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Markdouglas

Three things Mark Douglas taught me. (Pt2) Risk & Money Management Risk management, in my opinion, is equal in importance to psychology because it allows your trading strategy/edge to play out by keeping you in the market equity wise. There really isn’t much to risk management other than its number one rule, never risk more than 1% per trade. Risking one percent per trade allows your trading system to take losses and have drawdowns but not enough to the point that you won’t be able to get out of it. I’m actually not a big fan of risk so I place trades using less than 1% of my capital. A lot of traders would think risking .75% per trade based off of my trading strategy is ludicrous but to me, it makes a lot of sense. As a trend follower, I take multiple small losses and few big winners that make double, triple, or quadruple, the loss. Trend following is very difficult because of the multiple small losses but definitely pays off because it lets your winners run. Big winners and small losses are definitely a trader’s best friend because it allows you to have a high risk reward ratio. If you risk $1 per trade, your goal is to make at least $4 back. If you constantly trade looking for 4x your risk all you need to do is win more than 20% of the time to be profitable. (Ex: Win 1 trade=$4 Lose 4=$4=0) .To be profitable you have to win more than 1/5 trades or 20%. With that being said, risk management gets even better when you use money management. As you can tell from the title, money management and risk management are two different things in my opinion. This wasn’t always true though. The old me would've said risk management and money management are the same exact thing but now that I know what I know now, I completely disagree. Money management to me is where you spread your risk to give yourself an even bigger edge. To illustrate, let’s look at the example shown here. According to my trading strategy my risk would be .75% of my equity on this trade but I would "spread the .75%" by taking it and dividing it into six trades instead of placing it on one. Let’s say I have $1000 in my trading account with .75% of $1k being $7.5. I would take the $7.5 and divide it into six or $1.25 per trade. My trading system would've told me to take buy limit trades at 1.66308 and 1.66815 at .005 lots (possible through Oanda) at 25 pips stop loss. Unfortunately the trades would’ve been a loss of $2.50 total or -.25% but because I'm spreading the risk I would still be able to enter four more trades. The remaining four would be a buy stop at 1.6654, 1.67068, and two at 1.67980 in anticipation of price closing at 1.68300 for us to take profit. If we were to follow our trading plan and disregarded negative psychological energy, our end profit would be as follows: -$1.25, -$1.25, +8.73, $5.90= Total profit $12.13 or 1.2% gain.
Education
by ElieTheForexTraitor
5
Three things Mark Douglas taught me. (Pt1)Psychology Psychology, like anything in life, plays a big role on how humans function. It affects the way we think, act, talk, and so on but when it comes to trading it affects us, oddly enough, in only one way and that’s through our emotions. Any experienced (or shall I say inexperienced) trader knows and understands the waves of overwhelming emotions that resonates based off of a trade that’s a loser. These emotions range from sadness, depression, anger, and the list goes on. The reason for this, if I’m not mistaken, is because of the pure fact that the money we use to trade with is hard earned and even when it’s not it’s something that rightfully belongs to us. Human nature is something that’s extremely difficult to change because it's part of our genetic make-up that has allowed us to stay for so long by encouraging us to stay away from things that we don’t understand or that will hurt us. Trading psychology is definitely the hardest thing to master when it comes to trading because your psyche works against you when you're being hurt mentally (losing trades) and works for you when you're euphoric (winning trades). As if this couldn’t get any worse, a hurting mentality will tap you into a pool of past failures or misfortunes that have happened to you in life and convince you to think you're not any good as a trader and that your strategy is useless. This baffled me when I learned this from Mark Douglas because it wasn’t something that I realized. This fact is very important because it means you and only you alone are able to break this cycle of assuming a bad trade means a bad setup. A losing trade has absolutely no correlation to you as a person so you shouldn’t assume that you're the reason why you have a losing trade. According to Mark Douglas, it only takes one person around the world to negate your edge. This basically means that when you're buying, someone around the world is selling. When there are more bears (sellers) than buyers (bulls) you're long trade is no longer able to be profitable and stops you out depending on your risk. The markets are full of newcomers and unprofitable traders that agree on the wrong thing together and thus makes the impossible or improbable possible. This gets even more tricky because it makes you, the person on the other side of the trade, feel unsuccessful. This is not true! A losing trade does not represent a bad setup but because our phycology wants to protect us from losing money (what hurts us) it tricks us into thinking that we are unsuccessful as traders. The solution to this is to simply accept the risk of the trade by trading a strategy or setup that is profitable through backtesting. Mr Douglas implored that back testing should be done through 20 trade sample size to give accurate results. When I first started trading back in late 2016 I would always hear profitable traders talk about trading psychology and not trading strategies. I never knew why until I tool Mark Douglas’ principals into consideration and for that I am grateful. (see pt2)
Education
by ElieTheForexTraitor