Successful trading

Chapter

Plan Your Trading and Trade as per your Planning (3)

What is your plan to achieve your goal?

This is a tough question and there is no straight answer that fits all traders. However here are some guidelines and ideas. See if they make sense. If they don't, try to find your own version of it.

For one to reach his monthly profit target or annual return objective, he needs to look at following factors:

Trading Odds (ODDS).

Desired Profit in a successful trade (PPT).

Planned Maximum Loss in an unsuccessful trade (LPT).

Trades per month (TPM).

Let us take an example of a trader who wants to make 1,000$ per month. If his stock selection is average, his trading odds will be 50%. Half of the trades result in profits and half result in losses. Now if he takes say 300$ of profit in a profitable trade and 300 dollars of loss in a losing trade, you can see that with 50% success rate, he will not reach any where. He will in fact lose money because of the commission on both sides of each trade. So to reach to his goals, we will need either boost his Trading Odds (ODDS) and/or increase Profit Per Trade (PPT) in comparison to Loss Per Trade (LPT). Based on these three variables and your monthly profit target, you will get an idea about how many trades you will need to make per month.

Increase the odds. What is the success rate or odds for a trade to be in profit? It can be any number between 0 to 100%. However for an average trader, it can be expected to be around 50%. If a trader makes ten trades, on average five may turn profit for him and five may result in losses. So to come out as a winner in this game of trading, one will benefit by increasing his trading odds. Question is: is it possible to increase odds of success? If so, how far one can expect to go? This is the area most addressed in investment and trading books. One will find several books on the topic and this one- Profit From Prices- also deals with it. Based on my experience, it is possible to push the ratio to around 70% with the signals discussed in this book. However at this stage when we are developing our trading plan, I will advise one to be cautious than being too optimistic. I think you should take 50% ratio in your planning calculations with a goal to push it higher to around 70% as you gain more experience in trading.

Write down: I want to achieve a success rate of ___.

Have more profit in a winning trade than a loss in a losing trade. This is crucial to keep in mind if one wants to succeed in trading: Small Losses Big Profits. This is easy for anyone to say or advise but it is very hard to practice in real life. Most of the individuals have their emotions and psychology trained in quite an opposite fashion, and most of the time it acts against them. When a trader is in profit, he doesn't want to take any risk on that profit so at the first justification or sign of risk, a profitable position is likely to get closed. On the other hand, when a trade is in a losing position, he will neglect all negative developments and signals. Instead of acknowledging that he might have made a mistake, he will hold on to the position hoping/praying for one powerful positive news/development in the stock. A losing position is often time held too long in the hope that some day the stock price will reverse its course and there will be profit (or no loss)!!! So in short, normally an individual is practicing in the trading world what most of the religions have been teaching for thousands of years: Pass on the joy (profitable positions, I mean) to others and keep the bad part, bad incidences/happenings and bad luck to oneself (losing positions). Pass on nice smelling flowers or perfume to others but keep holding onto rotten bad smelling corpses for yourself! Believe it or not, the truth for most investors is: Small Profits and Big Losses!

So how much money should one risk per trade? How much profit should one go for in a trade? There are no straight answers but one can risk anywhere from 1% to 10% of his risk capital per trade depending on his situation, circumstances and objectives. For most novice traders, I would say they should not risk more than 5% of their risk capital on an individual trade. Profit target should be around 2 to 3 times the amount risked on that trade. I have made this a guideline for myself: Before I enter into any position, I like to see if the position offers me two to three times more gain opportunity than the risk or loss exposure it has.

My Goal is to make ____$ profit per successful trade and want to stop my loss at _____$ at most in every unsuccessful trade.

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