Planning in trading. Two strategies for achieving goals
Before studying the basic methods of market analysis, the principles of opening and closing positions, each trader should answer the following questions:
- What trading tactics to follow, why it’s noteworthy?
- What is a trading plan you will follow?
- What trading timeframe is better for searching market entry points?
- What position size to open?
- How long trades should be open?
These are the questions, on which it’s highly desirable to find the answers until you open your first trade. If you start trading and don’t have a road map, according to which trades will be opened and closed, then, in my experience, you won’t most likely succeed.
You should also pay particular attention to strategic planning, especially if you are conscious of trading and set ambitious goals. All of this must be considered before studying technical or fundamental analysis.
In a separate article, we considered the principles of building a trading plan, discussed what points it should include and which elements of the trading plan can be changed, and which not. In this article, we’ll discuss planning issues at the strategy level. What targets does a trader set at the beginning of his career? And what are the strategies for achieving these goals?
Trading as a kind of business. Goals of beginner traders
When communicating with traders, I concluded that most beginners, starting this kind of business, don’t have clear goals and consequently don’t know exactly how to achieve these goals.
Most often, beginners form goals really weird. For example, they want to get some money when trading in the financial markets. This is healthy desire, but in most cases, a novice trader doesn’t know at all how he plans to achieve this goal, and acts at random. Even if a trader has chosen the trading tactics and, for example, decided to trade important levels breakouts, that’s not enough. The main reason for loss of capital in the market is emotion, and planning is one of the effective ways to minimize its impact on trading results.
Trading is a business. Now we’re going to talk about trading just as a kind of business you should run as seriously and consciously as possible. In this case, the first thing to do is to realize what you want to reach in the end.
Suppose, a trader’s goal is to make a profit of $100,000 for three years using seed capital of $3,000. I define this goal according to the most beginners’ aims. That is, profit potential to investments ratio, as a rule, is just that.
How do traders achieve their goals?
Strategy #1 – the way of majority
Most often, a beginner is on the wrong path that results in “killing” of trading capital, putting money into account and its new loss (re-destruction).
In short, such strategy looks like this:
1. To open an account and deposit, for example, 3 thousand dollars.
2. To earn 100 thousand dollars when trading on this account.
I’d like to note that there were such situations. I saw when traders, carrying out transactions in the financial markets, reached that result, and not for 3 years, but much faster. Unfortunately, only some traders out of thousands were able to do this and that meant good fortune but not extremely efficient trading tactics.
This strategy of achieving the goal has nothing to do with trading as a kind of business. If you try to trade this way (that is, you open a trading account and try to increase it by 10, 20, or 30 times), then in terms of statistics you won’t succeed. Because, even if we increase time for achieving the desired profit to 3 years, then we have to receive at least 320% per annum and reinvest all the profits.
Although it may happen, such strategy of achieving the goal isn’t good for majority. Professional trades, who have been trading in the financial markets for a long time and are aware of risks they take and start trading with specific account settings, may probably act this way. As you understand, with such appetite for profit potential, the risks must be enormous. Most often, a beginner, coming to financial markets and following this strategy of achieving this goal, tries to “accelerate” his trading account growth.
Trading account acceleration is a process when a trader is constantly increasing the risks in trading, that is, he seeks to increase the account for one or two trades, simultaneously risking a significant share of capital, often all his capital. After making some profit, a trader risks almost all his money again, trying to increase his account several times in a row.
Often such trader uses especially risky strategies – martingale or averaging. In such cases, the risk is limited to all trader’s capital. And as a rule, this risk can be found in one or two trades.
Alternatively, in the option 3 a trader simply tries to achieve this goal, maximizing the risk in each trade that often also leads to a corny blowing up his account. Trying to act this way, a trader fails and doesn’t achieve his goal.
The trading account growth in such proportions is possible, but I strongly encourage you not to follow this strategy if you just start trading in the financial markets and the sum you’re going to use for such experiments is significant for you.
None of those principles presented on the slide above aren’t good for beginners: trading account acceleration, the use of martingale, averaging or other super aggressive trading concepts, the maximum leverage used on the account.
What is good for beginners in this case?
The first strategy for achieving the goal doesn’t consider trading as a business. In my opinion, this is the attitude to trading as a gambling, when a trader risks everything in one transaction. Next, we’ll discuss how we can achieve our goal if we consider trading exactly as a business.
Strategy #2 – the way of professional
The second strategy for achieving the goal is good not only for beginners, but for all traders who:
- are ready to consider trading consciously;
- want trading to become the most likely source of income for them;
- intend to become a professional trader in the future.
To implement the strategy, three steps are needed:
1. Opening a trading account.
2. System trading to form statistics.
3. Attracting investments or publishing trading signals.
Let’s talk more about key points of this strategy.
System trading to form statistics
Let’s say you trade, carefully following your trading plan and act according to the complete trading strategy you’ve tested on historical data.
We’ve already written earlier about how to properly build a trading plan – a set of rules according to which you open and close positions. So, following your trading plan, you trade and form statistics.
The most important trader’s asset is statistics. If a trader focuses on the formation of worthy statistics, his trading is highly predictable, he doesn’t open trades with unjustifiably high levels of risk, follows his trading plan and profit and risk potential in each trade are predictable, then the further result will not be long in coming.
Attracting investments or publishing trading signals
The last point of the strategy for achieving the goal is attracting investments. Professional traders are people who most often manage not only their own, but mainly other people’s money.
Most often, it’s investment, other people’s money. In fact, for every good trader (who follows the trading plan, who is disciplined and considers trading as a business), in my experience, three are at least ten investors. In addition, it doesn’t matter what market you choose for trading – stock market, FOREX, futures market or options trading on the exchange. If you form excellent statistics, the question of funding won’t be a problem for you.
Many services allow traders to attract investments in their trading. And if trading is good, then a trader can easily attract additional capital to his trading account.
If you look at statistics of attracting investments to trading accounts that generate high-quality trades and the worthy return, then the amount of investment attraction you see on the slide (about $35,000) is quite adequate. I took them from statistics of attracting investments in trading accounts that work according to trading plans and generate statistics and return that can be called competitive.
At the time of writing, this yield varies significantly, but it’ll be interesting when it’s several times higher than the banking one – from 25% per annum. In most PAMM-services and trading signals services, private investors are attracted by accounts with the return of 50-100% per annum and higher.
Not only return, but also risk-reward ration play a crucial role. The higher it is, the more interesting the trading account will be. For example, a trader whose account yield is 100% per year with drawdowns of 50-60% will be much less interesting in comparison with a trader who generates the same yield with drawdowns of 10-20%. I’d like to note that trading tactics, such as martingale, can create an illusion of low levels of risk until blowing up the trading account.
Traders who trade in professional way in the PAMM service make a part of profits on investors’ accounts. It can be different percent of remuneration – 25-50%. For example, let’s take 25%. If a trader is going to make such return for 3 years, he will finally yield 100 thousand dollars due to his money management and investors’ capital management.
Sometimes traders feel uncomfortable while increasing the sum on the trading account, they begin to open more emotional trades, they can lose sleep and get nervous. Therefore, the PAMM-service is not good for everyone. In this case, a trader can publish his trading statistics in the form of trading signals.
Most often, that solves the problem described above. At the same time, a trader’s profit potential can be equal or even higher than it can be obtained in the PAMM-service. The standard trader’s fee in this case is $30 per month, which is collected from each subscriber (for MQL5), or commission from each trade on subscriber accounts (for Zulutrade).
Moreover, signals can be published from the PAMM-account, that is, a trader can make profit from both sources – trust management in the PAMM-service and remuneration from subscribers in signal services.
The way described above allows a trader to call himself a professional, avoiding the need to use super risky trading strategies. In my opinion, this way is most suitable for all who want to consider trading in the financial markets as a business and deal with this kind of activity deliberately.
Once again, let’s look at two strategies for achieving the same goal. The first strategy is an attempt to increase the capital by accepting extraordinary risks. This is often a chaotic and emotional trading when just the name remains from it, and in fact, this is ordinary gambling.
The second strategy considers trading in the financial markets as a business, when a trader realizes that the main thing is not to increase his trading account by 10-20 times, but to form statistics striving to have predictable drawdowns and maximum risk-reward ratio in each trading period.
Each trader may have unprofitable trades – one, two, five or more trades in a row – it can happen. And what is important is not the number of loss-making or profitable trades, but the result a trader reaches in the reporting period.
Depending on the trading concept, a trader can assess the financial result on his trading account once a week, a month, a quarter or a longer period. It’s important that the trading account predictably increases in the reporting period, separate trades can be both profitable and unprofitable.
The trading account increase by two or three times is excellent, but such result forces a trader to take high risks, and it’s unsuitable for beginner traders.
Keep in mind that the main asset of a trader, who considers trading as a business, is statistics. Statistics will give confidence in the account, attract investors to the PAMM or signal subscribers, and increase the chance to become a professional private trader. Creating such statistics is your main task.
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