Trader Development Archives - Page 5 of 6

Going Live: Transition to Real Money

At this point you have learned a ton about the market, created your very own strategy, and discovered the power of your winning strategy through back-testing and paper trading. Now you are ready to start earning real cash from all your hard work!

You have made a great deal of progress but your journey as a trader is just beginning. As you start trading with real money your focus should now be narrowed down to two vital areas. First and foremost is your discipline for trading your strategy as designed. The second is executing your strategy to perfection.

By this point you should have become fairly comfortable with your strategy and have more than likely made a couple tweaks. As you paper traded your confidence, discipline, and execution should have also progressed.

However, switching over to real money in a live account is a completely different ballgame which can result in wild swings of your account balance. It doesn’t really matter how much money you are trading with that will spell the difference between success and failure. Keep in mind, losing on a trade is not failure. Losing on several trades is not failure. As long as you are trading your strategy consistently with discipline, you will be a successful trader. It’s really that simple.

You’re Wired to Lose

The difficult part is not allowing your basic human response to “danger” get the best of you. As humans, protecting ourselves at all costs is hardwired in us for the benefit of our survival. However, this works against us in the stock market.

For instance, going flat on an order when you see it start to eat away at those profits you gained on the first pop only to watch it bounce and return to where you exited as it continues to soar to the moon. Or hesitating to hit the buy button because you feel uneasy that the trade will work out.

Even for someone like myself who never really had any emotional ties to money throughout my life, still couldn’t avoid the emotional rollercoaster of trading real money. For me, it was more about being wrong with real money that allowed the emotions to creep in and make themselves comfortable in my trading home.

In this phase, don’t be shy to make some further adjustments as needed, but I warn you, DO NOT change your strategy here. I cannot stress that enough. If you have not mastered discipline and consistent execution, you are not ready to go to another strategy. Even if that strategy looks like the best thing since sliced bread. It doesn’t matter how much potential you see in this newly discovered strategy. If you are not disciplined enough to trade your original strategy consistently, win or lose, without letting your emotions take over, that “better” strategy will not make any long-term difference in your profit/loss column.

Just remember, there’s a reason you decided to take the strategy you created live. So, just stick with it until you are a trading machine reaping the benefits of consistent profits from your mastery of the art of disciplined trading.

The Cold Streak

Also, an important muscle to build is noticing when your strategy is just not working out that day, week, or month. Even strategies with the highest accuracy rating, fine-tuned to perfection, will have days where it just does not work. The market is the most dynamic environment for making money. Every single strategy will have days or periods of time when it just will not work.

Plus, there will be days where your strategy is fine, but you are just off your game. The best athletes in their respective sport has had games where their performance was far from their potential. Trading is no different and every trader goes through this regardless of their experience level.

You will need to develop rules to protect yourself during these unavoidable periods of struggle. For example, I have a protective rule I call “three strikes”. Typically, there’s only two futures contracts that I trade daily. If I’m wrong on a contract three times, rather I made a mistake, or the strategy just didn’t work, I’m not allowed to take anymore trades on that contract for the rest of the day. This rule has saved me from blowing out my account many times when the market had no life or was just doing its own thing, trading irrationally.

Contrarily, I’ve had days like August 3, 2018 where I broke my protective rule (see screenshot of Tradervue entry below) (Include link for journal entry aug 3, 2018) and paid dearly. There will also be times where this rule was triggered just to watch the move I was looking for finally present itself after taking the third loss. All I could do was watch the profits I could have had run away from me. But I can tell you with certainty that it’s better to follow your protective rules and start fresh the next day. Remember, the market isn’t going to shut down any time soon. It’s a marathon, not a sprint.

Click image to see my trades on Tradervue.

Startup Capital

So how much of your hard-earned money should you start trading with? That is completely up to your comfort level. Conventional wisdom says you only want to start trading with money you’re okay with never seeing again. You definitely do not want to lose any of your money. However, as simple as trading can be, not everyone can do it with consistent success. Some people just cannot get over the emotional mountain of trading with real money.

The stock market has one certified guarantee for all participants, which is you WILL lose money. There’s absolutely no way to get around it. If you just can’t separate yourself from your bottom line, maybe more passive long-term investing is a better fit for you, where you can just set it and forget it.

If you feel discipline is more of a struggle for you than the emotions, I would recommend starting with a small amount that will force you to make good decisions as you will have less of a cushion to fall back on. Once you have mastered being disciplined you can always add more funds to your account later. If you can grow a small account, you should have no problem growing a larger account. Just maintain the same disciplined strategy that helped you grow that small account. The only thing that would change is your account balance.

Go Forth and Crush!

Congratulations, you have learned all the essentials to building your very own trading strategy and you should be well on your way to major gains! Now, all you need is the experience to go along with everything you have learned. Don’t get discouraged if you get off to a rough start. Even if you do like me a get off to a bang followed by a series of rough patches, remember it’s all part of the process. Manage your risk and stay disciplined with patience and you will have a long career as a trader. Just like with everything else in life, the more you do it the more you will improve. The challenge is lasting long enough to make it through the rollercoaster phase. Remember, it’s a marathon not a sprint.

Sep, 2018

Managing Risk Trading or Investing: Risky Business

The two key aspects to master as a day trader and/or long-term investor is the psychology and risk management. Getting over the psychological hurdles of trading is simply going to take time and experience. The risk management should be one of the first things you get down if you want to be successful over the long term. Managing risk trading or investing can be the one factor that makes or breaks your success in the market.

History Repeats Itself: Avoid Becoming a Statistic

We all have heard countless horror stories about people losing significant sums of hard earned money by an investment or trade gone bad. Most of these coming out of times like the Dot Com bubble or the crash of 2008 thanks to those infamous subprime mortgages created for failure. Those are just two examples of many crashes resulting in many people losing tons of money at the hands of the market.

From all the stories I’ve heard, at the heart of all the lost fortunes were poor or non-existent risk management plans. People would just put their money into whatever equity with no real thought into what if this doesn’t work out? How am I prepared for this company or the market as a whole running into disaster?

We all know in the market things can go south quick, fast, and in a hurry. With this simple oversight many people have loss literally everything on something as common as an inevitable market correction or bad news. Other than not participating in the market at all, there is no way around avoiding this risk. Rather you’re long-term investing, swing trading, or day trading, risk management is vital to your success in this unforgiving market.

So What is Risk Management?

Now when we talk amount risk management for trading what does that really mean? It’s quite simple actually. How much are you willing to lose on a single trade, in a day, in a week, or even in a month. The time frame really is up to you, but you need to know exactly how much you can personally stand to lose and still live to trade another day for as long as you desire.

Also, you need to ask yourself, “Is the amount I’m risking for this trade worth the reward?” There’s countless strategies and technique you can use to determine what your reward possibilities are, but conventional wisdom says the minimum risk to reward should be a 1:2 ratio. For example, if I’ve determined my risk to be $100, the trade is only worth taking if I have the possibility of making $200 or more without compromising my risk.

Remember you should never risk more than you are willing to lose. Many traders have failed from blowing out accounts due to little or no attention given to the risk. Losing streaks are inevitable for every trader. Having a solid plan will ensure you are able to make it through the storm.

How can a losing streak spell the end of your career or hobby as a trader? Think about this. If you have $5000 to trade, with a per trade risk of $100, taking 10 losses in a day can take away $1000 in one day! Repeat this and your account is down to 0 in less than a week.

Morale of the story? Beyond planning the risk per trade, part of your plan should also include how much you are willing to lose in a day, week, or month.

A good rule of thumb is your per trade risk should be no more than 5 percent of your capital. Ideally, you want to risk no more than 1 or 2 percent of your total capital per trade.

Developing Your Risk Management Plan

Managing Risk Trading — Risk management process that can be used for developing how you will mitigate the risk in your trading strategy.

There are many sources on the internet and in books that cover what a risk management strategy for trading should look like. One of my favorite sources that I used to help develop my risk management plan is reallifetrading.com. I didn’t follow their strategy exactly, mainly because their main focus is on equities and currently I’m only day trading futures, but the core of the risk management technique is at the heart of how I manage my risk. The most significant part to me is the way they remove looking at risk in terms of an actual dollar amount since there’s typically a ton of emotion tied into money. Instead, when viewing risk they simply refer to it as an “R”.

As a quick breakdown, let’s say my risk tolerance (using the example above) is $100 per trade. Now, you can just replace $100 with 1R. So instead of saying I am willing to lose no more than $100 on a single trade, you say I am willing to lose 1R on a single trade. You can try to say this out loud for yourself and see if you feel different saying 1R instead of $100 dollars. Like removing the innate emotion from losing money. Like a way of tricking the mind by removing the fear from trading since we know fear is the root of all evil when it comes to trading the market.

You can even take it a step further now that you have the understanding of what your R is and make rules for how many R you are willing to lose in a day, week, or even a month before stepping away from your trading station depending on how you develop your risk management plan. I highly recommend checking out Real Life Trading’s educational content since it’s 100% FREE!

You Have the Control

Risk management is a key element to the success of every business. Every successful trader and investor agrees that participating in the stock market should be treated as a business. Contrary to popular belief, earning money from the market is not gambling even though there’s a lot of similarities and the rush you can get similar to that of gambling in Vegas. What separates trading from gambling is the ability to control your risk. Take charge of your business. It’s only as risky as you make it.

P.S. Averaging down = no good!!!

Rob

Mv3 Trader

Testing Phase: Putting Knowledge into Action

This guide is not so much about the detailed steps of how to create a trading strategy but will go more into what to do while you build out your first trading or investing strategy. The specifics for how to build your strategy are completely up to you. Use the power of your inner trader to develop a simple and easy trading strategy. Simple and easy is the key as too much information is typically not a good thing when it comes to trading the market.

Now that you have all this delicious brain food of trading and investment knowledge, it’s time to start putting that knowledge to work. Knowledge is power, but what’s the use of having a power that you don’t use right? Anyway, without getting too preachy…

By this point you should have an idea of which direction you want to take you trading. If not, don’t worry, it doesn’t have to be solid by this point. For instance, my interests began in swing and day trading stocks, then swing trading options on stocks, followed by forex, before I eventually settled on day trading futures, all in about a three-month span.

Lay the Foundation

For this next phase you will be using what you learned to start developing your strategy. There are tons of ways you can go about building your strategy. As well, there are dozens of resources at your fingertips, from websites, to trading platforms, to apps. The world of trading is literally as easy as the click of a mouse. These sources will be key in your strategy development.

There’s so much information that it can feel a bit overwhelming when starting. Just pick the asset class and time frame (day trading, swing trading, or long-term investing) that interests you the most and go from there. Chances are this will change and evolve as time and your experience progress, but you just have to take the first step and get started. You can look at this phase as laying out the foundation of your strategy.

Disclaimer! Once you build out this foundation of your initial strategy, it is extremely important you do not stray away from this foundation. You can make adjustments but do not change this strategy. Here’s the thing. All strategies work! Yep, every single strategy you can imagine works, just not all the time. More importantly, your strategy is not going to be what makes you a successful trader. Your thoughts and emotions are going plays a huge role in your success as a trader. What you do not want is your strategy adding to the difficulty of overcoming the psychological barriers you are bound to face. If you don’t pay attention to anything else in this guide, remember this. DO NOT change your initial strategy. Once you have mastered the psychological aspects of trading you can use whatever strategy you want. And by this time, you will have a solid strategy that you can always revert back to when things start getting shaky elsewhere.

Don’t Test with Real Money

Once you have created the framework for your strategy you will want to test it out. The best way to do this is by using a paper trading account. This step will get you familiar with your strategy as well as build confidence in your ability to successfully trade the strategy. As with most things, practice makes perfect. The more you practice using a paper trading account the better you will become at executing your strategy, relieving the stress of making unnecessary mistakes in a live account. The more mistakes you make here the better as people typically learn their most valuable lessons from mistakes. You want to make the mistakes here, (not on purpose of course) so you learn from it without wasting your hard-earned cash. It already sucks to lose money trading which is inevitable. What’s worse is losing real money doing something stupid.

Testing Tools

No matter which direction you decide to take your trading journey, there are many platforms available. Some paid, most for free, that offers paper trading. One of the most readily available paper trading platform can be found on Investopedia’s website. If you open a TD Ameritrade account, you will have free access to their paper trading, called paperMoney, on their Thinkorswim platform that allows you to paper trade just about every asset class. Some of the data on their paper trading platform is limited, but what I do is use the data on their live platform and sign into paperMoney on the mobile app to place the paper trade. It can take a bit longer to place an order on the mobile app but since I’m only paper trading I’m not too worried about timing.

Taking things one step further, some platforms, such as Thinkorswim, has tools where you can back-trade a previous day as if you are trading it real-time. These tools are essential to fine-tuning the execution of your strategy. TradingView also has this feature, called Replay, that I use frequently. I prefer Thinkorswim’s OnDemand vs. TradingView’s Replay, as Replay will only ‘replay’ the chart information. You won’t be able to trade it with paper money. These are the only two I know of. Check with your broker to see if they have a similar feature in their platform, as you will want to do this with the same platform you trade real money.

TradingView also has a user-friendly paper trading platform which allows you to place trades directly from the chart. TradingView also gives you plenty of details about the paper trades you placed. You can sign-up for a free account and have immediate access to their paper trading platform, as well as some additional features beyond what you get without an account. They also offer free trials to their more advanced features and data. Click the image below to get started with TradingView.

Example

Here’s an example of how this process would work. Keep in mind, this is only an example. I am in no way telling you to use this specific information as a strategy for any asset class.

So, let’s say you have decided day trading stocks using the VWAP is the direction that seems the most interesting to you. Let’s add more detail to that and say you want to trade stocks in the range of $10 – $50 because that fits your budget and you favor the typical price action of those stocks. To begin, you will pick a stock that you know and like in the desired price range. For our example we will use Twitter, ticker symbol TWTR. Pull up a chart using and plug in the ticker. You will want to use the platform you plan to use to trade real money if they have a paper trading companion, which most do. That will help you build familiarity with the platform minimizing mistakes for not being well acquainted with how the platform works. For our example here, I will use TD Ameritrade’s Thinkorswim.

Once you have the chart up with TWTR’s data, start looking for patterns you could take advantage of based off the price action in relation to the VWAP. Of course, for this you will be looking at historical data, rather that’s the previous day, a day from last week, a day from last year, or whatever. My recommendation here is to look at as many different days as you need to. This is what’s called back-trading, which helps you build the memory muscles needed to execute your strategy with minimal mistakes.

Using a 5-minute chart since the VWAP is only really useful for intraday strategies.

Once you feel you are comfortable with the VWAP and the stock you chose, you will then pick another stock and do the same thing all over again. It is highly recommended to go through this back-trading process as much as possible without letting it consume your life outside of the stock market, of course.

If your knowledge building phase was thorough enough, you would know the importance of also looking at multiple timeframes for your strategy. For example, using the same day trading off the VWAP strategy, taking a look at the five-minute, 1 minute, and daily charts could be very beneficial to helping you make trading decisions.

Taking a closer look into price action with a 1-minute chart.

In the beginning, this may seem very time consuming but the more you practice this the faster and more accurately you will be able to flow through this process. Just like a basketball player practicing his jump shot. At first, he will struggle to make baskets with the appropriate form. But over time, with practice, the shots will start going in more frequently with greater accuracy, requiring less mental effort. The same is true for making money in the stock market.

Keeping Track of Your Progress.

It’s a good idea to have a spreadsheet to track your trades. This will help you see the big picture of how well your strategy, and more importantly your trading habits, are performing. If you like you can email me at robwill@mv3trader.com for a sample spreadsheet tracker. There are also numerous examples available on the internet which can be found with a quick Google search. Some information you may want to keep track of is:

Entry and exit price
Entry and exit time
Date trade was place
Date trade was exited (if different from entered)
Profit and loss
Number of shares
Notes of thoughts, feelings, and reasons for taking trade.

Example of my spreadsheeting, tracking my futures trades.

You can also sign-up for a Tradervue account where you can input your trades for purposes of tracking. Tradervue also breaks down your trades which allows you to see an abundance of statistics which can be used to optimize your trading strategy. For example, your accuracy, your total P&L, your performance at specific times of the day and much more. For paper trading you may need to input the data manually. Tradervue has linked with most brokers to input the data directly from your brokerage account.

Get Out There and Take Action

Now it’s your time to get started building out your very own strategy and putting it to the test. Remember, the key takeaway here is it’s not the strategy that makes or breaks the trader. It’s the mentality of the trader that separates the winners from the losers. You are building your strategy here to have a methodical way of getting hands-on experience with trading the market. In the famous words of Ms. Frizzle (Magic School Bus) take chances, make mistakes, and get messy. Did I just show my age?

Get out there and crush it!

For real-time insights follow me on Twitter! @Mv3Trader

Comment below with your opinions and questions.

Rob