Continued fromPart 1
Risk small WIN BIG? Possible?
It is the final element that determines not if, but when a poker player is left empty handed with all his chips taken by the smarter players at the table and similarly, a trader looking at an empty trading account. This is called risk management.
An amateur or an undisciplined poker player bets large on low probability cards, and as a result usually ends up out of the game early. He "bluffs" his opponents into thinking he holds strong and to squeeze others out of the pot. If they call, he then needs to fire again and even larger until he is bust.
Scalping is where a trader has a similar risk management style to the amateur poker player. With a pip being a single movement up or down in price, he looks for a handful of pips, say 5 to 30 pips, in a matter of seconds or at best several minutes. He over-hedges his risk per pip, looking for large gains in a short period of time. The entry of the trade is probably based on some chart analysis, but it is the volatility of the market that makes this not only a highly risky way of trading, but also a highly emotional way of trading. A losing trade would result in a serious chunk of the scalper's account lost to the market. A scalper may not even use a stop, a predetermined price where a trader is automatically taken out of a losing trade, and if the market goes completely against him then he really is in trouble.
As a consequence, emotions such as anger and greed would kick in causing the trader to scalp again but this time at an even higher risk, hoping to claw back some of the money already lost. It is this style of trading that not only empties out most traders' accounts but is also emotionally draining on the scalper. It is a little-understood fact that it is actually human emotions that move the market, but in return the market shows no sympathy for emotional traders.
However, a professional poker player bets SMALL only on high probability setups over a LARGE number of hands and compounds - continues to add small bets to the pot - as the game develops. This ensures he stays in the game for longer, giving him a much better chance of taking the jackpot. It's basic bankroll management. Do not put all your savings on one
£50 000 tournament. Even a winning player will get unlucky once. You need to spread that money over say 500 tournaments at £100 and then the skillful player will win out in the end.
In trend trading, a private Smart Money has a similar strategy, risking a tiny percentage (typically 0.5% to 2%) of his account per trade and strategically compounds as the trend develops. It is through not over-trading and by catching a few good trends a year that the Smart Money private trend trader makes his money. It takes time to reap the rewards but gains are exponential: 2% on £100 000 is far bigger than 2% on £10 000. The Smart Money private trend trader understands this and is in it for the long-term. He knows that any single moment in the market is random, but that over time the market repeats itself. He has learnt to alternate between being patient when the markets are quiet, to being mechanical and ruthless when the markets are moving, or in trading terms, trending.
Having appropriate risk management ensures losses are minimal but gains are huge through having several positions running side-by-side, in other words compounding, on these large trend moves that repeat themselves. The emotional element is totally removed as time spent in front of the screen is at a minimum and risk management is also flawless, with stops in play and a clear understanding of how much is at risk. Trades are checked maybe twice a day, once at the start of the day and once again in the evening. The rest of the day is free to be spent as the Smart Money private trader chooses.
Why choose trend trading as a lifestyle?
Trading has to be kept in perspective, and so does money. Money should not govern us, but instead be a tool for us to be able to achieve the desires of our mind. The more we have, the better the lifestyle.
It is through long-term trend trading that a private trader is able to reap both substantial and life-changing monetary gains and also a stress-free lifestyle where he has complete control over his time. This does not happen overnight but after an initial period of education and then through consistent Smart Money trading, the rewards are well worth the wait.
Chasing this success through scalping and gambling guarantees a hair-raising, negatively-charged emotional roller-coaster of a ride, which will ultimately lead to an empty trading account and a totally burnt out trader. Many who choose this route end up believing that trading is gambling and that a living can not be made from it unless you have some secret formula or have links to the inside where you are one step ahead of the market or are some kind of financial guru.
Those of us at The Traders' Cosmos know the truth: that you need a mentor who is already part of the 5% Smart Money to educate you and guide you on your journey from a newbie to a competent full time trader, extracting consistent profits from the money markets.