Recently with our team, we stumbled upon this interesting picture in a few social media publications. After some contemplation, we’ve decided to look closely at what is shown and summed up on the picture and to take a look at each statement separately. However, the information shown is true; we believe that it does not give enough information, especially to those of you who are making their first steps in the trading world. In this article, we’ll give you some basic guidance on the things you can control, and most importantly, we’ll answer the question, “How to control them?”. Moreover, we’ll also take a look at the things in the financial world which you can not control, and again we’ll answer the most important question — Why?.
Lets’ start with the things you can control as a trader:
Risk Per Trade
It is extremely important for you to manage your capital correctly — it doesn’t matter if you speculate or invest. Due to this reason, your strongest weapon is risk management. No one can give a correct answer to the question “How much should I risk per trade?” since this is strictly individual and depends on your capital and on the potential of the trade, which your analysis show. Another important aspect is the psychological attitude — you need to be prepared to lose the capital invested in this trade. More often than not, we witness situations, in which people lose control due to fear or they start panicking when the market turns against them, and usually, they close the trade, without giving a chance for their trading plan to develop — even if it means that they will lose some money. At the same time, many people rely on the hope that their trade will be successful and actually risk a lot more than they would like to or can afford to lose.
According to us, a good starting point would be to risk 1% of your total capital per trade. With time you’ll have enough data to see what percentage of your trading plans work out and how correct you are when entering the market. This information will help you analyze your skill, find possible mistakes you are doing, and clear them, and after that, when you are certain in yourself, you can take a bigger risk. However, we’d recommend you still to stick between 1% and 5% risk per trade even when you get more experienced, since no matter how good your trading strategy is — the market is unpredictable.
An important aspect of risk management is setting Stop Loss. This allows you to limit the potential losses from a trade, which gives you the comfort of standing back and observing the development without additional stress. The stop loss is the best indicator of how much risk you are going to take. If you wish to use a broader stop loss on your trade, we’d advise you to adjust the position size to respect the 1% risk per trade rule.
The size of the position you are opening on the market is connected with your risk. Although there might be situations in which the risk you are taking exceeds the position size. For example, you can open a trade on a currency pair with 0.1 lots, while also setting your Stop Loss at a 2% capital loss. In this situation, 0.1 lost may require a smaller percentage of your capital to open, but you can still risk up to 2% or more on the same trade. To make things simple, we think it is better to adjust your risk based on the position size and vice versa — your position size and the risk you want to take. The best way to find out how big your position size should be based on the risk you’ve decided to take is by this simple formula:
Risk in pips x Value of a pip x Position size = Risk per trade
For example, if your Stop Loss is placed 10 pips away from your entry point and you are trading the EUR/USD currency pair at a price 1.2050, if we accept that your capital is equal to 10,000$ from which you are willing to risk 1% per trade or 100$, this means that the value of a pip with leverage of 1:100 is 1$. Lets’ put the numbers in the formula:
10 x 1 x Position size = 100
— > Positions size = 100 / 10 = 10 mini lots (1 Lot)
Of course, keep in mind that with every currency pair the value of a pip is different due to the difference in the exchange course, so it is best to use a pip value calculator before making the calculations about your position size.
Now that risk management and position sizing are clear, let’s see the third aspect when opening a trade, which is in our control — the entry. Every trader who wants to be successful needs to have a certain structure or signal to open a trade/take position. Similar to how you have a trading plan and expectations on where the price of an asset can go, you should be prepared with possible entry points based on your plan and, most importantly — what should happen with the price for you to get a signal to open a trade. Investors and traders often use technical analysis and other instruments to define good structures or signals to open a trade on a certain market. Of course, it is possible to have a few signals for entry, but I recommend focusing on just one until you’ve proven to yourself that you can be successful over time. It will rarely happen to open a trade at the very bottom or top of a certain market, so we need to be prepared with an alternative approach to open a trade, which allows us to risk less and, at the same time, have the potential to win more.
As the entry in trade is extremely important, so is the exit. It is an aspect you have to master to improve your long term results. Of course, you can always use Take Profit levels, but in the long run, this could lead to both — missed profits and losing trades. Due to this reason we advice you to have a developed structure for the price, which gives you a hint that it might be time for an exit. The exit is a crucial part of managing your trade, so it should not be neglected. You’ll see yourself in many situations where you’ve seen your exit signal, and you’ll have to close your trade even on a loss. Although this is not the best feeling in the world in many situations closing that trade will save you a lot more money in the long run than you expect. By not using a Take Profit and having an exit signal in place, you’ll also find yourself in many situations where you’ll have the opportunity to enjoy a nice movement in your direction and take the maximum you can from that market before the price turns against you. You can always use your Entry signal as an Exit signal, but this depends on the structure of the signal itself. Bottom line — do not enter a trade unless you are prepared with a signal to close it.
Trade frequency really depends on your personal way of trading and your trading strategy. If you prefer more action and your method of trading is scalping, then your trade frequency would be a lot higher than normal if you prefer a more long-term approach than the frequency would be lower. Especially for beginners, we suggest that you stick to a more long term approach as it gives you a better opportunity to analyze the market and the trade you have in the process. Overall the trade frequency is most important from a psychological point of view. Opening too many trades simultaneously increases the chances of losing, but it also affects your judgment if things do not go as you want them to. After a few losing trades in a row, which ultimately happens to every trader, you should do exactly the opposite instead of increasing the trade frequency. It’s hard to maintain a certain trade frequency, but it is important to analyze the periods we as traders are in, whether it is in-losing or winning one based on that to decrease or increase the trade frequency. Overall we can say that it is important to follow our trade frequency, so we don’t get ourselves in a situation where we can lose more than we’d like to.
After we’ve covered the controllable things in your trading and we’ve made some points on each of them, it is time to check what is out of our control and why.
Future Market Moves
If there was a way to control the future market moves, then each and every one of us would be a billionaire, and most likely — the markets would not exist. There is no way to control how a market moves since the movement itself is composed of many factors that are out of our reach, like frequency of trades by other people, interbank deals, deals between companies, the monetary policies of the countries, etc. This means that if we control the future market moves, it means that we control the whole world and everything happening in it from an economic perspective. What we can do is make decisions based on statistical data gathered by us. For example, if the US is doing well from an economic perspective, their export is uninterrupted and flourishing, the companies operating on the US market are in their prime time, and we can safely expect the USD price to rise against other currencies. Since the Forex market currencies are bundled up in currency pairs, it is good to make the same analysis for the second currency in the pair and the economy of the country before taking any crucial steps. This was a pretty basic example showing that if we are familiar with the situation around a certain asset we’ve chosen to trade or invest in, we can make more accurate assumptions about the future of the asset’s price. That is why you need to be informed of the economic climate, especially those economic factors that could have a strong impact on the chosen asset.
News can be a pretty unpredictable factor in the whole equation. Of course, there are a lot of news that are expected. Still, most often than not they are based on previous news that were hinting to that final major news and in most cases those type of news are already priced in on the market, so unless there is a drastic change when the news is published we can not expect to win a lot from it or win anything at all. We often see the publishing of unexpected news, especially in the corporate world, which can drastically affect a certain asset’s price. Very often, due to a large number of trading robots on the markets, it’s hard to react fast enough to those news. Due to this reason, there are two important things we need to do and know:
- We should follow the news in larger media outlets on a daily basis and react accordingly to their influence on our trading positions. At the same time, we should be well informed about incoming news regarding economic parameters and again act accordingly even before the economic readings are published. We prefer to lower our exposure by closing partially our positions before a major economic reading is published.
- The second thing is more hypothetical. If you read enough news and make it a habit to do so daily and you are well informed on the economic climate in the US, Europe, and Asia and at the same time you take into account the way people think since there are a lot of common patterns in general thinking, you can develop a hypothesis about future news and developments, only based on connecting the dots so to say or in this case connecting the news over time. Of course, this approach should not be the main approach when making trading and investing decisions, but very often, you can find patterns that appeared in the past and can be extremely helpful for future prediction of events.
According to the publication, this is something that you can not control, but in our opinion it is just partially the case. Of course, you can not guarantee the movement of the price, so you can not control your trade and get only the desired results. However, it is important to note that the correct entry and exit on the market, combined with good risk management and control over the position sizing, are major factors that could give you partial control over the trade results. Meaning that if you have a good entry and exit strategy, more often than not you also control the trade results and in the long term you’ll notice that when you lose — you lose a lot less and when you win — you take the maximum the market has to offer or close to it, and this is the secret behind a successful trading strategy.
Bottom line we can sum up everything we said so far in the following bullets points. Each of those bullet points are crucial for you to become a good investor or trader.
- Good risk management
- Good management of your position
- Good skills in dealing with expected and unexpected news
We hope that this article was useful to you and that we’ve managed to give you some valuable information regarding this topic. If you have any additional questions — we are here for you.
We wish you only profitable trading!