January was an interesting month for me. This was mainly because it started off with the worst trading week I have had in ages.
Like a lot of people I think of trading in terms of “R” - how much am I willing to lose on any one trade. If the risk is “R” then the trade should have a potential reward of some multiple of “R” to make it worth doing - otherwise you are risking e.g. £100 to make £100 which is not a sensible strategy. If you have any doubts about this, have a read of this post on why most people lose.
I will talk about a few real trades in the month and their outcomes. For the purposes of this post, to keep the maths easy for me, we will assume an account size of £10,000 and “R” - risk per trade - of 1.5% of the account. This doesn’t mean that every stop is 1.5% away from the entry point, it’s about the financial risk on each trade. In this case, for a £10,000 account it is £150. So, if my analysis reckons the stop needs to be 50 points away, then the trade size is £3 (£3 x 50 point stop - £150 risk).
This is sensible risk management and is perfectly achievable with smaller trading accounts.
So, the month started. I’d had a couple of good months prior to this, mainly trading the US S&P 500 so was full of confidence. One of the things I wanted to get better at in 2017 was reversing the position if the market did not go the way I thought it would. Again, like a lot of people, I look at “big” levels to place my stops beyond - the approach being if the market takes this level out then something has changed and maybe the trend is shifting. So I decided that if I bought something with a stop 50 points away, then if that stop gets hit I should reverse the position, and go short with a 50 point stop loss. Perfectly logical.
And - financially disastrous. I did seven trades that week, six of which were on the German Dax or the Bund. If I got stopped out, I reversed the position. All six trades were losers! The only winning trade that week was on the GBP/USD that made 1.9R. So the net result for this first week was a loss of 4.1R, or based on the £10,000 account and 1.5% risk per trade, £615.
That is a really sh*t start. I was not happy. Like all sensible people I keep a record of trades done, using a spreadsheet. I use Google sheets which is perfectly adequate for this, if you want a copy of the template just let me know by email. So I sat down over the weekend and went through the trades to see what I was doing wrong. The first obvious point was that the stop and reverse approach clearly hadn’t worked. Now this is only a small sample of trades over one week and that doesn’t mean it is not going to work, but clearly this was one major change I had made to my approach and it had created another 3 losing trades, or 3R for the week.
But the equally big mistake - and I think this is something that we all do from time to time - was I was overtrading. I had a much freer week than usual at the beginning of the year so had plenty of time to watch the markets. Tick by tick. My approach is not to watch the markets tick by tick but to run stuff over hours and days - it doesn’t add very much watching the prices flash, and I think this is true of many of us who have other things we should be doing during the day. So I had forced trades that weren’t really there - second guessing that a trend was going to reverse or continue, and placing too-tight stop losses. I resolved to take a more patient approach for the rest of the month.
This worked. The next week was profitable: 6 trades for an overall 2.2R. The week after was also positive: 5 trades for a 1.7R. And the final week of January also delivered a profit - with fewer trades: 3 trades for a 2.7R return. So January ended up being profitable after a catastrophic start, ending with a 2.5R month. On the parameters mentioned at the beginning this means a £375 profit, or 3.7% on the account.
Now I realise 3.7% isn't going to be buying anyone gold-wrapped Bentleys anytime soon - we all know the key to instant riches is to be a binary options whizz…. But as a sensible, low risk approach to trading that's a result I am happy with and would be more than happy to crunch that out month in and out.
A bit about strategy. I talk about this in the weekly webinars I run and you can register here.
But it is really just trend following and placing stop losses and targets based off big levels. My biggest loser for the month was a loss of 1.3R when the GBPUSD gapped through my stop on a Sunday night - this was the weekend when the market feared Theresa May was going to go for a much harder Brexit than first thought. Coincidentally the best trade of the month was also held over the weekend and delivered 2.5R. This was a short USD/JPY trade, with the setup below.
It’s a really simple set-up, and obviously does not work all the time, but can offer opportunities that are a multiple of the amount risked which for me is what it is all about.
The lessons from January reinforced the importance of keeping good trading records. I made two big changes that first week - trading too often and reversing losing positions, and it didn’t work for me. If you can look back on your trades in the cold light of day I think it can help highlight mistakes that you don’t even think you are making at the time.
For upcoming trading webinars you can register here.