Know why you are taking that position

‘Knowing you are taking a low-probability trade vs a high-probability trade is the most important thing for all traders,’ says , Coenraad Bezuidenhout, a Bahrain-based trader who traded in his spare time for 20 years until recently when he started up his own business.

‘As is knowing why you are getting into a position or why you are exiting a position,’ he says.

‘If I go long in a short market it’s a low-probability trade so more than likely it is going to end up in a losing trade. If you have a high-probability trade that failed, the market likely wants to change direction. If you have a high-probability trade that you don’t make a lot of points on it means the market is slowing down or reversing.’

‘Sometimes these low-probability trades also bring in points. Lower probability trades are against the prevailing trend, so taking a trade to the opposite side becomes preferable and may end up being a high-probability trade.`

That is because the trends start to change from the lower timeframes to the higher timeframes. But you have to keep an eye on the higher ones especially as it might be a retracement on a higher-level timeframe (typically a 5 or 15 minute timeframe). ‘

Fruit salad anyone? As discussed in our blog on intraday vs eod trading Coenraad looks for what he calls apples and strawberries to help him choose which direction to go in. ‘When it’s strawberries, it means the timeframes are in alignment with a downward move, so you are looking for short positions which means taking the highest probability trade possible.’ ‘When it’s apples, it means the timeframes are aligned to the potential upside move and is good for long positions. In both cases when the lowest timeframe aligns with the upper ones it provides a high-probability trade setup,’ explains Coenraad.

The idea is that when you lose you don’t want to lose more than 1.5 or 2 points, maybe 3. When you are winning you’ve got to let the market run.’

Risky business?

Jawaad  - another Tradeguider associate with a long history in professional trading - seconds Coenraad’s approach. ‘That’s how you would usually close and open a position, in terms of probabilities, setups, entries and exits,’ he says.

It’s about risk management: ‘Every trader understands how much money they are willing to allocate to that trade,’ says Jawaad. ‘For example it might be half a percent on a portfolio, and maybe [the trader] will have rules such as they only ever risk half a percent per position or max of 6% of their portfolio on any one trade.’

‘If it doesn’t work out it doesn’t work out – you lost half a percent.’

Jawaad says that when he first started he would question himself when he lost money. ‘Your risk management improves over time,’ he says. ’You become agnostic to the way that things play out – if it doesn’t work out you look at your plan and see where there is something that could be changed.’

Believe, practice and follow the rules

Aram Kiani - pictured above -  has been trading on his own since 2016 and now heads up Tradeguider’s Live Trading Room. ‘There is no secret to trade management’ he says. ‘If you believe in your system and follow the rules you can minimise your risk tremendously. I have a trading plan I follow strictly. I risk up to 1.5% on each trade, though often less than that.’

Aram says that sometimes people in the live trading room urge him to take a trade because it looks like the market is going against him.

‘But I stick to the rules and where the principles appear that’s where I’m going to trade because 90% of the time it’s correct.’

‘I’m not saying that all my trades are successful,’ he continues. ‘With any business you have profits and losses. As long as the profits are more than the losses it’s ok. If I lose 1.5% it doesn’t really matter – overall it’s profitable.`

It’s about practice he says: ‘It’s just like driving – you don’t go out and drive without first learning and practicing how to do it. That goes with anything in your life – you always have to practice. ‘

And part of that is practicing the art and skill of patience and not doing anything.

‘Sometimes it’s painful to sit in front of the computer and not get a trade on for 2 or 3 hours,’ concedes Aram, ‘but even if I stay for 3 or 4 hours and take just a couple of trades out it is better than doing 10 trades and having 8 losses and 2 wins,’ he says.

The only time Aram doesn’t stick to this is when he takes a trade in the live trading room to show the attendees why it doesn’t work.
‘Sometimes I can feel that everyone in the room wants to me to take a trade so I might do it to show people what happens when you don’t follow the rules – it’s 50/50 that it will work out.’

So even then it’s a conscious choice to deviate from the plan. You never want to be making involuntary or emotional moves.

Summary

Trade management is about following a process. It’s about doing the maths. It’s about controlling your impulses and sticking to your system. That system also needs to include logging each trade is so you always know your reasoning and can learn from your past performance. This helps with consistent trade execution which is the only route to profits.