I have $1,000 as my capital. How do you set your volume?
First, i will divided my capital into 33 trades i can take. Which means i will only Risk 3% out of my capital, and i will only take 5 trades at one time. Which mean i will never risk more than 15% of my trading portfolio.
In that one trade, i again will divided it into 50 pips. For this example, the position size, volume of my trade would be $1,000 divided 33 equals $30.3, then divided it again to 50 pips equal to 0.6 volume.I would look for any trade that i can place my stop lost within 50 pips from the HH (Higher High) or HL (Higher Low) Just say that my risk/rewards is 1/3 (i’ll share more how i find my risk/rewards later). Now just say that my winning over losing is only 30% to 70%.
Out of 10 trades,
3 x 3 Rewards = 9
7 x 1 Risk = 7,
Minus the spread, I probably ended up draw even if my winning rates is only 30%. After every 33 trades,
i again divided my capital plus (gain/minus) with 33 trades. I analyst the 33 trades i took, ask myself why i gain or losing trade. I keep working on my chart analysis and avoiding trading half and hour from and after the major news release. I have survived 100 trades by now. I have sharpen my skill and now my winning rates is 50%. In this scenario, you would have already gain a trading edge, and now consistently profits from forex every month.
Many new trader having a wrong mindset when they start trading. Oh! I want to make $10,000, $50,000 in one month. [I][B]The right mindset would be, can my capital survived the learning process until i can develop a positive expectancy strategy which i’ll then consistently making money every month from forex.[/B][/I]
[B][U]The 4 Major Psychological Traps and How to Avoid Them[/U][/B]
There are 4 major psychological biases that all human beings have a natural tendency to display. When these biases interact with the world of trading, disastrous outcomes often occur. Being aware of the biases is a major step towards avoiding the traps that they create for you in your trading.
• [B]Outcome Bias[/B]: [I]Using hindsight to judge our decisions based on the outcome, rather than the strength of the decision given the information we had.[/I]
o If we make a decision to take a trade and it turns out to be a loss, we tend to think that it was a bad decision. If it turns out to be a profit, we tend to think it was a good decision. The reality is that the outcome of the decision is irrelevant, and thinking that it’s relevant is the outcome bias in action. The only relevant thing is the information you had before the outcome became known, and you can’t let later information bias your judgment regarding the strength of your decision.
o Thinking in this manner, a mistake becomes defined not as a loss, but as any instance in which you don’t follow the rules of correct trading process that you’ve learned. If you break the rules and it results in a good outcome, that’s nothing to be proud of because you’re picking up bad habits that will degrade your edge in the long run. If you see all the makings of a good trade and take it, it’s something to be proud of even if it ends up being a loss. And this applies to decisions regarding profit exits too.
• [B]Loss Aversion Bias[/B]: [I]The tendency to strongly prefer avoiding losses to acquiring gains.[/I]
o This bias tells us that we will feel much worse when we lose than we will feel good when we win. The intensity of the bad feeling associated with losing is much larger than the good feeling associated with winning. As such, when you fall into the trap this bias sets up, you’ll start trading not to lose versus trading to win. But you’re not in this to just protect your capital. Otherwise you could have just kept your money in the bank. You’re in this to make money, and therefore you cannot let this bias keep you trading scared.
o A related effect that comes forth from this bias is “The break-even effect”. Because people hate losing so much, they’ll do anything to get back to break even when they’re trading. Whether in a particular trade, or in a day, or a week etc., they’ll take larger risks and worse risks just to get back to break even so they don’t experience losing. Experiments have proven this to be true, which is why you need to be aware of the greater propensity to take risks when you’re down money and not let yourself fall into that.
• [B]Sunk Cost Bias[/B]: [I]Making decisions based on already incurred costs or losses instead of future incremental benefi[/I]t.
o To understand sunk cost bias it helps to look at an example. If you bought a $500 ink jet printer that you plan to use extensively for the next 3 years, and if the ink costs $100 per month, then you should be willing to throw out this new printer and buy another $500 one that is now on the market with $20 per month costs in ink. This is the rational decision because you will save $80 a month and your savings in 3 years will be $2,880, which greatly outweigh the $500 new cost. But most people will incorrectly factor in that old $500 cost to their decision and feel like they can’t throw that away. In reality, even if the old printer cost you $3,000 you should STILL throw it away (assuming it can’t be sold) because that cost is in the past and is irrelevant now. The only relevant thing is how much you’ll be saving from this point forward with the new printer versus the old one. The $3000 you spent is already spent whether you throw away or use the printer. It’s a sunk cost and is irrelevant for any decision you make now.
o Sunk cost bias shows up in trading when you’ve lost money on a trade and the thought comes into your mind that you can’t exit now because you’ve already lost this much and so it makes sense to risk a bit more to get it back. But the reality is that the loss is irrelevant. The question is would you be taking this trade right now if you hadn’t been in from before? And if not, you should be exiting. Another way it shows up is in thinking about lost time. You may be in a trade for hours and think that you can’t exit now because you’ve already invested so much time and energy in the trade. But again, the past is a “sunk cost” and is irrelevant for making a decision on the trade. Finally, this bias can also show up when you’re in a drawdown (whether intraday or longer) and you start making decisions based on your losses. You may think “what’s another few hundred dollars?” and take risks that you shouldn’t. The reality is that what you’ve lost is irrelevant to the decision to enter any trade going forward.
o To spot sunk cost bias and avoid its trap, simply ask yourself if you would make a different decision if you hadn’t lost anything on the trade, day, week etc. If the answer is yes, you know you’re falling into sunk cost bias and you should make the decision you would make assuming no previous losses.
• [B]Recency Bias[/B]: [I]Giving more weight to recent results or events than they deserve.[/I]
o You can see one aspect of this bias in action when you base your market outlook based on the latest price action, while greatly decreasing the value placed on all that came before it and the general context. A strong down bar makes you feel “sure” that the market is going to go down. A strong up bar makes you think it’s going to fly up. The most recent price action keeps taking precedence even though it is just one small piece of the puzzle.
o The other aspect of this bias comes when looking at our results. We ascribe more weight to the last few trades than to the big picture equity curve of our trading. We fail to realize that if the last 3 trades are losing ones that this doesn’t mean anything about our trading and there’s nothing more significant or special about these trades just because they just happened. They don’t deserve extra weight, attention, or worry in our mind.
o The way to deal with this bias and avoid its traps is to just be aware of it. Be aware of it when you’re reading the market and be aware of it when you’re looking at your results, and just watch this tendency arise without judging it. Doing that will allow you not to fall for it, and not to project forward just based on the latest events or results.
-courtesy of [B]Ziad Mastri[/B] and [B]Awais Bokhari[/B]
[B]Question 4: Stop Lost[/B]
<To Be Continued>