The 2 most important things you need to know about trading is how to win and how not to lose. Most people go straight to the ‘how to win’ part first but that’s a mistake. Without knowing how not to lose winning becomes very difficult as your losses are constantly dragging you back and pulling you under.
There are plenty of strategies on the forum showing how to win but people will often ask ‘do any of these actually work?’ The answer is yes, they all do, but whether they will work for you will depend on how you implement them and knowing the basics of how not to lose.
So learning how not to lose must come first.
Here’s what you need to trade:
A demo account.
A trade trigger strategy.
A trade exit strategy.
A risk management strategy.
A journal to record results.
The first is down to you, the 2nd and 3rd come via any of the trading strategy posts on the forum. The 4th will depend on your own tolerances but simplified will go along the lines of,
I will not risk more than 1% of my account on any one trade and will not have more than 2 trades open at any one time.
I will always have a Stop Loss in place and I will stop trading for the session if I suffer 5 loses in a row as this is a sign that market conditions are not conducive to my strategy.
I will stop trading the strategy if after x number of trades (I would suggest 20) the strategy proves to be not profitable.
All basic stuff so far;
The most important tool available to you is a trading spreadsheet to record your wins and loses, if you can’t quantify them you will end up being lost and wandering round in circles, possibly for years at a time.
A journal spreadsheet will tell you what works and what doesn’t over time, it will highlight a losing strategy and enable you to amend it or just abandon it and move on to a new strategy rather than waste time on something that just doesn’t work for your market, or the time frame you are most comfortable using.
Most people are put off from journaling because it sounds such a chore but it doesn’t need to be. For strategy testing you just need a bare bones journal that will just highlight what is working for you and what’s not.
In the journal spreadsheet .xlsx file below you really only need to fill 5 data boxes, 3 prices (entry, stop loss and exit price). And 2 drop-down boxes (long/short and win/lose) that literally take less than 30 seconds to complete per trade.
The spreadsheet will then calculate your win ratio and your average risk/reward.
You can then mark the plot on this graph, any plot above the red line is a winning strategy, any plot below the line is a losing strategy.
You can then amend the strategy and restart the test or choose new strategy to test.
This section has some random general information and important tips:
(not exhaustive or in any order)
The market is made up of 3 types of participants, the commercials, who the markets were made for, they are the slow grazing Dinosaurs slowly collecting contracts building huge positions over months and years, rarely noticing the charts. They roam around in herds all going in different directions with different objectives. They are in the market because they need to exchange large sums of currency or hold large amounts of stock or hold large hedging positions.
Then there are the large speculators who are like sharks, they are only in the market to scavenge. They are opportunists looking to start and take advantage of relative short-term trends.
Then there are the small speculators (you) who are like Remora, sucker fish to the shark, they stick close to the large speculators trying to feed of their scraps. Going in any direction other than with the sharks will mean getting eaten.
So that’s the pool you’re swimming in, here are some important tips to avoid getting eaten or just plain drowning.
Avoid shorting into support or going long into resistance. Wait until significant hurdle levels have been dealt with then look for an entry as price is moving away (not towards).
Be very wary of an entry immediately after a fail.
Be very wary of trying to call tops and bottoms, stick to trend trading.
Be very wary of price whipsawing on market open or big news, wait for the calm after the storm once price has decided on a true, clear direction.
Practice trying to predict which new level price is heading for based on previous support and resistance for setting targets.
Price moves up because the market has buyers looking for sellers, where might those sellers be waiting?
Practice trying to determine whether price movement at any particular time is due to speculators getting in or getting out, they have the resources to make big calls, we want to follow them and no be entering the market when they’re all exiting.
Hope this might help.
PS: LibreOffice recommended free open source app for opening .xlsx files but anyone should do.
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