“I realised that the best way to free myself from worries
about uncertain outcomes, is to make sure a negative outcome of a specific
trade will not affect me.” -
Christiaan van der Meer
I recently came across a popular social trading program that
enables signals providers to go through various career levels. This social
trading program appeals to me because it doesn’t honor those who achieve most
profits over the shortest period of the time without considering risk control
methods and survivability of trading strategies used over a long period. The
organizers of the social trading programs know what it takes to be a winning
trader – unlike most competition organizers who flaunt lucky gamblers as market
wizards.
There are 5 categories of traders in the program, namely:
street traders, advanced traders, professional traders, risk-adjusted traders
and institutional traders. Street trader is the lowest level and institutional
trader is the highest levels and that is the level that most followers want to
follow. You go through each level one after the other, and gradually.
Traders going through each level must not suffer more than
25% at each level.
1.
A street trader must spend 30 days at that level and
must make at least 0.5% profits before becoming an advanced trader.
2.
An advanced trader must spend 90 days and must make at
least 1.5% profits before becoming a professional trader.
3.
A professional trader must spend 180 days and must make
at least 3.0% profits before becoming a risk-adjusted trader.
4.
A risk-adjusted trader must spend 360 days and must
make at least 6.0% profits, before becoming an institutional trader, who must
spend at least 365 days to get to that level.
Institutional traders are what people want to follow.
Honestly, anyone who reaches the institutional trader level really has a proven
strategy and safe risk control techniques. One sensible trader follows one
institutional trader and he’s happy to have gained 2.1% in a recent month (not
20% or 200% per month that irrational people aspire to).
If trading contests and social trading programs were
structured like this, all temporarily lucky suicide traders and gamblers would
be prevented from reaching the top: the highest level. Can traders, brokerage
firms, trading education websites, and other financial institutions learn
anything from this?
A Baptism of Fire
When you buy or develop a new trading methodology, you’re in
high spirits, thinking that you’ll soon be soaked in money and you’ll be rich
enough to serve your landlord a quit notice. However, your newly-found
speculation methodology will sooner or later go through a baptism of fire.
There are merits and demerits of wide stops, tight stops,
wide targets and tight targets.
When a take profit level is tight, profits are taken quickly
and the hit rate increases. But it’s the disadvantage of missing on larger
movements for each trade, therefore making us to miss out on greater profits.
When a take profit level is wide, the hit rate is reduced
but few trades that hit the target levels would recover numerous losses. Wide
take profit levels are rarely hit in consolidating markets.
When a stop loss level is tight, we’re quickly taken out of
the markets in case adverse movements occur and we keep our losses small as
well. But it’s the disadvantage of too frequent stop-outs, plus too many small
and accumulated losses can become something big with time. We’re also
frequently, prematurely stopped out of trades that could end up being
profitable.
When a stop loss is wide, we give our open positions enough
leeway so that in some cases, we aren’t prematurely stopped out of positions
that could end up being winners. This has the potential of increasing our hit
rate, but there is a disadvantage of being stopped out eventually, which makes
the loss per stop loss trigger a considerable thing because of its width.
If you don’t use stop loss, then you’re a suicide trader and
a gambler. This means your risk is unlimited. You may look smart in most cases
and for a long time, provided that market are choppy and consolidating, but
rare adverse movements will soon occur and your account will go kaput.
If you don’t use take profit levels, then you need patience
and discipline to catch rare trending markets which would recover all your past
losses and move you ahead. This means your reward is potentially unlimited,
though you’re better off using take profit levels.
To sum it up, someone called “loyek590” on Elitetrader.com
wrote: “I've traded the chop and I've traded the trend. The chop is nice
because you make money every day. Until that one day that wipes out the whole
months profits. Now I trade the trend and lose money almost everyday, until I
catch that one rare trend and hopefully it wipes out all those small losses.
This is really a baptism of fire which all traders will
face. If your trading methodology can come out victoriously in spite of the advantages
and disadvantages mentioned above, then you’ve found a pearl of inestimable
value.
Conclusion: There are no perfect trading
methods or perfect risk control methods. We simply need to find optimal
parameters for our strategies and adapt to the ongoing market conditions. I’m
so grateful and happy now that I allow my stops to always protect my
capital. I know a trader who’s never had
a negative year in his career – this is possible for all us to attain.
This piece is ended by the quote below:
“Accept drawdowns as part of this business and learn how
to deal with them. When you think about increasing your position-size, be aware
that more profits usually mean more risk. Get to know your drawdowns and
backtest to get an idea of what to expect so that you’re not surprised when it
happens.” - Marco Mayer
Source: www.tallinex.com
What Super Traders Don’t Want You To Know: Super Traders
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