The complications of greed
Several weeks ago, a friend of mine was asking me how my trading was going. I told him that it was going well and that I was slowly learning to be consistently profitable. This guy is a very savvy businessman, and has had a lot of success of his own, but has no experience with trading anything. Nevertheless, I value his opinion.
I explained to him how pips and lot size work, and told him that I was basically trading 10-20 cent pips, making a few bucks a week on positive weeks. With this info he gave the most logical encouragement he was able to give. Based on what he knew and what made sense to him, and he suggested that I lot up. He expressed the idea that by doing this I would force myself to take trades even more seriously and that this would more than likely help me grow as a trader. Since I was relatively consistent already, I expected that I would also make some extra cash by lotting up.
This made sense to me, and honestly, I was beginning to feel a little bit like I was in a demo account since I was trading such a small lot size. So lotting up was appealing for this reason, and making cash would be icing on the cake! I took my friend’s advice and threw a couple hundred bucks into my trading account and began to trade larger lot sizes.
My experience with lotting up, and focusing on profit
As soon as I began to consider the idea of lotting up, I began to dream about the money that I could make. It made sense to me that my trading would become more precise if there was more money on the line. I couldn’t have been more wrong.
As I began trading larger lot sizes, I found myself making a lot of really foolish decisions. There were days that I lost a fair amount of money, and still kept trading, taking as many as 4-5 trades per session. I would lose in a trade, and then be upset by the fact that I had lost an uncomfortable amount of money in a trade, but I would still hold onto the belief that I could make that money back. It didn’t work out well.
I didn’t know at that time exactly what I was doing wrong. I tried analyzing my trades, to no avail, because it was simply rooted in trade management. I was taking too many trades and taking foolish trades, mostly based on the hope that I could get my money back. I wanted to get back what the market had taken from me. I suppose the expression is true “Want in one hand…” and… well, you get the point.
After analyzing and making rules such as “rate each trade on a scale of 1-10 before entering,” “wait at least 5 minutes between trades” and plenty of others, I was still losing trades. I would follow this list of rules for the first trade, but then I would get trigger happy and start taking all kinds of foolish trades. I had made a little progress by making all of these rules but I was still failing to recognize the root of the problem. Not to mention the fact that more rules equals more work.
It wasn’t until a few weeks later that something really clicked. I was talking to Steve, our director of enrollment at the Institute, and he told me something that stood out to me. He said “A new trader thinks about how much money they can make, while a professional trader thinks about how much money they can lose.” You can find this in a blog post he wrote titled “Money Management In Trading.” It is a great post and I recommend everyone read it.
The effects of this paradigm shift
Realizing this key difference between new traders and professional traders has had many benefits. Many things that I was doing wrong began to almost fix themselves when I saw the bigger picture. Understanding this simple truth helped me to get to the root of the matter. It wasn’t that I didn’t know how to trade, or read the charts. It was that my trade management was horrible. Even though I was “able” to trade well, I chose not to due to the fixation I had on making money. I had become incredibly biased in my interaction with the market. I entered trades without thinking about what I could lose, always thinking “I know how to pull pips” and “I can make money.” The funny thing is that both of these things are true. But if I focus on those two things, I am forgetting that there is another element of trading that I have to keep in the forefront of my mind: the fact that I can lose!
After I began to keep in mind what I can lose by trading, and keep the dangers of the market in clear view (no longer obstructed by wild dreams of rolling in money) noticed myself not having to try as hard. I was almost not having to try at all to adhere to the list of rules that I had made for myself. Instead of forcing myself to rate each trade so that I would stay out of bad trades, I found myself staying out of low probability trades without even thinking about it. Instead of struggling with overtrading, I found myself naturally limiting myself to one trade per session, and often times going the whole session without trading. Once again, many of these big struggles that I was having were all corrected with my mindset. This mindset of thinking about what I can lose versus what I “could win” is closely related to something that I like to refer to as passive trading.
This blog entry is going to be short, and I hope, sweet.
We all want to maximize our winning PIP count and minimize our losing PIP count for every trade that we take.
After a month of trading with the Market Maker Course software (Smart Money Profile), I’m convinced that limit-profit to stop-loss (reward to risk ratios) can be 4:1 to 6:1 and even higher. In Market Maker Course language, this means we can often look to capture 20-30 PIP profits with a 5 PIP loss as our risk management number.
HOW can we dare use such a small stop-loss of 5 PIPs? Because when the SMP charts are showing high probability setups and entries, and you’ve chosen the correct direction to take your trade, the price-action rarely violates by five PIPs or more the significant price levels shown as dots, average price lines, liquidity lines, grid and net lines.
WHY use just 5 PIPs as your stop-loss? Two huge reasons. First, the conservative reason. Simply put, if you’re wrong three trades in a row, your losses will amount to about fifteen PIPs. One successful Market Maker Course trade can be well over twenty PIPs, but, let’s keep it at twenty for this example. Do the arithmetic, one success completely cleans up three losses and even after adding in all the commissions, leaves you about even. To me this is really smart risk management.
Second, the aggressive reason. I’m assuming you’re a veteran, seasoned Market Maker Course trader, able to see and act on, mostly, high probability trades when they present themselves. By practicing conservative five PIP stop-loss trading and adding in an overall winning trade percentage of 70%, I can see weeks where you will be up ten, twenty or more PIPs over your weekly PIP capture goal.
If you choose, you can decide to go after a big winning trade without endangering your weekly PIP goal count. An example: your weekly PIP count is twenty above your goal; you see a setup/entry opportunity with an 80 PIP target; allow yourself, on this trade only, a wider 15 PIP stop-loss; this allows you the luxury of a wider negative drawdown on the way to a possible 80 PIP win. If you’re right, that’s some nice icing on the cake for the week; if you’re wrong, you’ve still met your week’s PIP goal.
Simply put, the five PIP stop-loss allows you to be a flexible trader, if you choose—in my case, mostly conservative, sometimes aggressive.
“If someone offers you an amazing opportunity and you’re not sure you can do it, say yes – then learn how to do it later.” -Richard Branson
As many of you know, there are some groundbreaking changes taking place at the institute this month. Most noteworthy of all is that the institute will now be using Smart Money Profile (SMP) as the school’s primary platform for instruction.
Before I share my list of concepts that Wealth Smart students need to know about the SMP platform, I would like to take a moment to celebrate Wade and Shane Guth for their amazing work developing and fine tuning the revolutionary SMP software. Additionally, due to Shane’s skillful and dedicated teachings, every SMP trader I know absolutely loves the platform. Kudos gentlemen!
I have been an SMP student for three months. With that in mind, here are the things you’ll need to know as a new student making the jump into the SMP program.
When a person first opens the SMP software to trade it for the first time, it may be a little intimidating. The multi-colored candles, lines, dots, boxes and the ever fluctuating rate indicator can easily create a sensory overload for newcomers.
Although the task at hand may appear difficult, once you understand the Market Makers business model, you will understand the genius and simplicity of the SMP software. By helping you discern what the Market Makers are doing, the SMP platform allows you to make predictive and logical assumptions about potential trading opportunities. As you learn to recognize the best trading opportunities, your win rate can soar into the 70 and 80 percent range.
From time to time, cross-traders at the institute (those that trade SMP and WealthSmart) explain that one of the greatest advantages of the SMP software is that the exit points for SMP trades are clear. The SMP platform is a map. As part of that map, the software clearly shows you points where the market may turn or possibly take a large breath. Once price approaches one of these points, it is easy to see your exit and book your profit.
Additionally, as you gain experience with the software, you will learn to finesse your entries so that you have less and less risk in your trades. Of course every trade is unique, so there is no rule that says, for example, “Keep every stop loss set at 6 pips.” However, within a relatively short amount of time, you will likely be able to keep your risk at a minimum as you enter into high probability trades. The ability to combine high probability entries with clear profit targets and low risk exits is a magical combination that can lead to long term trading success.
When you first get involved in the SMP program, you will find there is quite a bit of subjectivity to everything happening in the SMP arena. Some students may see the market preparing to go long, and others see it preparing to head in the opposite direction. No matter what you see on a particular day we encourage you to share it!
There are no guarantees in trading, but if we are able to gather our information together, we all benefit from the opportunity to make good, well-informed trading decisions.
For anyone who may be worried about making the transition from WealthSmart to SMP, fear not! You have already furnished great skills as a Wealth Smart student. Although the change may be uncomfortable at first, you will be surprised at how well you will adapt and become proficient with this truly phenomenal software.
Be sure about the direction:
While this seems obvious, it can be extremely easy to fall prey to a false trend. Smart Money counts on the retail trader being easily swayed one way or the other, which is why it is so important to identify what belief is being created in the market. Price broke out and started running? Awesome, now figure out whether it’s stop taking or the real thing. If you are wondering if it is the real move or stop taking, chances are it is the latter. Not being sure about the true direction is the reason many a trader has clicked into a trade only to have it slowly (and painfully) sail against them for a whole session before getting snapped out.
The perfect entry into a trade comes along every so often when we as traders are actively scanning the charts. Actually catching it at that perfect spot is an even rarer occurrence. Like a bald man in a hair salon, you are going to feel out of place. By their very nature the best entries will be completely counter intuitive in that they look and feel as if price is going the complete opposite direction. Luckily for us though, getting in at the perfect entry is similar to becoming ambidextrous; with some practice it can be done and become more natural. The best entries without fail include one (or both) of two things: 1)Taking out stops; 2)Bouncing off an average price level. If you can coordinate these two things into your entry you are going to minimize your risk and maximize your profit 99% of the time.
Your Trading Plan:
When considering a trade it is of utmost importance to have a solid trading plan. A trading plan will keep your profit taking consistent, your exits realistic, and the trade overall more bearable to ride as it ranges back and forth. A good trading plan consists of : 1) Entry 2) Profit Target 3) Exit for risk 4) Any variables to keep in mind (upcoming news, early exits due to accumulation, etc.). If you form your trading plan and do not like how far you actually need to put your stop to give it decent room, chances are there is a better entry coming. If there are a few places you think price might run to for profit, you should usually place your limit at the closest one. Nothing is quite worse than overestimating your trade and seeing a decent profit turn into a negative.
Managing your trade:
Okay so you entered into your trade and your eyes are glued to your screen. Time has stopped and your coffee is getting cold. At this point you are not sure if you are blinking involuntarily anymore. Why am I holding my breath? From here on out it is important to reaffirm your Trading Plan and to be realistic with yourself on how this is going to play out. However much we wish it would, it is probably not going to snap in 1 tick 50 pips in our direction (if only). When managing your trade be confident in your judgement and allow yourself to walk away from it. When checking on it, merely see if it has formed a new accumulation zone, or new information has shown itself (unforeseen manipulation). If neither of these things have happened then keep calm and let the trade play out. Time has no bearing whatsoever on whether or not a trade is going to play out in your favor.
Remember this rule about trading- When other traders are getting greedy, you need to be scared. When other traders are getting scared you need to be greedy.
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