For example, let’s take a look at Black Jack. If you start with $10,000 gambling capital, placing bets of $100 per hand and play 100 hands per day, how long will you last? In the game of Black Jack, with Las Vegas Strip rules, a casino has a built-in advantage of 1.5% over the player in the long run. That means that on average, a player will lose $1.5 per any $100 he bets with. After 100 hands, on average he’ll be down $150. Starting with a capital of $10,000 a player would last about 67 gambling days. That is very similar to the previously described trading scenario. In such case I would choose gambling because at least I would be losing my money in a more pleasant environment.
I chose Black Jack for our example because it is the only casino game in which it is possible for a skilled player to increase his odds to such extent as to be able to beat the House in the long run. A skilled counter can obtain advantage of up to 1.5% per hand over the House in the long run. That means that such a player playing 100 hands per day and average hand being $100 could double his gambling capital of $10,000 in less than 50 days. Similar odds apply to trading forex, with more potential for profit and less chances for being kicked out of a casino. In order to make it work for you, we’ll need to get the odds on your side. Now lets look at how we can extract as much profits from our trades as possible.
Understanding Trailing Stops
Once you are in the trade and the price has started moving in your direction, you need to extract as much profit as possible. Not being able to do so will make you a losing trader in the long run. How can a trader lose if he only takes small profits at a time? Profit is profit, isn’t it? Not exactly… Profit of $550 is not the same as a profit of $850. If such profits are followed by three losses of $200 each, profit of $550 will become $50 loss, while profit of $850 will become $250 win. Do you get my point?
Profits are always followed by losses and if the profits are small they will not make up for the losses that will eventually and surely follow. However, becoming too greedy can turn a small profit into a loss. This will make you lose money in the long run. The best solution to resolving these conflicts is to use trailing stops.
As the name says, trailing stop follows the stock price that is moving in your direction. For example, let’s say that we have bought (long) 2 lot EURUSD at 1.3240. We will automatically put our stop loss at 30 pips below the support line or if that is over our 4% limit we will put our stop loss at 1.3210. The price starts to move upwards and reaches 1.3280. We will now move our stop loss at $1.3250. For every one pips move in our direction we will move our stop loss 1 pips up (or down if we were in a shortsell trade).
However if we were trading two contracts (lots) and the price has in our example hit 1.3280 (40 pips profit for EURUSD) we would close one contract to protect our profit and for the remaining contract we would use trailing stop.
Good Trading
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Trading in Partnership - Joe Ross
If you haven’t decided on the contingency measures in advance you’ll find yourself arguing and disagreeing in the middle of a trade going against you when timely action is of the essence. It can be quite disheartening and dangerous.
If you are not absolutely sure about your partner, and you don’t agree with the way he trades, you are better off trading on your own.
Take for example an instance where the order placed was ambiguous and the broker executed it twice. The traders accepted the mistake and then the market moved against them. The partner with the greater margins but less experience was in charge of execution. He placed the order before the market opened to roll the position out. The market moved against him, he covered the position at three times the premium received and then the market corrected. He was unable to get the other side because he couldn’t watch intraday.
Trading is a business! You must be totally prepared in terms of having a business plan, knowing how to place orders, and being on top of them from beginning to end. Even then things can go wrong, but being unprepared can lead to disaster. The smallest details must be thought of and prepared in advance, but mistakes and oversights still happen.
I came across an interesting concept. The path to enlightenment involves conquering five human weaknesses: greed, fear, ignorance, pride and jealousy. We should be all familiar with the first two, which cause much grief to traders, but the last three can be a big problems, too, so it’s worth pondering on them. Human weaknesses always show up to undermine one’s trading.
Greed makes people stay in a trade too long, or trade too big a size. Fear makes one get out of winning trades too early. Ignorance makes people commit innumerable mistakes. Pride doesn’t allow one to admit one is wrong and often, small losses are allowed to turn into huge losses because one doesn’t want to accept one is wrong. Jealousy can make one trade in a subjective manner.
A detached attitude is a great asset in trading. Trading is war and it is essential that you execute a pre-planned line of action flawlessly and unemotionally. You must be flexible and let things (that are now second nature) take their course. Be like an outside passive observer.
