Prior to answering this key question, let us clarify the
difference between a trader and an investor:
From a top-down perspective, there are many elements
where both do the same: Participating in the financial markets with assets like
stocks, commodities, currencies, treasuries and their derivatives: Futures and
options. However, there are behavior differences, where the action of the one is
very different to the other: The investor usually takes a longer-term
perspective and mostly only makes money when an asset bought, increases in
market value. A trader focuses on participating in the short-term price moves
of assets and mostly uses methods and trading instruments, which allow making
money when prices move up or down.
Successful traders and investors manage the following
challenges:
Challenge-1: Finding
assets with a future perspective price move.
Challenge-2: Applying
a method of protecting profits.
Challenge-3: Managing
risk.
Given the circumstances that some assets have price
developments: With-, separate from, or against the markets, makes Finding Assets with a price move
potential a key challenge. When those are found, the second challenge is to
define how far their price move will reach to realize profits or find forms of
protection prior to a potential reversal price move.
In general, there are two basic methods to identify
trade- or investment potentials:
Fundamental
Analysis: Where you equate financial and other business factors of
an observed asset to decide for its future perspective. This is the arena of
smart people working for the big investment firms, constantly analyzing the
world’s markets and finding assets to invest in. As a private investor; however,
if we try to replicate the same; we are facing a hard time in keeping up with
the information base and point of view of institutional investors. Their
managers have contact to the world leaders of business and politics and use
pre-information constantly to their benefit.
Technical
Analysis: If applied right, a sound chart analysis helps you to
spot and follow the action of institutional money moves with a trading system
which equates the happening in price, volume and volatility for identifying
asset in supply or demand, for you to trade along with the referring price
moves.
Given the magnitude of more than 40,000 investment
instruments in the US-markets only, you might want to find a service, helping
you to identify assets with institutional attention, fundamentally or
technically.
Take a look at NeverLossTrading Alerts and
you see how we can help you to find assets on the move if you are a day trader,
swing trader or long-term investor, reducing your effort from hours a day to
minutes a day to know what you want to trade or invest in.
Protecting
Profits
The equation to consider is: Protecting Profits = Making
Profits. A common saying is: “You trade with the trend until it comes to an
end”. However, there are two fundamentally different ways of making and keeping
profits:
Way-1: You
find a systematic to trail a critical price level along with the price move of
an asset and when the price direction reverses to this level, you either exit
your trade or you apply a method of profit protection against a potential
counter price move.
Way-2: You
define positive trade exit price levels by equating the minimum and maximum
expected price move from trade entry. When those critical price levels are reached,
you either exit or you apply a form of protection to assure that the gains you
made cannot disappear from your account.
Both of those methods are applied in the systems of NeverLossTrading and
TradeColors.com,
where you either trade for momentum price moves or with developing price
trends. Check the graphics below to further investigate which system would suit
your trading style best.
Trail
Your Stop (Way-1)
Approximate Min and Max Price Expansion (Way-2)
Managing risk builds the foundation for successful
trading or investing. Only when you are able to prevent major draw downs in your
trading/investing account, you will be suited for staying long-term in the
trading/investing business. If the foundation of your trading system/plan is not
standing on solid ground, your temple of success will quickly fall: Always be
aware that there is no risk-free trade and the higher you put your return
expectation, the higher the risk will be to accept a trade or investment. At
the end of the day, a million dollars is a million dollars; however, if you are
able to build up a trading plan, where you keep a constant low risk, while
producing constant returns from multiple trades, you are better on than aiming
for a onetime high return with an associated high risk:
Imagine a trader with a $20,000 account, if he aims for a
onetime return $10,000 and an associated risk of $10,000. When he fails, 50% of
the account holdings are gone and the trader needs a 100% return on the remaining
capital to just breakeven. Instead, if he is striving for a $1,000 return/trade
with an associated risk of $1,000, he has a much higher probability to being
long-term successful, as long as he constantly finds and trades assets with
high-probability trade setups.
The key question arises: How to define an appropriate risk
in relation to the considered return?
Our recommendation is to consider two risk levels:
The
minimum risk is the one you need to accept to allow for a
price move in the desired direction, considering the natural price distribution
of the asset to trade: Finding this price level prevents that you will be stopped
out even so the price moves in your desired direction. If you continuously
experience being stopped out and afterwards you see the price taking off, your
risk tolerance was too narrow. Best is when a computer programs measure the
statistical volatility of an asset at the time to trade, giving you a clear-cut
approximation, where to put the stop- or trade adjustment level. Aside from
this, you can surely pick a major support or resistance level where the price
haltered in the past, at which your base hypothesis of the directional price move
will no more have validation when it is surpassed.
In addition to the minimum risk, you need to decide for a
maximum risk to allow for accepting
a trade, with the implication: When the maximum risk level is touched, a trade
adjustment is necessary, which can be released or enforced, depending on the
continuation of the price development. If your experience from the past was: Small
gains, small gains and big losses, your risk tolerance was too wide and you
face the danger to drain your account by either having no trade adjustment or
stop level or an inappropriately wide risk tolerance, which is not in relation
to the potential reward of the trade you entered. For any trader, if the
relation from the maximum risk to the expected return is not in your favor,
just do not accept the trade. Price levels, where the prices remained for a
longer period in the past, can be used to define maximum risk levels. However,
you can also help yourself finding those levels by letting your computer build
the associated volume-price-relations, so you can see on the chart where the
critical price levels are.
Sounds more complicated than it is. With the right
trading system, you can find the required risk levels right on the screen.
For a personal consulting hour call: +1 866 455 4520 or contact@NeverLossTrading.com
Prepare for your trading success by installing the
elements of asset selection, profit protection and risk management. The
knowledge how to apply those instruments to your benefits is not widely
accessible, however with the help of this article, you can check and balance
where you stand today and how you can create your trading future by gaining the
necessary knowledge and obtaining the referring instruments, helping you to
develop yourself into the trader or investor you want to be.
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