Risk managment is another aspect of staying in the game. It involves making sure that your money managment doesnt mean shit. Some expamples would be that trading right after the Fed should be done real small (if at all). Some days the market is really in a knot over something (terrorism, war, the Greenspan has hiccups....anything) and volume is real light. This tends to be a dangerous type of market too. You may not want to buy a stock right at the close before it has earnings unless you are an options wizard and can offset it. Overbought and Oversold are two terms I really hate, never the less there are times you can objectively state that the market is one or the other. This does not always mean to start fading trends (it rarely does), but it should tell you to step your size down. These are all aspects of risk managment that should be considered. Brandon
Of the people I know the most successful tend to be systems (mechanical) traders or have some sort of statistical model that they follow with some discretion thrown in (An example of this would be my NQ gap trades which I have a thread here about, a lot of the stuff from "Trader Vic" etc). Of the pure pattern type traders it's a wide bag of tricks since each persons eye is different. A (purhaps) surprising number rely on a lot of fundamental info. Brandon
I would like to thank you for the quality of education that you are offering up for traders. No matter how experienced one gets, there is always room for the quality being presented on this thread....in my humble opinion. Brandon could you define these terms and their differences: Money Management Risk Management Trade management Michael B.
Money Managment: How you Manage Money (Toni says Im terrible at it) Risk Managment: How you handle your risk. (I recently went sky diving with my brother, again, Toni thinks my risk managment skills are poor) Trade Managment: "If you go sky diving, no sex for a month", and then you go sky diving. After sky diving try to apologize and manage your way out of that situation. On a more serious note though and to specifically address the question I have them defined basically as follows. Money Managment is that aspect of your overall plan that you decide how much you will risk on a trade, how you will handle loss clusters, severe drawdowns and how you take money out of the account. Risk Managment is how you make sure your money managment is meaningful. That is, avoiding situations that are likely to cause trouble in the context of your money managment parameters. Also it includes noting what types or markets you might increase your size in and be more aggressive, as well as those to be more conservative. Trade Managment is a huge area that includes everything from how you enter and exit (setups, order types), when and if you will hold overnight (this is also a part of risk managment) Brandon
I concur and on the same page. Please continue thank you, Michael B. P.S. That skydiving part...... is scary.
Proper Money Management and Risk Control means never putting yourself in a position that one bad trade, or even a series of 10, will put you out of business. Remember, your primary business objective must be to stay in business. What is Money Management and Risk Control? Money Management and Risk Control is the portion of ones business plan (trading system) that tells you how much you can risk on one trade. What amount of risk should you be willing to take? A proper Money Management component to your business plan not only assures your longevity simply by not allowing large positions, but also by removing significant psychological barriers in trading. Let us quickly quote Larry Hite from the book Market Wizards (which we would recommend you all read) by Jack Schwager. "Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical." Larry Hite. Mr. Hite manages futures, and the risk control modules used are slightly different, never-the-less the principles are much the same. Incidently should you be thinking you can not make good returns taking such small risk you should know that when Market Wizards was written (1988) Larry Hites funds had a compounded average yearly return of 30%. This was done taking probably the lowest risk of any trader I have heard of. How many funds consistently do 30%, not many. If you can consistently make 30%, people will beat your door down begging you to manage money for them. Brandon
I am not as big of a fan of "Trading Psychology" as most seem to be. If you go to work for a respected hedge fund they dont make you sign forms not to disclose their mental techniques, however they will sue the hell out of you should you talk about their timing models and entry/exit criterias. That said, there is some validity to it, here is a rather wordy post. The popular idea among traders is that if I can just find the "right" system or pattern I will be profitable. Traders think the market is a battle that pits them against "the market" but in fact nothing could be further from the truth. Like so many things in life, in the market what it really comes down to is you. You are your own opposition. If you look at the trading landscape there are thousands of ways to make money, maybe more. There are scores fo chart patterns you can use. Simple things like bullflags and bear flags form the basis of much of my trading approach. I have found they have the best Risk/Reward ratio of any pattern when traded correctly. I promise you though, people are going broke using bullflags and bear flags. I also love the "Oops" pattern. Over time I have found it to be my most accurate (highest % of winning trades) pattern, and it also gives out a very nice payout. You know what? People are going broke trading the "oops" setup as well. Given the above, there are two conclussions you could arrive at. A) Nothing works and I might as well stop trading now, return this book for a refund and get about my life. Those who are successful at this are just lucky, statistics would dictate that some people will make money even if it is only via luck. or B) There is much more to trading than a simple mechanical method or setup. That what seperates the winners from the losers has much less to do with with setups than the losers think it does, and much more to do with "something else". What is that "something else"? My take on it is that the something else is a mental edge, and that mental edge comes from the difference in the manner a winning trader looks at the market, as opposed to a losing trader. I will use a pretty personell, non trading example here but it has everything in the world to do with trading. I don't know how many of you get migraine headahces, but those who do know they are not any fun at all. What if you had one all the time, I mean 24/7 and it would not go away. Noting would make it better except for brief periods of time were strong narcotic medicines would give very temporary relief. Several years ago I go pretty sick with a viral infection. For about 3 1/2 weeks I held a steady temp. between 101 and 105, and also during this time I had a very accute migraine, something like a 22 on the 1 to 10 pain scale. Eventually the fever and virus cleared up but the migraine did not. The theory being that because of the intense pain and high fever my pain receptors turned "on" and did not turn "off". So the end result of this is that every minute of every day I have a migraine. If I stop to think about the pain level, its at a pretty steady 6 unless I get a flair up. I have been to most of the prominant (and some not so prominant) headache/pain doctors and clinics in the country. For the most part, after many tests they all come to the same conclussion which is, "Gee, it really sucks to be you" They can do some tests to figure that Im in pain, but they can not find anything medically to treat it. For some time the only relief I got was from Morphine or Demerol IM or IV injections at the doctor. I was doing this fairly often because it was the only time I was not miserable. For some time the pain got to the point were I did not get out of bed at all unless it was to go to the doctor. I was in bed, in a dark room almost all day for about 9 months and was suicidal because of the pain. If you were to talk to me about anything, it would only be my pain. That had become the central focus of my life. How bad it is, how bad I feel, and God damn it how bad you should feel for me. During this time I am continuing traditional medical treatment, trying to find the magic combo of medicines or whatever. Nothing was coming of it. Finally I ended up at the Pain Managment Clinic run by the Mayo Clinic. It is a very intense 1 month program for people who are basiclly at the end of their rope. By the time you get there, it has been established that you are in a heck of a lot of pain, and that nothing medical science has to offer is going to work for you. By that time all the Biofeedback, Narcotics, Surgeries, Physical Theorpy, Dietary changes, Acupunture etc had been tried and failed. (Bullflags, Bearflags, Penenets, Triangles, Oops, Black Box Systems) I of course went into the program hoping that they had the magic bullet. Some pill I could take, or surgery or anything they could come up with at all to make the pain go away. When I got there, I expected to find the very best Neurologists and Anestesiologists in the world. I was in for a big shock when I found that there was one staff physician ( a psyciatrist) and a resident, along with numerous clinical psychologists and nurses. But, there was not a single "Real" pain doctor. When I got there I sat down with the Medical Director of the program, and the psychologist who had been assigned to me. We talked for a few hours about my headaches. What makes them better, what makes them worse. Do I notice any signals before they really flare up.Anything that can lead to a flare up? For me its certain smells, or not exercising enough, or exercising too much. Getting too much or not enough sleep (mostly too much), not eating enough and once I have them any sound or light is just horrible. So we went through that and I got into the program and met the group of people there. A pleasant group of people, so they asked me: "How are you doing?". As per my routine I started to talk about how bad my headaches are and Jeez I hope they have the magic bullet here, but they did not let me get any further. No they said, "HOW ARE YOU?" So, I stumbled and thought for a bit, but I didn't have much so I went back to the tried and true, my headache. Again I was stopped, this time by a the nurse who ran the group meetings. She said "Brandon, are you simply a walking headache? How are YOU?
And I really did not know what to say, because for a long time that had been my life. I was a walking headache. I was in the program for 3 1/2 weeks, and really the entire point of the program was to let a person know that, everything has been done to try to ease your pain (every setup tried, every chatroom a member of, every seminar attended for the traders out there) Every medical treatment that everyone knows about, and every one that very few people know about too. Its all "been there, done that", and the end result had been the same. Nothing, I was exactly were I was when I started. That is, I was bedridden, in terrible pain, miserable and suicidal. But their program focused on taking the control of your mind back..you don't have control of the pain, but you do have control of you (you cant control the market, you can control you response to it) During the time I was there, I fought the program almost the entire time. It was not at all what I wanted to hear. I was miserable, I had a god damn headache and they would not let me take my fleeping medicine. But, in the last week, and after I left, the program started to sink in and its had a major effect on my life. The pain is still there, in fact over the last year and half it has gotten more intense, and it still becomes overwhelming from time to time and I have to take morphine for relief. But that is not what is important, what is important is the fact that I get by. Nothing has substantially changed with the headaches, but what has changed is more important anyway. What did change is how I associate myself and what goes on around me. Instead of trying to have control over the headache, which is not possible, I now realize I do have control over myself. Much like a trade, which I have no control over, but I can control myself. Most traders screw themselves over in the way they relate to themselves in the market. And how is it that they relate themselves to the markets. Money and being "right". When they are positive, and more traders are winners than losers they are doing wonderful thank you very much. When they have taken some stops and are down everything sucks, screw you and leave me alone. So, the only way they have to relate to themselves in the market is by the amount of money they are making or losing, the number of trades they are right on vs wrong on. Good or bad is defined by, how much did I make/lose? If the trade made money, it was a good trade, if it did not it was a bad one. If you make money today, it was a good day, if not, its a bad day. Good Trade = One I made money on Bad Trade = One I was stopped out on. Good Day = One that was profitable Bad Day = One that was not profitable But looking at it in this manner tends to lead to larger and more frequent losses. A better way to look at this is to say, did I have a valid plan and follow it? If yes, good, if no bad. A bad trade is one that you did not follow your plan on, regardless of the outcome. A good trade is one you followed a valid plan on, regardless of outcome. This of cours is not how most traders CHOOSE to look at things. Most traders try to read all the books out there about patterns and setups, but in the end, if they associate things in a screwed up way, they will get screwed up results. Nothing will ever matter if the association is wrong. Nothing will help you. Its not easy, its probably one of the hardest things you will do. It wont seem natural. It will seem like exactly what it is...very forced (like getting up and trading even though I have a headache and I want to die if I think about it too much)...but slowly, it will come around. Look at trades in the context of an overall plan and I think traders will have better results. Brandon
No offense to "Brandon", but... of course this is an advertisement for your services! How dumb do you think the ET crowd really is? (obviously a rhetorical question ) There isn't anything terribly wrong with marketing your services, but don't insult the intelligence of the ET population w/ your altruistic BS. Call a spade a spade!! Suggestion for your next thread: Hello, my name is Brandon and I run a website called Trading from Main Street. I'm unable to make a living via trading -- but I'd like to teach the principles of trading anyway. On my site we'll explore complex principles such as "support" and "resistance." As a bonus, you'll explore the mysterious world of indicators like the often maligned "Stochastics" and maybe even throw in some bonus material on "Bollinger Bands" for the first 10 people to join out elite internet community! Bahh! Maybe you should team up with the bigfella from the desert! Respectfully, The Dog