bredin
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[Names omitted to protect the guilty]
A while back a much respected trader (read: poster) on another trade forum said "Im going to show everyone how to trade with a live example."
To which I said "Cool. Id love to see someone else trade live, even if I only get to see it after the fact as posts on a forum and not through something like twitch which, lets face it, would be like watching paint dry."
Then I saw the "trade plan" which said wonderful things like "I will follow my plan without emotion" and "I will risk 1% on each trade." The kind of stuff you see over and over as "recommended" trade plans.
I got real excited when I read this and said to my students "Who wants to watch a train crash?"
Long (or rather not so long) story short, It was the train wreck I predicted with the trader in question being down more than 20% in the first week, and it didnt get better in the next few until the whole project was abandoned with the traders rep in tatters and account bleeding from the rectum.
The problem was it looked good, but to the trained eye it wasnt a trade plan at all.
You see, you cant plan a trade with words. You can structure your method with words but not the trade itself. That has to be done with pictures.
So with that intro heres how to trade/invest as principles
1. Protect your capital
2. If everyone does the same thing no one makes any money
if you cant work out how to protect *your* capital you are a disaster waiting to happen. Period.
This is what our intrepid failure did earlier. "I will risk 1% on each trade" does not protect your capital. A run of bad trades will, sooner or later, gift *your* capital to the market.
Heres how to trade as process
1. Where am I going
2. How will I get there
3. How will I know when I am wrong
4. What will I do about being wrong
the first part is the most important, and the bit that almost all traders (even many of the successful ones) get wrong.
Since you only make money when you close a trade, the end is more important than the beginning.
If you knew where price was going (and polls/experiments have shown that traders as a group are right about 70% of the time) then entry price is almost totally irrelevant.
And yet so much of 'trading plans' is devoted to entry method and almost one to exit. How many trade plans read something like "I will enter long when the fast MA crosses the slow MA and price is above the 200dMA and the [you get the idea]" while the exit goes "tp 30 pips"?
By now there are almost certainly millions of trading forum posts that boil down to "Id be profitable if my entries were better, help me get better entries." Which, as it happens, is totally the wrong question.
Only after finding an exit can you move on to part two and plan an entry, adds etc.
Most trade plans spend absolutely zero time on the last 2 parts and say things like "sl 30 pips" or "sl behind S/R"
Stops are the biggest scam in trading (with the possible exceptions of indicators, technical analysis and fundamental analysis). They are also the 'easy answer' which is why, i suspect, they are promoted so universally. The alternatives to stops require a great deal of considered thought which leads to more advanced MM techniques that are often more difficult to adequately explain. Stops have their uses, theyre just not the use that (especially) retail traders use them for.
I have said for a long time now "Only a fool allows his stop to be hit"
About now most readers will be livid with me. This is good.
You see, it all comes down to risk. Specifically the definition of risk. I like simple definitions for things, and risk doesnt have one. Its about probabilities and risk averseness and a lot of other things that arent actually calculable except in an about-there best guess manner.
So I define risk as "The amount of my money I stand to lose if I am wrong."
Now theres something to work with
Now we've got something we can use to parse Protect Your Capital through.
Oops, didnt define Capital. This is the amount of my money the broker has.
Damn, now I have another thing to make sure Ive defined. Leverage. if Risk is a specific amount of capital, then Leverage must be whats left.
[dont panic getting to the alternative for stops, by the way we talk of stop profit and take loss orders, rather than tp and sl]
Which means that an account must be made up of two parts
Capital = Leverage + Risk
Finally lotsize is defined by risk and the distance between your entry and your stop. its literally $/pips [we call this Space]
Like a poker player you never play at a table using your whole bankroll. In trading this means that the Leverage side defines the maximum lotsize the account can be traded at. $1500 Leverage at 100:1 means maxlots of 1.5. if you also had $150 of risk and placed your stop 500 pips back from an entry you'd have a trade lotsize of 0.03 (3 micro), Which is a far cry from 1.5 lots.
Also like a poker player we intend to play a lot of hands with our stake (risk) and do not intend to be so reckless as to go all in (a sl order as the actual exit) unless risk is severely depleted by a series of bad decisions.
So then, if the stop is the point when our risk has been taken by the market ($150 over 500 pips) we can come back to the statement about fools and stops.
How can we structure an exit inside 500 pips if things go wrong?
One answer is to wait for price to close over a line where you might place a traditional stop loss order. This means that you might wait for a 4H bar to close, or a daily, even a 5M bar will do if you charts are small enough. That closes are arbitrary is irrelevant, since most sl orders are every bit as arbitrary.
In fact, this is our answer to step 3.
This leads to step 4 in our plan "What will I do about being wrong?" You could close, you could just reduce lotsize, but most importantly where will you put those lots back on the table? Whats changed about your analysis that told you where price was going in the first place?
Often price will close back over that line and you can stick the lots back on the table again a short time later.
So with all this an actual trade plan can be put in place. This is done in a few quick markups to show what is intended for the future, or to show how we could/should have traded a dead chart.
This example comes from Silver, December 2011.
this pic shows a good place to take a crack at a long position on a daily chart at clear long term demand.
this pic shows an entry close to the line that we want to trade away from (all trading is ultimately draw a line: trade away from it) followed by an 4H close below losing ~50 pips
reentry on close above and close in a target supply area.
+210 net pip (+$63)
in account terms the space has gone from 500 to 710 pips (risk from 150 -> 213)
when price breaks above the top line we can use that as the line to trade away from and compress the space to 4 micro over 532 pips, knowing that the first $63 is not our money (ie the first 150 or so pips)
although not marked up that next trade is also worth about 230 pips (at 4 micro)
very roughly this means that we could place the next trade at 6 micro over 500 pips. All because we dont consider that held profit to be ours, yet (note yet)
Like a poker player we are increasing the table stake so we can be more aggressive and still protect our capital. In fact as a side effect of being extremely conservative initially we will eventually (read: not long) be trading much larger lotsize than can ever be managed at 1%/trade and we will quite quickly be playing with 0 real risk. this process doesnt need a very large run to hit max lots (1.5 was the example target).
At this point we will be trading risk free (ie OPM) for 1%/pip. (at 100:1 leverage)
Its also a great time to move some funds from risk -> leverage or risk -> pocket
G.
A while back a much respected trader (read: poster) on another trade forum said "Im going to show everyone how to trade with a live example."
To which I said "Cool. Id love to see someone else trade live, even if I only get to see it after the fact as posts on a forum and not through something like twitch which, lets face it, would be like watching paint dry."
Then I saw the "trade plan" which said wonderful things like "I will follow my plan without emotion" and "I will risk 1% on each trade." The kind of stuff you see over and over as "recommended" trade plans.
I got real excited when I read this and said to my students "Who wants to watch a train crash?"
Long (or rather not so long) story short, It was the train wreck I predicted with the trader in question being down more than 20% in the first week, and it didnt get better in the next few until the whole project was abandoned with the traders rep in tatters and account bleeding from the rectum.
The problem was it looked good, but to the trained eye it wasnt a trade plan at all.
You see, you cant plan a trade with words. You can structure your method with words but not the trade itself. That has to be done with pictures.
So with that intro heres how to trade/invest as principles
1. Protect your capital
2. If everyone does the same thing no one makes any money
if you cant work out how to protect *your* capital you are a disaster waiting to happen. Period.
This is what our intrepid failure did earlier. "I will risk 1% on each trade" does not protect your capital. A run of bad trades will, sooner or later, gift *your* capital to the market.
Heres how to trade as process
1. Where am I going
2. How will I get there
3. How will I know when I am wrong
4. What will I do about being wrong
the first part is the most important, and the bit that almost all traders (even many of the successful ones) get wrong.
Since you only make money when you close a trade, the end is more important than the beginning.
If you knew where price was going (and polls/experiments have shown that traders as a group are right about 70% of the time) then entry price is almost totally irrelevant.
And yet so much of 'trading plans' is devoted to entry method and almost one to exit. How many trade plans read something like "I will enter long when the fast MA crosses the slow MA and price is above the 200dMA and the [you get the idea]" while the exit goes "tp 30 pips"?
By now there are almost certainly millions of trading forum posts that boil down to "Id be profitable if my entries were better, help me get better entries." Which, as it happens, is totally the wrong question.
Only after finding an exit can you move on to part two and plan an entry, adds etc.
Most trade plans spend absolutely zero time on the last 2 parts and say things like "sl 30 pips" or "sl behind S/R"
Stops are the biggest scam in trading (with the possible exceptions of indicators, technical analysis and fundamental analysis). They are also the 'easy answer' which is why, i suspect, they are promoted so universally. The alternatives to stops require a great deal of considered thought which leads to more advanced MM techniques that are often more difficult to adequately explain. Stops have their uses, theyre just not the use that (especially) retail traders use them for.
I have said for a long time now "Only a fool allows his stop to be hit"
About now most readers will be livid with me. This is good.
You see, it all comes down to risk. Specifically the definition of risk. I like simple definitions for things, and risk doesnt have one. Its about probabilities and risk averseness and a lot of other things that arent actually calculable except in an about-there best guess manner.
So I define risk as "The amount of my money I stand to lose if I am wrong."
Now theres something to work with
Now we've got something we can use to parse Protect Your Capital through.Oops, didnt define Capital. This is the amount of my money the broker has.
Damn, now I have another thing to make sure Ive defined. Leverage. if Risk is a specific amount of capital, then Leverage must be whats left.
[dont panic getting to the alternative for stops, by the way we talk of stop profit and take loss orders, rather than tp and sl]
Which means that an account must be made up of two parts
Capital = Leverage + Risk
Finally lotsize is defined by risk and the distance between your entry and your stop. its literally $/pips [we call this Space]
Like a poker player you never play at a table using your whole bankroll. In trading this means that the Leverage side defines the maximum lotsize the account can be traded at. $1500 Leverage at 100:1 means maxlots of 1.5. if you also had $150 of risk and placed your stop 500 pips back from an entry you'd have a trade lotsize of 0.03 (3 micro), Which is a far cry from 1.5 lots.
Also like a poker player we intend to play a lot of hands with our stake (risk) and do not intend to be so reckless as to go all in (a sl order as the actual exit) unless risk is severely depleted by a series of bad decisions.
So then, if the stop is the point when our risk has been taken by the market ($150 over 500 pips) we can come back to the statement about fools and stops.
How can we structure an exit inside 500 pips if things go wrong?
One answer is to wait for price to close over a line where you might place a traditional stop loss order. This means that you might wait for a 4H bar to close, or a daily, even a 5M bar will do if you charts are small enough. That closes are arbitrary is irrelevant, since most sl orders are every bit as arbitrary.
In fact, this is our answer to step 3.
This leads to step 4 in our plan "What will I do about being wrong?" You could close, you could just reduce lotsize, but most importantly where will you put those lots back on the table? Whats changed about your analysis that told you where price was going in the first place?
Often price will close back over that line and you can stick the lots back on the table again a short time later.
So with all this an actual trade plan can be put in place. This is done in a few quick markups to show what is intended for the future, or to show how we could/should have traded a dead chart.
This example comes from Silver, December 2011.
this pic shows a good place to take a crack at a long position on a daily chart at clear long term demand.
this pic shows an entry close to the line that we want to trade away from (all trading is ultimately draw a line: trade away from it) followed by an 4H close below losing ~50 pips
reentry on close above and close in a target supply area.
+210 net pip (+$63)
in account terms the space has gone from 500 to 710 pips (risk from 150 -> 213)
when price breaks above the top line we can use that as the line to trade away from and compress the space to 4 micro over 532 pips, knowing that the first $63 is not our money (ie the first 150 or so pips)
although not marked up that next trade is also worth about 230 pips (at 4 micro)
very roughly this means that we could place the next trade at 6 micro over 500 pips. All because we dont consider that held profit to be ours, yet (note yet)
Like a poker player we are increasing the table stake so we can be more aggressive and still protect our capital. In fact as a side effect of being extremely conservative initially we will eventually (read: not long) be trading much larger lotsize than can ever be managed at 1%/trade and we will quite quickly be playing with 0 real risk. this process doesnt need a very large run to hit max lots (1.5 was the example target).
At this point we will be trading risk free (ie OPM) for 1%/pip. (at 100:1 leverage)
Its also a great time to move some funds from risk -> leverage or risk -> pocket
G.
