Let’s face it – we wish all our trades could be winners. What separates the men from the boys as it were or the successful from the unsuccessful is how you handle a losing trade. Anytime you take a losing trade it can break you – mentally, emotionally and financially of course. The key to limiting those debilitating outcomes is to trade within your reality. What I mean by that is to trade within reasonably established industry parameters – those that successful peers in our industry employ to trade every day. I like to find my reality by answering 3 questions:
1. How much am I willing to lose on the day? – Professional trading firms and funds typically limit this to 2% of your account. That let’s you be wrong many, many times before your account goes belly up. So if you have a $5000 account – guess what? You can only lose $100 on the day. Are you trading futures? Forget about it. Try trading Forex with Oanda for instance who will let you trade down to the unit level. The answer to this question lets you live to trade another day.
2. How much am I willing to lose on a single trade? I like to take the answer to question 1 and divide it by 2, 3 or 4. The reason for this is if you risk the day’s acceptable loss on a single trade and the first trade of the day is a loser (like it was for me today – Results Page), you are DONE – KAPUT – FINISHED trading for the day. If you risk a portion of your daily loss, then you can afford to take another trade. The answer to this question lets you live to take another trade.
3. After how much gain will I quit trading? Many people I interview answer, “As much as possible.”. I believe that is a recipe for disaster. It leads to over trading and feeds the GREED. Do some research and you will find the average hedge fund last year made just over 10% for the YEAR. So if you get to 1% on the day – that is a fantastic day! Quit trading. I believe a good daily range is .25%-1% of your trading account – the lower the better. Many argue that since they are only trading a $15,000 that this is not enough to pay the bills, but that is the reality of the matter. Qualify to trade with a professional firm and trade with much more leverage but don’t over-trade, over-risk, or over-extend your own account – small or large because the professional firm is surely not going to let you do that to their account.
Trading is challenging and rewarding. Give yourself every advantage possible. If you don’t know the answers to those 3 questions – find them and live by them. If you need help position sizing, drop me a line or contact me on Skype.