In this chapter you will learn the response to these questions. Defining your financial goals is extremely important, since the results of the next steps all depend on YOUR goals.
It really does not count WHAT you trade, as long as you are successful. Each market has pros and cons which we’ll discuss here. This will make it easy to strike the right market for YOU.
Even More Info….
In this section you’ll learn the differences between daytrading, short-term trading and long-term trading and how to get to the best approach for YOU.
Unfortunately the trade you just placed is a loser, and you lose the whole $1, 000. Since this was the amount you were wiling to risk, you close your account, transfer the remaining $4, 000 back in to your checking account and that was it for you.
In scenario 2 the risk of losing your money after 10 trades is fewer than 1%. However, you have a fair opportunity of making $200.
Therefore you is necessary to define first how much you’re willing to risk, since the amount you can make is a feature of that risk. Make sense? I’ll give you more specific examples later in this chapter.
Keep in mind that there is a difference between the amount you require to trade and the amount you are willing to risk. Your broker is always asking your for a ‘margin’. You need to finance your account with that margin requirement + your risk. In our previous example you funded your account with $5, 000, but you only risked $1, 000. More on that later.
If your back testing shows an average profit per trade of $36 then you can be most sure that the system won’t suddenly jump to $57 average profit per trade.
In trading we have good weeks and bad weeks. Losses are part of our business. After a slow week there might be an extraordinary week. After a winning streak we will realize a loss.
Looking at the execution of that week a correction was inevitable. And it happened: Tuesday, March 22nd, we realized a loss of $712.50.
Such a loss hurts. You quickly forget all the nice profits of the last week and concentrate on the loss. You may start questioning your system and believe that it stopped working, and so you stop trading. You start looking around for the following system. You do not give the system a chance to get back to ‘normal’. You see an extraordinary week like the week from March 14-21, 2005 and think that you’ll continue making profits like this forever.
You are getting very low commissions. That’s important to keep your costs down and increase your bottom line.
You are trading some of the more liquid and popular markets around the world, hence you’ll experience little or no slippage.
If you are new to trading I strongly recommend beginning with the futures markets. It’s way easier than you might think. If you follow this guide then you will have no problem getting started in futures trading.
When you take a smaller timeframe (less than 60min) your average profit per trade is normally relatively low. On the other hand you get more trading opportunities. When trading on a larger timeframe your profit per trade will be bigger. However, you’ll have fewer trading opportunities.
When prices are trading at an extreme (e.g. Upper band of a channel), you sell, and you attempt to catch the small move while prices are moving back into normalcy. The same applies for selling.
Most indicators that you’ll find in your charting software belong to one of the following two categories: You have either indicator for identifying trends (e.g. Moving Averages) or indicators that define overbought or oversold situations and therefore offer you a trade setup for a short term swing trade.
So do not become confused by all the indicators and trading approaches that are out there. Make sure you understand what the indicator is measuring and what category it belongs to.
In my opinion trend-fading is actually one of the best trading styles for the beginning trader to get his or her feet wet. By contrast, trend trading offers greater profit potential if a trader is in a position to catch a major market trend of weeks or months, but few are the traders with sufficient discipline to have a position during that period of time without getting distracted.
There are dozens of books, magazines and websites that offer you countless entry techniques. But as a famous trader once said :’ The exit is more important than the entry’. So let us take a look at exit rules.
I usually do not recommend using a fixed dollar amount, because markets are too different. For example, natural gas changes an average of a small number of thousand dollars per day per contract; however, Eurodollars change an average of a small number of hundred dollars a day per contract. You need to balance and normalize this difference when developing a trading system and testing it on different markets. That’s why you should always use percentages for stops and profit targets (e.g. 1% stop) or a volatility stop rather than a fixed dollar amount.
A time stop gets you out of a trade if it isn’t moving in any direction, therefore freeing your capital for other trades.
Entry and Exit Rules are the basic elements of your trading plan. If you’ve got a rather small account then that’s all you need to be started.
All these elements are becoming important when your account size grows. However, in the beginning you can omit these elements to make it easier.