Lessons from the Pros


When You Are Bored Making Money

Hello Traders! Catchy title, isn’t it? That is a phrase I use in the Online Trading Academy classes that I teach when the discussion comes up about risk management in your trading account.

As you may have heard, discipline is an extremely important personality trait to have to be a successful trader. Some have even said that good discipline is the Holy Grail in trading! No, the Holy Grail isn’t a moving average crossover with a stochastic over-something with a 68% Fib retracement. Having the discipline to follow our rules-based trading plan is probably the most important factor in our students’ long term success.

So what does the phrase “when you are bored making money” have to do with risk management and discipline? I have students apply that phrase to their position size and trade frequency portion of the risk management section of their trading plan. In class, we recommend that you risk a very small percent of your account on any individual trade. It makes no sense to risk half of a trading account on this one particular trade! The easy math says that if you lose half of your account on one trade, you must then earn 100% on your account just to get back to break even! Believe it or not, earning 100% on your account isn’t done as quickly as cutting your account in half. Weird how that works.  A common percent that traders use is 2% of their account on an individual trade; this allows a trader to have several losing trades in a row without dramatically drawing down their account.

Believe it or not, I recommend an even more conservative percent risk. Almost ridiculously conservative! I recommend your beginning risk be ¼% per trade. So on a $10,000 account, your stop loss would take you out of the trade when you were down a mere $25. Hard to blow up an account when risking that much! So when do you get to risk more/trade bigger position size? When you are bored making money. That phrase has two significant components to it. First of all, you have to have been profitably trading for some time before you should allow yourself to trade more aggressively. My recommendation is either 30 days or 30 trades, whichever is longer. This way you will have a statistically significant track record to measure if you are on your way to becoming a profitable trader. One winning trade in a row doesn’t make you a good trader, nor does one winning day!

Now that you have those 30 days/trades under your belt, AND you are profitable, do you WANT to trade larger size? Is the ¼% starting to bore you? If you are still excited about the big wide world of trading, where every pip in your account makes you shout yippee! – you might not be bored enough to trade larger risk. When you are bored enough, then I suggest you start to risk ½% on your trades. How long do you think you should trade at that level? If you guessed 30 days or 30 trades whichever is longer, you guessed right! Keep gradually increasing your risk size in such a manner until you get to our threshold of 2%. If you have the discipline to do this, I bet you will be a profitable trader with money in your account!

The second application of this phrase is to the number of trades you do in a specific time period. For example, if you are a day trader, how many trades will you take in a day? Do you have a limit? Or do you take any trade that you see, changing time frames back and forth just so you can make a trade today? If you are doing that, you are doing it wrong.

For beginning day traders, I recommend doing a MAXIMUM of three trades a day. If you plan on being in front of your screens for 3, 5, or even 8 hours a day, you may be tempted to do several dozen trades without even realizing it! Start off with 3 trades a day. When do you get 4 trades a day? You guessed it, when you are bored making money. Same rules as before, you have to be profitable after 30 days and you have to want to trade more actively. Then I would let you do 4 trades, and so on and so on.

The funny/interesting thing about trading is that when people are losing money in their account, they often start to trade more aggressively. Trading larger size, trading more frequently, you name it. Logically this makes no sense. Think about it like this: you are trading poorly, losing 1% of your account on each trade and you are doing 3 trades a day. Then you make the decision to risk MORE of your account per trade, and put on MORE trades. But you already saw that you were losing money! Why on earth would anyone trade larger and more often when losing money? Wouldn’t they just lose more money even faster?  The common reasoning is that this trader just “has to get back to break even, then I’ll settle back down.”  Ever hear a trader friend of yours use that phrase? I have, and it has never ended well.

To sum it up, I hope in your risk management rules you can add this funny phrase to keep you from trading too big and too fast.

Until next time,

Rick Wright


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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