[bootstrap]

The idea for this post came out of an email I recently sent to a struggling trader.

And with the loonies still running amuk in the street, there is no time like the present. So here goes.

Are you struggling with your strategy development? Have you hit that wall where no matter what you do, you just can't quite make it work? Well take a step back and look at what you are doing from a different perspective.

If you accept the often quoted stat that 95% of all traders fail and eventually give up, the the secret is to do the exact opposite of what the herd is doing. Sounds simple enough.

When a newbie first starts out, he jumps from one strategy/indicator to the next. Looking for that secret. Well if the indicator is truly an integral part of the secret, why in the hell do I have a library full of them?

They spend countless hours on testing, back-testing, and tweaking. Then just use simple exits and risk management.

But you have to have a way to get in the market.

So I am going to break that cardinal trader rule and fast track you over to the path.

Currently you are on the path of: Setup - Entry - Exits - Position Size - Money Management.

Well, the real traders have been telling you that Money is key. You have to protect your capital. You have to be adequately funded. That you need follow the KISS principle. They have been giving you the path, but you haven't been listening.

There is nothing wrong with the Set-up to Money path, but you better have the capital to trade what you find. As you move from Set-up to Risk Management you need to put as much if not more thought into each step. The 95% spend months on set-up and entry, and then less and less time as they move through the steps.

But what you really need is to find that strategy that will work with the capital you do have. And build around the premise that you will live to fight another day.

So reverse the development steps. Start with Money/Risk Management and work backwards to the Set-up. Take the strategy that you are currently working on right now. Dissect into the individual parts. Then start with Risk management and develop that first. While doing this ignore what you have done on the next step down. Just concentrate on managing your risk.

Work back through your strategy to the Set-up.

Are your exits the same? Is the position size the same? What about entry? Do you really need all those indicators now?

You may just be surprsied at what you find.

[zdo]

bootstrap,

Lately the 'gurus' around here have been saying put trading 'psychology' last on the list.
In this different approach, would it now go first?

thx,

zdo

Have a great weekend all

[bootstrap]

i know that i am gonna get all kinds of hate mail, but don't confuse the method with the madness.

money management is not psychology. money management is risk management.

psychology is dealing with the fear and inability to follow the strategy that you determine to trade.

[jasont]

I am actually surprised this hasn't got more attention Chris. I actually have looked through the Money Management thread on this forum before and was surprised at the lack of threads (22 in total) in comparison to say the Technical Analysis threads which total 327.

Presuming the statistics of 95% of traders losing in this game over a longer term basis, I would say that according to this forum 95% of traders are working on the technical analysis more than the risk management. Something I have recently been guilty of myself.

What interests me the most, and something I have been relearning over the past few weeks is that if the answers are found in technical analysis rather than risk management, why wouldn't traders risk it all on each individual trade? I'm presuming most traders hear that you can't predict the market, yet from the looks of the amount of threads in regards to Technical Analysis in comparison to Risk Management would say that they don't believe it.

[greyowl]

Sorry -- double posted ...

[greyowl]

Dear BootsTrap,

thanks for Your interesting articles...

May I get more and plain information on Your "different approach"
which sounds logical for my deep detecting mind -lol - ?!!

Please explain with patience, so we can understand
or send email or PM, if possible!

THANKS ALOT !
Rolf

[zdo]

Originally Posted by bootstrap »

i know that i am gonna get all kinds of hate mail, but don't confuse the method with the madness.

money management is not psychology. money management is risk management.

psychology is dealing with the fear and inability to follow the strategy that you determine to trade.

bootstrap,

Maybe my question wasn't clear. I wasn't confusing 'Psychology' with Money Management. Psychology is not on your list / sequences. The gurus have been saying ‘edge’ first / ‘fears’ last. My question was - if Psychology was on your new list, where would it go?

thx

zdo

[bootstrap]

in the frame of the question i would put it last. you can't build the discipline until you have an approach to the market to be fearful of.

but would you be as fearful if you built your strategy around risk management? what if you put as much thought into this piece as you do trying to find that set-up you are so desperately seeking?

if you start with risk management, would you just go with the standard:

" i am going to risk 2% of my account on any one trade. "

probably not, you might add some things like:

" i am going to adjust my position size throughout the trade based on the current risk level. "

" due to commissions, slippage, and spread resulting in a position starting out in the red, i am going to work these into my risk management. "

" to build my bankroll, i will use a scaled risk model based on my weekending balance. "

" i can only trade "X" and maintain my risk level."

if you spend quality time determining how you are going to protect and grow your capital (notice the order i put those two words in), why would you be fearful in trading the end result?

once you have your risk strategy down, move onto exits. what kind of exits support the risk being taken and still generate a profit?

you are now asking: "but how do i know where to put the exits, i do not know if i am long or short the market?" remember that you are in the development stage. so you are going to look at both. running a long and short trade at the same time.

"but i don't have an entry?" sure you do....its NOW. you are going to run this little madness test until you have 100 profitable long and 100 profitable shorts.

now design an entry that captures the profitable trades and limits the losers. you may have one entry for longs and another for shorts. or maybe not.

and finally the set-up. is there a common factor that is present in each of the profitable trades? what is it?

" but all this is making my head hurt! ".

yeah, but now you know how to build a strategy the right way. through every step you were thinking about risk. and that is what you shoudl be doing now.

set-up: find something that occurs regularly in the market. the set-up is nothing more than a set of conditions that are necessary to be in place. nothing more...

entry: entries should confirm the direction you are wanting to trade, and guarantee that you capture every price move it is designed for. nothing more, nothing less.

exits: how do i maximize my profit, and get out quick when i am wrong.

risk management: stretch the strategy to the limits imposed by your capital and risk profile.

good trading to you all....