Whenever people ask me about my trading performance and I told them I am able to generate 10% and more a month, they will full of surprise and doubtful. “What strategy you use for your trading”, “How did you do that?”, “Are you trading using price action?”, “You using F.A and T.A?” … and the list goes on…
However, I seldom hear people talk about topic regarding trading management. You can do some googling and you can easily find all kind of strategy like Elliot Wave, Harmonic Pattern, Price Action, Swing Trading and the list goes on.
Unfortunately, not a single trading management is covered. This puzzled me as trading management play a big role in my trading. You might be wondering now, what is so big deal about trading management.
Trading management is the application of knowledge, skills, tools, and techniques to maximize your return with lowest risk and lowest cost in shortest period of time.
Have you ever wonder why we venture into trading? If what we focus is about profit then before we venture into trading we might as well look into other alternative that is less risky and can fulfill your profit expectation.
For example, become a Grab or Uber driver can potentially provide you 700 to 1,200SGD per week. Someone make an analysis and breakdown here which you can understand more on their revenue generated become a full time Grab or Uber driver.
So before you jump into trading with excitement and high hope, you might want to take a step back to understand what you are getting.
So am i just going to pour you cold water and just stop here?
Don’t worry! I won’t.
What I want to point out is that if you are a profit seeker, there are always alternative as this saying goes, “all roads lead to Rome”
However, if we put trading management into perspective. You will be surprise how it can lead you to understand why trading is so lucrative and outstanding compare with other options.
Trading management is not just about technique and strategy to manage your trades, it is much more than that.
So what exactly is trading management about?
To further elaborate trading management. Trading management comprises these 5 key processes,
It covered since beginning of your trading, not just apply to each trades.
with these six knowledge area,
where tools and techniques are apply to optimize your trading performance.
Where key elements of trading are covered and elaborate here, why we choose trading compare to other less risky option.
The key point here is trading provide you the shortest time for you to reap maximum profit with minimum risk and minimum cost. Yes! You never see wrongly. When come to trading everyone thought that it is a risky business, you are not entirely wrong. But can you tell me what kind of business can be totally free from risk? Even you are a grab or uber driver, you will need to face the possibilities that you will be encountering accidents, car breakdown or spoil and etc. There are always risk elements in all ventures.
The key thing here is profitable trading is not necessary achieve by taking high risk. It is a matter of right concept, knowledge and technique to be applied.
To begin your trading journey, you have to look for an appropriate broker which is regulated by respective country. For example, in Singapore we want to choose a broker that is regulated by MAS.
You need to know commission charges (for example in Forex context which we called spread, what is the spread charges for currencies pair that you want to trade) and restriction or addition fees that apply for your withdrawing or deposit of fund.
Is there minimum balance require to be maintained for your trading account?
What is minimum lots that brokers provide you to trade? Some of them started with 1000 units (1 micro lots) and over a time due to their business modal changes, they will increase to 10,000 units and more (10 micro lots). As a retail trader we have to pay attention to this aspect.
You also need to decide what kind of financial instruments you want to trade, for example is it Equities? Forex? Futures? Options? You have to be clear and able to address why is it you choose that specific instruments for your trading.
After all those hassle, I believe all of us are excited to jump into trading.
However, before we start trading, remember to familiarize your trading platform.
Every experience/veteran/successful traders will have a trading plan. As this saying goes, “if you fail to plan, you plan to fail”. Without a trading plan is like going to a war without any preparation.
At this stage, you have to know in depth of the financial instruments that you want to trade. Understand scope,( your objective and purpose) by taking this specific trade. You need to be clear and able to ask why is it this asset class, this specific pairing, when you are going to trade this (timeline), what is the planned duration for you in participating this trade (is it a day? a week? a month? or a year?). How are you going to do it? What kind of trading strategy you will be using? Why this trading strategy? Is it supported by back test?
How are you going to enter a trade with that specific trading strategy that you are choosing. Will you be using multiple entry or single blow entry?
After that, you have to perform cost and time analysis (money management), will this specific pair of currencies or asset class able to generate the highest return with minimal risk in shortest time. From there you are able to observe each different currencies pairing or asset class, their quality of expected return that you can achieve.
You also need to choose appropriate trade size that provide you optimize risk to reward ratio. For example, if your profit target and stop loss is equally 100 pips away from your designated entry for USD/SGD pair. You start with $10,000 capital on your trading account, by risking 1% of your capital you risk $100. With such scenario, your trade size should be 10,000 units for that trade opportunity. (You can use trading calculator here to help you)
Last but not least, what is your risk management. If your trade is not going as what you plan, how are you going to respond to that risk. Are you going to mitigate it with hedging, cut loss partially or are you going to accept it with cut loss? Before that are you able to avoid such risk? If able to identify, then prevent it to happen as prevention is always better than cure.
For example, You want to avoid to take EUR/USD and EUR/JPY at the same time where it has positive correlation. If you still decided to take such trades, you might want to split their weightage and your trade size to reduce your correlation risk.
Risk come with opportunity also, if your trade setup is correct, how are you going to manage your trades opportunity?
Are you going to wait your trade goes and hit your TP (take profit) level or are you going to take profit in multiple level or you may want to trailing your profit? If so, how are you going to do it.
Here we talk about how you are going to perform risk respond and risk planning. What is your risk appetite (How much percentage you will risk for a trade and a portfolio as a whole), risk tolerance (what is the max draw down you can accept) and risk threshold (For example, if hit 20% drawn down on your portfolio you will cut loss and stop trading for a day or a week)
As you can see planning play a great role in trading. Trading is not just taking high probability trade setup or a gamble game that let luck decide your outcome.
Two traders can use same trading strategy but their result might differ? Why? The answer lies on execution part.
At this stage, you have to follow your trading plan, most new traders fail and incur heavy loss due to failure to follow their trading plan or don’t have a trading plan to begin with.
You need to enter your trade with type of entry (is it single entry or multiple entry) according to your trading plan, suitable trading strategy that you decide to use, trade at correct time-frame (higher or lower, 15 minutes? 4 hours or a day?) that your trading strategy excel at and has an edge.
Last but not least, you have to place appropriate stop loss level on your trade.
As this famous trading quote goes, “Placing your stop loss where your initial trading idea is invalidated”
Monitoring and Controlling
At this stage, you have to observe how is your trade perform, how long is your trade duration. Is there any upcoming event or news that might impose additional risk on your trades. If so, how are you going to scale out your trade?
**Scale-out: Scaling out of the trade is a similar idea to scaling in, but in reverse. Rather than letting a trade hit a profit target and close out the entire position, we instead partially close the trade, and let the rest have the opportunity to move further into profitable territory. This secures a profit but also leaves the door open for further gains.
If without any upcoming news or events but your trade enter a territory of strong support/resistance, demand/supply zones, how are you going to manage your trade. Are you going to trail your profit? Take partial profit and etc.
If there is a momentum going in your favor, are you going to scale-in? If yes, how are you going to do it?
If your trade against the market , how are you going to manage your trade? Are you going to hedge your trade? Cut partial loss? Accept that you trade is wrong and cut loss fully? Hold trades? If hold trades how long, what is the duration? How your time stop is placed?
**time stop is a type of stop loss that using time as a variable instead of price
For example you will be holding a trade for maximum 10 days, by end of 10 days if price has a little movement or against your position, you will manually exit your trade.
If you are using re-balance strategy. When is the time to re-balance? Why there is a need to re-balance? Which asset class/trade to re-balance? How are you going to re-balance your portfolio?
A trade process is incomplete without a proper closing – trading journal. It is so important to review you trade and perform post trade analysis upon completion of trades, no matter that trade return you profit or loss.
If that trade result you a profit, try to understand the condition that enable you to ride a winning trade. Then, create a structure and process for it so that you can lather, rinse and repeat same strategy and maximize your return.
If that trade result you a loss, try to understand the condition that cause you to a losing trade. Then, enhance your trading plan, you will be able to avoid similar pitfalls. By avoiding making the same mistake twice, you are maximize your profit and minimize your risk!
I hope you enjoy this article and hopefully it able to widen your perspective to trading.
Leave a comment for me if you want me to write second part of this topic 🙂
Do you know that we have an inner circle for traders? Interested? Join us here,