How to Instantly Multiply Your Profits
If you approach any profitable trader and ask them what sparked their interest in the field, you will not get a single response saying, “I heard there was a lot of losing to be had so I had to get in”.
But in reality, as a beginner you are much more likely to encounter frequent losses than frequent profits. Dealing with these losses is routine, and a vital component of the professional traders life. With a lot of practice you can reduce the frequency and magnitude of losing, but never completely eliminate it.
In today’s post I would like to share four fuses which you can implement to immediately turn around your trading results and improve your risk management:
1 – The Daily Fuse (2%)
You cannot lose more than 2% of your trading account size in a single day. The trading fuse works similar to the fuses in your home, if the circuit is overloaded and the fuse blows the electricity goes out. If your trading fuse blows, your trading should also cease. If you are a day trader, you have probably heard the 2% rule in a different context – you can only lose 2% in any single trade. That rule is also correct. This means you only have one chance per day, or you can decrease your maximum trade loss to 1% and have two opportunities. This rule will have the added benefit of forcing you to be more selective of which trades you take, manage your risk more actively and proceed with caution.
2 – The Weekly Fuse (5%)
The weekly fuse is set at 5%. If you decide to risk 2% per trade and you lose two consecutive trades on Monday at 9:32AM, this means your next trade can only be 1%. If you lose the next trade as well, you just earned yourself a week off the markets. Implementing this rule would greatly reduce your long term survival probability. If you run into a trading rut, and you certainly will, and blow a fuse in 5 consecutive weeks – you are only down 25%! This may sound like a lot, but some people lose 25% in a single day! Those people don’t have a fuse system, so a short circuit in their strategy will cause a fire in their account. If you don’t manage to make money you do not have a strategy for risk management.
3 – The Monthly Fuse (10%)
The monthly fuse is set at 10%, which is a significant loss of your capital. If this fuse is blowing every month, it is probably time to apply less load on the circuit, which is the equivalent of taking less risk per trade and reducing your position size. You cannot plug all your home electronics into a power bar from the dollar store and expect a result more positive than a disastrous house fire. From my vast trading experience, and familiarity with market cycles – I can tell you that this fuse is most likely to blow in the month of October. Just look at this seasonality chart. Now that you know this, you should probably insert a 6 or 8% fuse during October for enhanced security.
4 – The Fuse is Blowing too Often Fuse (40%)
This is an unfortunate scenario, but occurs when you have lost 40% of the trading capital you started with. At this point, it is best to stop live trading, go back to the drawing board and come up with a better strategy, test it in a demo environment, then roll it out live when you are ready. There are two roads you will be able to walk down at this point of your trading career. The first will be holy crud I just lost 40% of my money I can’t believe it road, this road is usually traveled by traders that give up and exit the industry. The other road is where a real trader will say, at least I have 60% left so I can revise my strategy and make it all back! The difference in attitude is the separation between a successful and failing trader – but at this point they both have the same amount of money at the end of the experience. You chose your own road, but we can help you walk it.
Implementing these fuses will immediately tilt the odds in your favor and will give you the advantage of longevity. If you want to be around for a long time, you have to give yourself enough time to be around for. Professional traders are obsessed with reducing risk and fine tuning their risk management strategies.
If you would like to learn more about risk management techniques for long term survival, and how to manage your downside for maximum success, signup for the Trading Foundations Course and get started with your learning today.
Good luck and good trading.
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