So is there a trading apporach that could be universally adopted for trading success? In my opinion, I do not think so. The reason is simple, if you have ever heard of the turtle traders (Richard Dennis), one of the pretty much successful and talked about trend following strategist many years back, whom engaged a group of newbie traders that had no experience or idea about the financial markets. It was where Richard and his partner later trained this group of people to use their proprietary strategy, and with no stone unturned, to find out if they could attain the similar result that they had achieved over the years.
And yes, the result indeed turned out to be pretty surprising to many, as almost 70% of this group of trained trend followers failed to make profit from the market using their proprietary strategy, where the remainder either modified or refined it, and only a minority found success in following the system totally. But the final result of this interesting story was pretty interesting as well, among all, a few gave up being traders, a few were multi-million managers, and a few did marginal returns. So what am I trying to imply in this?
As it turned out to be, through these years of trading, interacting with many students, as well as making lots of losses to the market. I discovered that most traders go through these common stages all the time, first, they try to find their winning formula, second, even if their trading results are moderate they will always try to create a trading system out of the strategy, third, they move back into trading discretionarily to enhance their earnings, lastly, they finally get back to focus on risk and money management.
In my humble opinion, I personally would recommend a new trader to start from the basis on money management first. Reason is very simple, most new traders give up trading for a living mainly because they tend to lose their pockets after a few good runs on the market, and when they get so confident to claim that:" Yes! This is the run for the Bingo." they usually get so engrossed that they made the right decision till they lose their head. Now you know why bucket shops exist.
So let's say you have a set of pre-determined monetary level to limit such an error, do you think it may help? Not for all. Reason: I used to lose control also. What about anyone else? We are all humans mates.
Personally, I find the most effective method to prevent such a setbacks is to have a top down approach to your money management. Here is a very simple set of questions where I felt that changed my view on taking risks in the market:
- How much losses (in monetary terms) incurred in this trading account would deem that I may have to relook into my trading strategy? (Calculate the risk tolerance in term of percentage)
- How much profit (%) per year is your targeted Return on Investment? Multiply this ROI to your starting equity to check if this is what you really want.
- Assuming you achieve consistent trading results where it will always be 20% profit/80% loss, ideally, how much risk should be taken as a result of your targeted returns (in monetary term), in order for you as a trader to stay profitable consistently at your ROI?
- From all the above data calculated, what is your maximum risk tolerance per trade? If it is not realistic, how do you refine that? Increase equity? Increase profit targets? Etc..
- After all the above steps are completed, then search for a trading strategy that will suit you. If not, rethink about your focus and commitment on trading.
I hope the above could be useful to you. These are just some questions where I found it useful in my discovery when I told myself that I want trading to be part of my life. Imagine if you are a full-time trader, where you consistently risk 5% or more of your inital equity on every single trade, and especially when your annual income is dependant on your annual trading performance.
I hope this is interesting for you although it may be a little long for some. Let me know if you need to clarify.
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