Let’s keep it simple: money is made if you buy when the market is going up and sell when the market is going down. That’s why technical ana¬lysts hold to the motto "The trend is your friend.”
The price chart of a security may appear like a random distribution, but that’s not true. About 30% of the time, a security will be in a d... Read more
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Having a trading plan is like having a solid blueprint to build your home, or having a map when traveling to a new location. Even a professional trader won’t survive in the markets without a good trading plan.
And once you’ve defined your goals and created your trading plan, you need to make sure it really works. So far, everything might look great, but how can you be sure that the system works when you start trading it with real money? Evaluating a trading strategy is easier than you think. You just need to use the 10 Principles of Successful Trading Strategies. Below you’ll find numbers 6-10. Principle #6: Start Small – Grow Big Your trading system should allow you to start small and grow big. A good trading system allows you to start with one or two contracts, in¬creasing your position as your trading account grows. Regardless of the strategy or method you use to trade, there will be occa¬sions when you have losses, or even a string of losses. When these occur, it’s important to have faith in your trading plan; don’t try to double up your trades to “catch up” on your wins. The main point I want to make here is that every trading system you find will go through times when it has more losses than wins. This is to be expected, and it’s where effective money management comes into play. Principle #7: Automate Your Exits Emotions and human errors are the most common mistakes that traders make. You have to avoid these mistakes by any means necessary, espe¬cially when the market starts to move fast. You might experience panic and indecision, but if you give in to those emotions, you’ll suffer a much greater loss than you had originally planned for. Your exit points should be easy to determine. The best solution for your exit points is the use of “bracket orders.” Most trading platforms offer bracket orders, which allow you to attach a profit target and a stop loss to your entry. This way, you can put your trade on autopilot, and the trading system will close your position at the specified levels. If you can’t make money with simple entry and exit points, you won’t be able to make money with more complex trading rules. Think about driv¬ing a car: if you can’t drive a Ford, you definitely won’t be able to drive a Ferrari. Principle #8: Have a High Percentage of Winning Trades Your trading strategy should produce more winners than 50%. There's no doubt that trading strategies with smaller winning percentages can be profitable, too, but the psychological pressure is enormous. Taking 7 losers out of 10 trades, and not doubting that system, takes a great deal of discipline, and many traders can't stand the pressure. After the sixth loser, they’ll start "improving" the strategy, or stop trading it completely. It’s very helpful for beginning or novice traders to gain confidence in their trading, and if your strategy gives you a high winning percentage, let’s say more than 65%, your confidence will definitely be on the rise. Principle #9: Test Your Strategy on at Least 200 Trades The more trades you use in your back-testing (without curve-fitting), the higher the probability that your trading strategy will succeed in the fu¬ture. The more trades you do, the smaller the margin of error, and the higher the probability of producing profits in the future. You need at least 40 trades for a valid performance report. Principle #10: Choose a Valid Back-Testing Period I recently saw the following ad: "Since 1994, I've taught thousands of traders worldwide a simple and reliable E-mini trading methodology." The E-mini S&P was introduced in September of 1997, and the E-mini NASDAQ was introduced in June of 1999; therefore, NONE of these contracts existed before 1997. Regardless, though, we only have to worry about the age of the contracts for back-testing purposes. And, if you develop an E-mini S&P trading strategy, then you should only back-test it for the past 3-4 years anyway.
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