Lessons from the Pros


Winning by Losing the Right Way

All too often traders are so focused on getting the big winners.  This is not a strategy that will allow you to be consistently successful in the markets.  If you are wondering how to make money trading, a trader or investor can only be profitable if they can properly evaluate and manage their risk in any position they take.

When I managed a hedge fund I was in charge of hiring traders to work under me.  While looking at the resumes and trading records of applicants, I was not only focused on the returns they were able to achieve, but the amount of risk they took to get those gains.  A trader that made a 10% return with only a 1% maximum drawdown in the account is a more valuable team member than one that had a 20% return with a 9% drawdown.

The first trader may not make as much money, but is more likely not to suffer catastrophic losses that severely damage the account.  The second trader has been taking unnecessary risks and having larger losses.  They may have been lucky to recover, but that luck is often transient and cannot be depended upon and this is not how to make money trading on a consistent basis.

Losses are the only thing within your control when you enter the markets.  You may have done your research and planned the trade, but no one can know with 100% certainty whether the markets will move up or down and how soon.  So when you enter a trade you decide several factors that will tell you if you are likely to lose and if so how much.

  • Free Trading WorkshopThe market environment – Are you trading with or against the broad market?
  • The stock’s trend – Are you trading with or counter trend?
  • Gap risk – Will you hold overnight or over a weekend?
  • Timeframe – Longer holding periods increase risk.
  • Position size – How much risk are you willing to accept?
  • Stop placement – How much are you willing to lose in the trade?

It is possible for you to learn how to make money trading. In our Professional Trader Course we teach a proven strategy. We teach you to examine several odds enhancers that are part of the decision making process for every trade.  Failure to take these steps and evaluate every trade opens you up for greater and more frequent losses.
By understanding the risks in a trade, we can make adjustments to minimize the effect of losses on our account.  You can adjust the timeframe, use tighter stops, less share size, or even be more selective in the trades you take.

In addition, you need to have a set of rules that are written into a trading plan that you follow.  Included in these rules should be limits as to how much of your money you are allowed to risk on any one trade.  This should be a small percentage of the total amount of money in your account.  Remember that you may be entering into several positions at the same time and do not want to draw down your account too much if the markets suddenly turn against you.

You should also have a maximum drawdown for your account that you are willing to accept.  If you exceed this amount, do not keep throwing money at the markets “hoping” to make your money back.  This would be like driving a car long after the check engine light has illuminated.  You need to fix the problem before you do more damage to your car.

When you exceed your maximum allowable drawdown, you are doing something fundamentally wrong in your trading or investing and need to figure out what it is before you lose all of your money.  Many times it is difficult to stop yourself or even evaluate your trading system to see where the problem lies.

This is where having a mentor is important.  Between the assistance of their Education Counselors, Student Support Specialists and Extended Learning Track Instructors, students of Online Trading Academy have a multitude of resources to help them work on and improve their trading plans to increase their chances for trading success.

Brandon Wendell – bwendell@tradingacademy.com

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.