Boost Your Trading Game with This “Boring” (But Proven) Philosophy

[Money Trends with Andy Krieger]( Welcome to Money Trends! If this is your first time reading one of our issues, learn more about us [here](. And if you have any questions or comments, shoot us a note anytime [here]( or at feedback@andykriegertrading.com. Boost Your Trading Game with This “Boring” (But Proven) Philosophy By Imre Gams, Editor, Money Trends When I first started trading, all I could think about was how many winners I had to hit in order to bank a million dollars. I completely ignored the fact that trading is risky. So I overleveraged my account. I didn’t size my positions according to a proper stop-loss, either, because I didn’t have one. My strategy for exiting trades was simple: if the pain became too much to endure, get out! As you can imagine, this resulted in more than one blown account. And my story isn’t unusual. Many traders go through this process. Most end up quitting, thinking the game is rigged and there’s no way to win. But this isn’t true at all. Trading can be both enjoyable and profitable, so long as it’s done right. But how do you know if you’re doing it right… especially when you’re on a losing streak? It comes down to one basic, but often overlooked, philosophy… I’ll tell you what that philosophy is today. And I’ll give you three simple tips that can help you find your edge in the markets. The Three-Legged Stool of Trading As a trader, your number one responsibility is to preserve your capital. It is NOT to make sky-high returns. This philosophy is not particularly exciting, which is why many traders ignore it…. with catastrophic results. It helps if you think of trading as a three-legged stool. The first leg is your methodology for analyzing the markets and finding trade setups. The second leg is your methodology for risk management. The third leg is your trading psychology. I believe the first leg, while important, will ultimately have the smallest impact on your portfolio returns. The second and third legs of that stool are crucial. That’s why, in my last article for Money Trends, I discussed the importance of having a strong risk-to-reward ratio on your trades. I showed you how, with the right risk parameters, a trader with a 50% win rate can outperform a trader with a 90% win rate. This is only possible, however, if the trader with the 50% win rate can stay alive long enough to hit some winning trades. I know, I know. This part of trading isn’t as exciting as showing a really cool trade setup with massive upside. But it is far more important. Let’s look at the math behind our numbers. For instance, our trader with the 50% win rate will at some point go through a 16-trade streak. That streak could be a winning streak, or it could be a losing one. The thought of losing 16 trades in a row is horrifying for any trader. But even a trader with a 60% win rate will go through a streak of 12 winning or losing trades at some point. If you plan on trading for any significant length of time, you will go through this streak. And if you’re hoping it will be a winning streak… then you’re gambling. I’ve been there… Over my professional trading career, there have been times when I’ve lost 8 or 9 trades in a row. If I didn’t have a rock-solid risk management strategy, odds are I would have gone through a devastating drawdown that would have been nearly impossible to come back from. Which begs the question: How do you find the risk management strategy that’s right for you? Three Steps to Finding a Winning Strategy Every trader’s exact risk management strategy is different, but one thing is for sure… You should protect your downside… and always think first about how much of your account you could lose on a trade before sizing up the potential rewards. How do you do that? Here are my top three tips: - Keep your positions small and your targeted risk-to-reward ratio high. Nobody puts on a trade thinking that it is not going to turn out well. Every time you pull the trigger, it’s because you think you have a winner on your hands. Remember that and plan accordingly. By keeping your positions small and your targeted risk-to-reward high, you don’t need to take outsized positions to achieve strong returns over time. If you take a position that is 0.25% of your net account value and you hit a 3:1 winner, you just returned 0.75% on your account. Not bad at all. - Have rules for how much net exposure your account can have at any time. It is all well and good to commit to taking small positions. But if you have several small positions open at once, they could add up to a significant exposure. - Don’t throw out your strategy and go shopping for a new one just because you’ve lost a few trades in a row. Remember, a trader with a 50% win rate will eventually go on a 16-trade streak. The odds of having smaller 4 or 5 trade streaks is much higher. If you decide your strategy is no good just because you have a few losing trades in a row, you are not allowing your statistical edge to play out. Bottom line: Losing is a part of trading. What separates the “bad” from the “good” traders is that the good traders set a risk-management plan… and stick to it. So next time you’re going through a rough patch in the markets, don’t panic. Just remember the three tips above. Regards, Imre Gams Editor, Money Trends --------------------------------------------------------------- Like what you’re reading? Send your thoughts to feedback@andykriegertrading.com. READER MAILBAG A Money Trends reader is thankful for our currency education, while a Big Trades subscriber has some doubts about the unemployment situation in America… I'm fortunate to get your education for currency greenhorns like myself and to see trends that could be opening up. A year ago when I first started getting this material, it was frightening to me. I overcame a similar fear of trading options. It's comforting to know that currency trades will be making more sense down the line. – Robert P. Andy, your regular thoughts on the economy and markets are articulate, informative, and highly anticipated. You provide a depth of understanding that is very helpful to me as I make investment decisions. I have one thought about the unemployment numbers that you regularly reference. While I do realize that many people are unemployed because of the response to COVID, I have to wonder how many of the unemployed are in that category by choice. For example: I do not, nor does my wife, know one single unemployed person who wants a job and can't find it. And I don't mean an underemployed job. A good job. My wife is a physician and cannot find administrative employees for her practice. No one is available. She is forced to practice without adequate office staff. Where are all these unemployed people? A friend in Tennessee who runs a construction business is being forced into retirement... not because he wants to retire, but because he can't find anyone to work. While on a trip a few weeks ago in our RV, we heard a conversation from the campers beside us that they'd been traveling all summer on their unemployment benefits. They bragged that they were making more on unemployment than they had made when they were working. Recently, while in the drive-thru at McDonald's, I asked the person at the window why the wait was so long. Was it COVID related? She said no, it was that the manager could not find anyone to work. They were, she said, chronically short-staffed. I don't believe these unemployment numbers reflect the true situation. But I do believe that our nation's economy is in trouble when our national work ethic has been lost. – Ken S. Is our economy in trouble due to a lost work ethic, as Ken says? Will you be putting Imre’s three-step risk-management plan into action in your own trading? Write us at feedback@andykriegertrading.com. [Money Trends with Andy Krieger]( Andy Krieger Trading 55 NE 5th Avenue, Delray Beach, FL 33483 [www.andykriegertrading.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This email was sent to {EMAIL} because you subscribed to this service. If you no longer wish to receive emails from Money Trends with Andy Krieger, [click here](. Andy Krieger Trading welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. To contact Customer Service, call toll free Domestic/International: 1-888-206-3481, Mon–Fri, 9am–5pm ET, or email us [here](mailto:feedback@andykriegertrading.com). © 2020 Omnia Research, LLC. All rights reserved. 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