Written by: Matt Awesome Blog
Trading for a living is fundamentally different from retirement
investing, or trading for supplemental-income. There’s actually a
little bit of pressure that goes along with attempting to make your
living from trading, especially if you’re not starting with a huge wad
of cash. So if you want to trade for a living, and you don’t have a
gazillion dollars to fund your account with, read on to learn a few of
the principles that I have used in order to make, and sustain a decent
living trading currency.
#1: Take Profit
That’s what trading is all about. Period. Taking profit. You’re
not losing money by taking profit. Your account is not big enough to
absorb and sustain drawdown, yet you’re trying to pay bills so you’ve
got to get paid. At this point, the direction your account balance
moves is of much greater importance than the speed at which it changes.
Not to mention, there’s some unbreakable and unwritten law of trading
that says when your account balance goes down, it drops much faster than
you can make it go up. Don’t test this theory, accept it and let it
put the fear of God into you. The idea is to quit while you’re ahead,
every time you get ahead. Do not concern yourself with how far ahead.
Taking less profit more, results in more profit.
When your balance has grown to something more substantial, you can
endorse concepts like “let your winners run”. For now however, you just
can’t. Doing so will cost you dearly. There’s nothing wrong with the
idea that the vast majority of your trades are closed at break-even or
just slightly above. In fact, with a small account this is desirable.
You’re taking trades, but not losing money. I’m a huge fan of 10 pips.
I’m a bigger fan of 5 pips. 2 pips will do nicely as well. A pip in
the books is a pip earned. A hundred pips in open PnL is worthless
until you take it. Your chances of success go up proportionally to the
age of your account. Every day, month, year that you trade without
losing your account increases the chances that you’ll end up where you
want to be.
#2: Size Matters
Trade size. What a debatable topic. Everything is relative. The
viability of your “system” is relative to your capacity to implement it
properly. The amount of income your pips represent is relative to your
trade size. With a small account and a “must-produce” scenario, a
constant trade size relative to account balance simply does not work
over the long haul. At least not with the degree of efficiency required
to pay the bills, leading instead to step-forward/step-backward,
sideways behavior in your account. Don’t get me wrong, I’m not
advocating trading as big as you can, this destroys accounts. I am
saying however, that you’re not going to pay many bills trading
micro-lots. This goes hand in hand with #1 above. If you put a couple
of standard lots on a trade with a $5k account, you had better be taking
profit quickly. Margin Calls suck. If you are intent on 20 pips, 50
pips or more, then your size needs to be much smaller than you want it
to be. A mini-lot for every $10k in your account. This will definitely
grow your account, but not if you need to pay bills with it.
#3: Do something else
90% of a day trader’s day is spent NOT trading. You need a finish
line, every day. Whether you make money, lose money, or break even,
there must come a time every day when you are finished. Don’t trade
because the market is open and you want to make money, trade because an
opportunity that you are prepared to capitalize on has presented
itself. These are fewer and further between than most people think.
You’re undercapitalized and over-leveraged. In this situation, an
impulsive trade is like arming a nuclear bomb in your trading account.
There will be no recovery after it blows.
A higher level of risk has been assumed by trading larger relative to
your account balance than anyone ought to feel comfortable with. This
elevated risk must be offset as much as possible by a) reducing the
trades you take to only the absolute most probable to succeed, and b)
limiting exposure time in the market. If you’ve been between 2 and 5
pips in profit for an hour, CLOSE the trade. You’re finished.
One of the things I love most about trading, is all the glorious time
off. Your reward for doing a good job, is to take the rest of the day
off. Your punishment for screwing up, is to take the rest of the day
off.
Seriously, how awesome is that? Maybe it’s awesome, but it can also
be very hard for some traders to accept. For some, the “call of the
charts” is powerful and the opportunities they present quite difficult
to resist. Know and understand however, that resisting the urge to
trade constantly is one of the skills that will make you tons of money.
#4: Deny loss
When your stop loss gets hit, it’s over. That is a loss, and nothing
can be done to mitigate its effect on your capital. As capital
declines, so does the efficiency with which you can recoup the loss.
Only in very rare occasions do I use a stop loss, and even then it’s
usually an in-the-money stop. My prevailing viewpoint is that if I feel
the need to have a stop loss, then my level of conviction in the trade
is not high enough to warrant taking it. Stops can create a false sense
of security in the trader, implying that “it’s ok to lose
this
much money”. It is not. Trading without stops promotes increased
selectiveness and more thorough planning. Just because there’s no stop,
does NOT mean you don’t need to plan and prepare for a trade to go the
wrong way. Your job is not to be right, it is to be profitable. While
being right tends to make profit a little easier to realize, it’s just
as easy to lose money when you’re right, especially with a small account
and stop losses.
When a trade goes bad, there are options. Options that can save the money this trade is putting at risk.
Roll it over. The very first thing to determine, is whether or not you’re actually wrong, or if it just
looks
that way at the moment. Could you be early? Adding to a losing
position is not the cardinal sin we are led to believe. Sometimes it’s
just foolish, but skill in this regard can not only save you thousands
in losses, but also earn you incredible profit.
Hedge it up. Hedging allows you to stop the
bleeding and assess the situation calmly without actually taking the hit
to your account. Often times both positions can eventually be closed
in profit. US traders cannot hedge directly in the same account, but
you can certainly open a trade in the opposite direction in another
account, or use a proxy-instrument as a “soft-hedge”.
Wash it clean. You’re carrying a loss that’s out of
hand. It’s not coming back, or if it is it’s just too long from now
and you’re account can’t deal with it. If you’re not subject to FIFO
regulations, washing is a rather simple affair. Hedge the trade and
begin trading “inside” the loss. Take small trades and tiny profit.
Each time you take profit “inside” this loss, close a portion of the
original trade that is equal to the profit. Consider the following as a
quick example:
1
st trade 1 standard lot goes negative.
2
nd trade 1 standard lot opposite direction – You hedge it at -10 pips for a running drawdown of -$100.
Now the washing begins. The idea is to make $100 before closing both of the above trades.
Wash: 3
rd trade .5 lots, profit taken at 5 pips for $25.
Rinse: Close .25 lots of the original position and the hedge for a loss of $25. You have just washed 25% of your bad trade.
Repeat: do this 3 more times and you’re back to even.
Why not just close the position in the first place? Well, maybe you
should. If you’re stuck with FIFO you’re going to have to. In this
case you’re going to have to earn every dime you lost at the time the
trade closed back before you’re even. Washing as described above
though, keeps the loss capped while at the same time giving the original
trade time retreat closer to your opening price. While not guaranteed,
this means it’s possible for the amount you must wash to shrink while
you’re washing it.
The bottom line is that you cannot afford to accept defeat.
Unexpected consequences bring unexpected opportunities. Keep your eyes
peeled for these when things go wrong, and no matter what, keep calm.
Only action can help you,
reaction will tend to make things
worse. If you don’t think you can calmly handle things like adding to a
loser, or washing trades, then it is paramount that you avoid these
activities and simply close trades before they can get away from you.
Often times though, just knowing there are options is enough to make
the situation a little easier to handle.
#5: The Kung Fu of it all
At some point, we all want trading to be a “paint by numbers”
endeavor. It simply is not. Trading is rife with subjectivity, and
markets behave irrationally all the time. At its very core trading is
somewhat counter-intuitive and in any case, an argument for any other
case may be made. To succeed at this, you’re going to have to break the
rules at times. You’ll need to discard conventional trading “wisdom”
and all-to-familiar platitudes at the door. You’ll need to do it
differently than everyone else, most of them are losing money.
Sometimes it’s easy. Sometimes it is excruciatingly difficult and
painful. Sometimes it’s pointless to argue with your chart, and
sometimes it’s your gut you can’t ignore.
Good Kung Fu (and trading) requires harmony and balance in all
things. Your trade size must be in harmony with your available capital
as well as your profit target. Your dedication to following rules must
be balanced with a willingness to break them. Your opponent cannot be
knocked out. Understand that you must break him over the duration of
the bout with well-placed and perfectly timed jabs. Search for weak
spots and then go to work on them. When you find something that works,
put a lever on it. When the market counters your moves, it’s up to you
to counter the counter. Don’t complicate your existence. During this
account-building phase, live simply. It is always easier to spend less
than to make more. Also work simply. You’ll need to put considerable
effort into keeping your trading as simple as possible. If you’re
relying on 39 indicators and a math equation that crashes any computer
more than 2 months old for a 5 pip trade, well, you’re toast.
Above all, you must remain realistic with regard to your trading. If
you have expectations, trust me, they’re unrealistic. Throw them out.
Don’t expect to make a lot of money, or lose a lot of money. Don’t
expect things to be easy, don’t expect them to be hard. Expect them to
simply be. When they do get hard, when things go bad, quit. Be done
for the day. Or week, it doesn’t matter. You cannot allow trading to
grind on you, to wear you down, because it can literally wear you
out.
Kung Fu is dynamic, fluid and highly adaptable. The trader must also
be dynamic and adaptable. Remember that everything is relative. As
your account grows, you must also adapt your trading to remain in
harmony with your growing balance. You can’t trade a $100k account the
same as a $5k account, and you certainly can’t do the reverse. As your
account grows, you will want to decrease risk relative to your equity.
You’ll have the opportunity to broaden your approach to trading, and
employ more quantifiable strategies. You can put on some longer-term
trades and begin looking for bigger rewards.
You don’t even have to be good at this to grow a small account into a
big one. You just need a good set of symbiotic principles to guide you
through a repeatable process of accumulation. Growth is a side-effect.
