I was talking a with a trader the other day who is struggling and he mentioned a tendency that he has.  I think all of us have done this at some time or another, but if we don’t grow out of it, it WILL end our career.

The problem could be described as Risk Spikes.  They win slowly and conservatively, trading by their rules and risking a small amount of capital, but then all of sudden they get sick of the slow capital growth.  Instead of realizing that by waiting another day, a month or a couple months their positions will continue to grow in size (proportionate to their account), they charge into a trade taking excessive risk and gambling on making a big profit to speed up the process.

Let’s face it, this may work and give us a nice bump in the account.  We may even be able to do it several times in a row and we promise ourselves this will be the last time.  But the psychology which starts that need to speed up the process does not just go away.  It needs to stop completely and never be done.

If Joe-Trader is day trading 200 shares, and collecting small profits, those profits will grow and over time we will be able to trade more and more shares (and more more and more money).  But if he trades 200 shares, and then all of a sudden grabs 1000 shares on a particular trade (assuming same price area, volume, volatility and all that) it has the potential to wipe out a lot of little profits if the trade goes sour.

There is strong desire in certain people to say “I can afford to take the risk.”  In life we do take risks, and often they pay off, but if you want to trade as a career for the long haul, if are we saying this to our self it is obvious we are about to deviate from our trading plan.  Our trading plan which was created when we weren’t under stress or pressures….created when our mind was clear and logical.

Every trade has risk attached to it.  We know this.  We have a standard level of risk we take on each trade that will not do much harm to overall capital.  If we start to say “I can afford the risk” we are likely planning to do something that is well beyond what we normally risk.  We are groping for reasons to make the trade and this is not a good sign.

In times like these take your standard position.  Then, tell yourself that if it moves in your favor you will add to your position (in alignment with your risk tolerance) when it passes through another critical level.

Don’t give respect to a move that hasn’t happened yet.  Let it impress you with what it actually does, and when your original position is onside you can add to it in a conservative way.  Risk spikes will only bring frustration, regret, stress and an empty account over the long run.

~Cory Mitchell, CMT

Follow the Trend But Don’t Get Attached to It.

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Proper position sizing is something many traders never even think of, let alone learn to master.  Here is a very quick guide to position sizing.  I am publishing a full article on this topic and will post the information on where it can be attained when it is available.  So in the meantime….

To determine our positions size we must first set a stop level.  This should be a logical place which will be out of range of normal market movements, and if hit will be at a level where we know we are wrong about the direction of the market.  Setting stop losses will be covered in future tutorial posts.  Remember a trader should not risk more than 1-3% on a trade.  Less is better.  Larger accounts are likely to risk much less than 1% of capital on many trades.

Let’s say we choose a stop which is 50 pips below our entry buy price.  If our account is $5000, we can have a maximum loss of $100 if we risk 2% of our capital on the trade.  Therefore, we now know that we can take a maximum of 2 mini lots on this trade.  If our stop is hit, we will lose 50 pips X 2mini-lots, or $100 on a mini account (each pip is worth $1 approximately in a mini account).

Whether we risk a percentage of our account on each trade, or choose a fixed dollar amount we are willing to risk on a trade (for larger accounts) the method above should be employed to determine the proper position size based on the stop level which is ideal for the trade.  This means each trade may be for different qualities, depending on the dynamics of the trade set up.

~Cory Mitchell, CMT
Market Strategist

Remember, failed breakouts are tradeable too!
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The USD/JPY pair broke above the 99.50 resistance level a few days ago, and has since retreated. The retreat took the pair back to a low 99.30 – right near the top of the old resistance area. The fact the market held this level, combined with a strong day today which is pushing the price back above 100.00, provides a potential swing trade to the upside.

If the old resistance level continues to hold we have a potential trade.  Currently the pair is trading at 100.47.

We have two potential entries. The first entry is a daily close above 100.42. This is a more aggressive entry in that the market will have not yet proven it is going to resume the uptrend, but has simply given us strong indications that it will. That said, the risk in pips for this trade will be lower.

The other possible entry is a daily close above the recent swing high at 101.42. The higher entry price shows the market is continuing the uptrend (higher highs, higher lows), yet, our stop in pips will be increased due to the higher price paid.

Here are the setups for both trades:

1.     BUY on a close above 100.42 (this could be soon)

Stop at 99.25.  This is a risk of 117 pips (assuming an entry around 100.42).

Profit Targets at 104.80 and 109.00.  This is a reward of 438 pips and 858 pips approximately.  It is approximate because we do not yet know our exact entry price which will be based on an upcoming daily closing price.

OR

2.     BUY on a close above 101.42

Stop at 99.25.  This is a risk of 217 pips.

Profit Targets at 104.80 and 109.00.  This is a reward of 338 pips and 758 pips approximately.  It is approximate because we do not yet know our exact entry price which will be based on an upcoming daily closing price.

Downsides of the trade:  The upside of the trade is that we have seen a pull back and thus far a successful hold above the old resistance level (now a support level).  The downside is that that this pullback was relatively small compared to other pullbacks we have seen in this pair.  With the pair still showing some signs of being overbought (this is not a bad thing in and of itself, it is actually a sign of recent/current strength) the danger is that we could still see a pullback possibly back into the 98 area.

-On the flip side, strong trends generally always show oscillator type indicators nearer to overbought levels.  Also a small pull back can be a sign of strength as the market was not able to push prices much lower before moving back higher.

These comments are made not to confuse, but rather to help you gain an understanding of the thought process you should go through before you a choose to incorporate a certain strategy into your trading plan.  For information on building a trading plan please see my article in the March issue of Technical Analysis of Stock and Commodities magazine, or you can find an abbreviated version here on the site: http://vantagepointtrading.com/tips-and-tricks/trading-plans

The amount of pips multiplied by the number of lots should not exceed 3% of your total account balance (less is even better).   For example if you have a mini account, each pip movement is approximately $1 US.   If you have $10,000 in your account you can risk 3% of $10,000 which is $300.  That means you can take 2 mini lots for the first trade and risk $234 (derived from 2 X 117).  If you take 3 lots your risk would be $351 which is more than 3% of your account balance.  If you take the second entry you can only take 1 lot.  Bottom line control risk on every trade if you want to stay in this game for the long term.

~Cory Mitchell
Market Strategist

PLEASE READ THE RISK DISCLAIMER BEFORE TRADING: http://vantagepointtrading.com/legal-disclaimer
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Are you interested in getting into trading? Or if you are already trading and dissatisfied with your broker, check out mine at Forexyard. Switch to Forexyard, open a Standard account and receive up to a $1,000 bonus.

Open a SuperMini or Standard account now and receive a 100% cashback worth up to $300.
Open a Standard account and trade commodities, receive 10% cashback worth up to $1,000.

I am here to personally help you out if you open an account, and need help with strategies or figuring out the trading platform.

These are the 8 Rules of “Carney” from the book “Ugly Americans” by Ben Mezrich (published by Harper Perennial). They are pretty good so I thought I would reproduce them here. Check out the book, it isn’t too bad. Not as much trading material as I was hoping for but still an entertaining read.

1. Never get into something you can’t get out of by the closing bell. Every trade you make, you’re looking for an exit point. Always keep your eye on the exit point.

2. Don’t ever take anything at face value. Because face value is the biggest lie of the market. Nothing is ever priced at its true worth. The key is to figure out the real, intrinsic value-and get it for much, much less.

3. One minute you have your feet on the ground and you’re moving forward. The next minute, the ground is gone and you’re falling. The key is to never land. keep it in the air as long as you can.

4. You walk into a room with a grenade, and your best-case scenario is walking back out still holding the grenade. Your worst case-scenario is that the grenade explodes, blowing you into little bloody pieces. The moral of the story: don’t make bets with no upside.

5. Don’t overthink. If it looks like a duck and quacks like a duck-it’s a duck.

6. Fear is the greatest motivator. Motivation is what it takes to find profit.

7. The first place to look for a solution is within the problem itself.

8. The ends justify the means, but there’s only one end that really matters. Ending up on a beach with a bottle of champagne.

Posted by Cory Mitchell