And with lots of so-called gurus advocating for their own preferred systems, it’s not surprising that many new traders lose their way in a never-ending search for “the perfect system.”
Unfortunately, in trying to find “the perfect system,” many traders miss an essential point. Virtually all reputable trading mentors stress to their students that risk management is at least as important as the mastery of any particular strategy.
No professional trader would dream of entering a trade without knowing the exact dollar amount they’re risking. And, even more importantly, what percentage of their account this amount represents.
Successful traders may allow themselves different percentages depending on their temperamental attitude toward risk and their overall financial position. But once incorporated into their trading plan, the figure is inviolable, and never to be altered for the sake of one particular trade.
This rule is, if anything, even more important for new traders and those with limited funds, for whom a failure to control their losses is a certain route to a blown-up account and a potentially painful exit from the markets.
After more than 30 years as an automation sales manager, Derrick Cook of Winnipeg, Canada, turned to trading to build an extra income stream as he approaches retirement. Starting with a small account, he initially struggled with an issue familiar to many new traders – the difficulty of sticking to a trading plan. Worried that winning trades might turn against him, he was inclined to exit before hitting his profit target, leaving money on the table. But since he recently joined Bullseye Trades, he’s already more confident and feels he’s finally on the right track.
As crucial as careful loss management is, it’s far from the only element of the comprehensive trading plan every trader needs to develop and follow.
To be effective, a good plan requires that you put in writing the strategy or strategies you will use, as well as the chart time frames and indicators you will rely on.
You’ll also need to decide whether you’re going to be a day or a swing trader and whether you want to trade penny stocks or options on Fortune 500 big names, for example.
Armed with this information, many new traders, such as veteran sales professional, Derick Cook of Canada, feel ready and eager to transition into live trading.
“I was jumping out of my trades too soon and seeing profit fly away.”
There’s another essential aspect of the trading plan that often gets overlooked, and that’s to set a minimum profit target for each and every trade.
Here’s why it matters:
Statistics tell us that even elite traders expect to lose about 35% of the time, and logic suggests that the win rate for newbies must be considerably lower.
But while those odds might seem daunting, by taking only those trades that offer a healthy ratio of risk to reward, you can “stack the odds” in your favor.
Make it a rule, for example, never to take a trade that offers less than a conservative 2:1 profit to loss ratio, and you can break even with just a 34% win rate. Shoot for 3:1 or 4:1, by no means unusual set-ups on the intraday charts, and the odds get dramatically better.
That’s why trading is so potentially lucrative. And it’s why even newcomers can quickly prosper with the right guidance.
Here’s the problem; as Derrick realized early on, many new traders have a hard time letting trades run to their targets.
“I was jumping out of my trades too soon and seeing profit fly away,” he says, “I had 7 straight wins, and average profit was less than 20%, so I needed to figure out how to have more confidence in my trades.”
Of course, those kinds of results sound pretty good to most people, and if you can keep winning with that kind of consistency, you may be entirely satisfied with 20% profits.
As the old saying goes, “no one ever went broke by taking profits.”
But every experienced trader knows that all hot streaks eventually come to an end. And when the inevitable losses do come, it’s crucial to have extracted maximum profit from your winning trades, so you have the resources to ride out a bad run.
“Bullseye Trades just made sense, and I really liked that they put their own money and their own trades out there and didn’t hide things.”
On the other hand, Derrick was of the many new traders who gave in to the temptation to cash out early to avoid the disappointment and stress of seeing a winning trade turn against them.
Being fearful is understandable, but this kind of emotional trading will get you into trouble.
Fortunately, Derrick knew that he needed help and found in Jeff Bishop’s Bullseye Trades a service that perfectly meshed his objectives.
“It just made sense,” he says, “and I really liked that they put their own money and their own trades out there and didn’t hide things.”
Now Derrick is sold on the importance of paper trading as a way of building confidence and practicing exiting his trades without emotion, and according to his pre-determined risk and reward parameters.
“Learn to set rules and live by them,” is what he tells himself and others. “Get out when your rule says to get out… and don’t look back on what could have been.”
“Just closed on a Bullseye trade, NKLA 42%. I made $440, so I’m pretty pumped right now!”
Acting on what he’s learning, Derrick recently posted an impressive $440 win on Nikola Corporation (NKLA), a thumping 42% gain that’s a considerable advance when compared to his previous results.
Understandably describing himself as “pretty pumped,” his experience with Bullseye Trades has led Derrick to reconsider his trading ambitions.
Though he started with just $3,000, Derrick is shooting to have a $50,000 account by the end of 2020. Hitting this target will enable him to start trading full-time by the summer of 2021.
Of course, this is an ambitious goal, but he already knows what it’s like to win seven times on the bounce.
More importantly, Derrick now wholly understands the overriding importance of setting and hitting profit targets – an often forgotten but crucial aspect of sound risk management.
Armed with this newfound knowledge and increasing confidence, Derrick is on the road to big-time trading success.
Raging Bull does NOT track or verify subscribers’ individual trading results and these individual experiences should NOT be understood as typical as or representative. Please see our Testimonials Disclaimer here: https://ragingbull.com/disclaimer.