I've done a lot of trades in my trading career.  I've taken many notes, and I've kept a journal of my thoughts for the past few years, and one of the things that I want to share are three things that I think all new and struggling traders need to focus on.  They are your winning percentage, position sizing, and risk/reward.  We've all heard these terms before but what do they mean?  I want to talk about each one in turn and give you my thoughts on how you should approach each component.

 

Winning Percentage- This number will increase as you gain more experience with the patterns and increase the number of trades you have done in your careers.  When you first start out however, you have an initial lack of understanding of how stocks react to different catalysts and are unfamiliar with what stocks to trade and how often you should be trading.  I could go on a rant about a bunch of other things like how many trades you should be making in a day and what time frequency charts you should use and stuff like that, but what everyone should do is find a niche like Tim Grittani has said in past conferences and webinars.  Whatever strategy you find best suits your personality or seems to work for you in profits, that is what you need to focus on first...  Now, when you first start out trading a new strategy or trading at all for that matter, you should not be betting large amounts of money on each trade.  Focus on only one stock trade at a time, meaning one position, so you can focus just on that.  It doesn't matter how much money you have in your account, you should only be risking 1/2 to 1% on any one trade. Now what do I mean by this?  If you have $1,000 to start with I am not saying you should buy $10 worth of stock, that would be stupid because the stock would have to double for you to make back any commission/fees.  Your focus needs to be on making good Per Share profits, and it's okay to burn through commissions as long as you aren't over-trading.  Your focus in NOT on making money when you first start out! Make good trades, and once you become more confident/consistent then you can start to risk a bigger percent of your account (1.5-2% max).  Now, if you have $1000 for example to start with, I'm saying that you should plan on losing either $5 or $10 if you are wrong since that is either .5 or 1% of your account.  Got it?  Good.

 

Position Sizing- Recently, I found that the way I was position sizing my trades needed some tweaking.  A year ago, I used to just buy or short 500 shares of stock, no matter whether it was a $3 stock or $15 stock.  This makes no sense for multiple reasons, mainly because I was risking more money on the higher priced stock even though stocks in the teens tend to have large spreads and can move 30-40-50 cents easy.  After I realized that this was a flawed way of doing things, I started to consider the $ amount I put into each trade, and I tried to keep it the same.  However, I later realized that this also was a bit flawed.  You generally should bet more money when you are extra confident in a trade than when a normal opportunity comes along.  Also, the way I trade now is I determine my risk based off of the volatility of the stock rather than what I used to do which was set the same per share risk/stop no matter what the price was.  Going back to the previous paragraph where I sort of introduced the idea of risking a certain percent of your account, I now base my risk on a small percent of my account.  The math may be confusing at first, but its actually quite simple. First, take the percent you are willing to lose of your whole account (.5%, 1% realize that this gives you either 200 or 100 losing trades in a row for you to drain your account to zero, although account mins would come in to play at some point) and multiply it by your account size.  This is your new dollar risk!  Mine right now is about $80 before commish and fees.  Next, based on the chart, you need to determine where you would want to cut losses and move on.  Based on where you would enter and where you would exit for a loss, take the per share difference and divide this by your max dollar risk. This will give you a different number of shares to buy each time based on your stop for that particular stock.  So whenever you use 10 cents risk, you will always buy X number of shares and every time you risk 20 cents you will always be buying/shorting Y number of shares...  This ensures that you are risking the same amount each time unless you switch from 1% risk to .5% if you're less confident in a setup and bet more when you have a tighter stop.  Warning: Sometimes this will involve using leverage, especially if you have a smaller account, but remember, you are still only risking a very small percent of your entire account.

 

Risk vs. Reward- Lastly, this brings me to the last point every trader needs to keep in mind.  If you have a stop of say 25 cents, most of your trades should be bringing in at least 50 cents so that you have a 1:2 risk reward (everyone seems to always put reward ahead of risk in the ratio for some reason idk lol).  Maybe you trade smaller priced stocks and you put a risk of 5-10 cents like Tim does a lot of the time.  He will always say looking for a least double what his risk is, 20+ cents.  If you don't see that much potential upside, it is not worth a trade! All three of these points seem to synergize as the more often you win, the lower the risk reward it takes to make a profit.  For example, if you win 50% of the time, it would take 1/.5= 2:1 reward to risk, risking the same amount, to turn a profit (if one a winner and the other a loser and both had 2:1 reward to risk ratios, then you would end up with 1 part profit.)  If you had 3:1 reward to risk, you would have 2 parts profit and so on...  But let's say you are just starting out and your winning percentage is not as good, say 33% win rate. That would mean you would need 1/.33= 3:1 reward to risk to have one part profit left.  As you can see, the lower your winning percentage, the harder it is to make a profit and the bigger you r/r ratio needs to be.  This is why its important not to over-trade when you first start out.

 

Overall, it starts with a strategy that you know can/will work with your style of trading.  Next, a trading system that allows you to eliminate at least 50% of emotions from your trading is necessary.  If you work on the characteristics that make good traders, Focus, Discipline and Patience, and remember the components I mentioned above, you are doing what most excellent traders are doing every single day.  

Good luck with your trading guys and girls, I'll see you in the chat room...