trade the plan.
Adding to a failing trade: Doubling down on losing traders makes you want to hold it longer, hoping desperately for a turnaround. Trading aggressively against the trend is generally not the best idea, and adding to a losing trade is bound to create losses.
Bias: It’s risky to get caught in bull-mode or bear-mode and can end in drawdowns if you keep playing on a team that loses day by day. Continue your flexible trading and go for the ride. Staying on the losing end of a strong trend is costly.
Chasing a trade: Unless you miss a great entry spot and then price moves away, it’s best to wait out the trade. It’s easier to have a strategy and be prepared for the next setup. Most notably, Risk /Reward proportions will be skewed if your entry is too far off.
Themself: the willingness of a trader to self-control can decide their long-term success. A successful trading system must be adopted in real-time market conditions after backtesting with consistency and correct position sizing. On your path to trading prosperity, the biggest enemy you’ll ever face is yourself.
When you open a trade, a stop loss is probably the primary exit method that you will use to realize it’s time to get out of a trade because it’s losing money. A stop loss is a weapon that you need to use to prevent a small loss from moving into a major loss. This may be your most important element in every trade, as big losses can drive an unsuccessful trading career.
Every trade should end in one of these 4 ways:
A great victory
A little profit
A minor setback
No trade should result in a massive loss, or the way you eliminate the huge losses from your trades could be the inclusion of a stop loss.
A stop loss in your relative time frame should be far enough away from normal market action, however near enough to avoid what would be called a huge loss by your own standard. Your position size behaves in relation to the order book at the trigger of your stop market, of course, and you shouldn’t be selling such a large position that when your stop is activated you create slippage and pay the price.
Using price action as your compass, here are five stop loss methods:
Exit your trade based on a main-moving average support break. Exit your trade during an uptrend when the key moving average support has been broken. Exit your short during a downtrend when the key moving average resistance has been recaptured.
Exit your trade based on a percentage decline from your entry point. Your exit strategy may be to sell for a loss if the price falls from your entry price by more than 5 percent. If you bought it at $100 however it falls below $95 your stop loss would trigger.
You may exit your trade based on a time stop. When you buy at $100 for a swing trade with a price target of $10 and the stock is still selling at $101 weeks later, one tactic is to exit and free up resources for better opportunities as the asset has failed to meet the profit target within a reasonable period of time. In reality, this relies on the specifications of your own program, which can vary.
Your stop loss may be dependent on a technical signal such as RSIbreaching a critical level, the price far below the lower Bollinger band, or a MACD cross over. It is also possible to use technical indicators as tools in creating good risk/reward opportunities and establish proper exits based on risk.
You may use a volatility stop if the market or asset is growing parabolically, or it starts moving the entire daily range against you. You either reduce the size of your position or exit because of increased risk dependent on the volatility expansion. Another way to measure this is the ATR (Average True Range).
There can be many approaches to limit the danger of the loss and let you know ahead of time your trade probably won’t work out. To keep the losses minimal, every good trading plan should have signals for entry and risk-minimizing invalidation signals as well.
Profitable trading does not involve opinions, predictions or even great stock tips. Successful trading is all about statistics, making more profit on good trades than you risk on unprofitable trades. Trading without knowing basic metrics induces in your system arbitrariness and chance. Knowing how to make the metrics work for your system will shift everything as you move away from pride and feelings and towards measuring a system that supports profitability.
Traders must be able to address the logic behind their trading if they really want to function as a professional and maintain efficiency and subsequent long-term profitability.
Here are the top 10 metrics for traders:
Risk/Reward Ratio: How much capital do you gamble for every unit of profit to be made?
Position Sizing: How much money are you going to put in one position?
Backtesting: How have you traditionally handled the buy and sell signals you are using? How have they performed?
Drawdowns: How much money can you lose from your equity peak?
Returns: What’s the average return you’re trying to achieve?
Win %: What is your historical metric on the number of wins versus the loss of trades you make?
Losing Streak Probabilities: What is the likelihood of a losing streak in your worst-case scenario?
Risk of Ruin: What are the odds that you will potentially blow up your account given your exposed risk and current positions?
Stop Losses: If you’re wrong how much will you lose on a trade?
Profit Targets: If you’re right about a trade, what is your maximum profit potential?
It’s all in metrics, whether you’re making money or losing money in the long run.
Does your trading strategy include moving averages? Laying a moving average like the standard combination of a 50 and 200 period MA to a chart can be very fascinating. You’ll start seeing trends emerge. Each stock or asset has a unique interaction with the different moving averages. Knowing the key moving averages for what you’re trading can really help you find support and resistance levels.
Here are 10 tips that will help you with Moving Averages:
The 20-period moving average usually represents the short-term trend, 50-period is the medium trend, and the long-term market trend is the 200-period moving average.
The 5-period and 10-period EMA as entries and exits have significance in rapidly shifting markets that better monitor the trend when the long-term moving averages are too far behind.
Exponential moving averages add greater weight to recent price adjustments, while each data point is treated uniformly by Simple Moving Averages.
SMAs allow you to see where many big and small participants are buying and selling. The importance of moving averages as support and resistance points on charts relies upon how other traders behave as they are more impacted than the current technical or candlestick patterns.
General market sentiment can be determined by the location of the current price to the 200DMA. Bulls like to stay above the 200, while Bears prefer below. Bulls buy pullbacks to the MA, while Bears short rallies to the MA.
When the moving average of 50 periods crosses the moving average of 200 periods in either direction, a significant change in trend is anticipated. The 5- day rising above the 200-day is considered a Golden Cross, while the bearish breach is called a Death Cross.
For the specific stocks chart, a great second chance entry is buying the retest of a 50-day moving average. Most strategic investors are waiting to add to their long-term positions at the 50 D
Buying a blue-chip stock like MSFT or AAPL at the 200 DMA is a gift. If the 200DMA is lost it could be very dangerous and begin a fall with little support.
Many investors use a simple trend following signal that triggers when a shorter-term moving average crosses a longer one. Trading expert Richard Donchian used a five and twenty-day cross-over method.
Many analysts notice when a moving average starts to move up or down and see it as a symbol of a cycle beginning, progressing, or shifting.
Every trader has to determine how moving averages can be integrated into their own framework and time frame.
If you are just arbitrarily trading what you like without any real underlying process, procedure or strategy, the long-term odds of success are small.
It is important that you create a system or strategy for yourself that helps you to trade in a manner that consistently works, reduces risk, and does not destructively put your ego and emotions into your trades.
Here are 10 questions you need to ask yourself, every trade: