The Journey Of A New Trader: Money Management

Trading is known to be the one area where you can lose your entire life’s earnings in a single day. There are however many techniques and ways to prevent yourself from losing money unnecessarily.

The first one would be to trade according to trend. Buying lows and selling highs according to the current trend is a great way to have a small risk to large reward. The great Steve Nison would speak about having low risk to high reward trading methods and trend-based trading is one of them.


Let’s assume  a market is in a downward trend, making lower lows and lower highs as well as continuously breaking support levels. Knowing the market is always zig zagging I wait for the market to go up and when I see it is meeting a resistance level I would short and put my stop on the resistance level and my take profit on the next seeming support level as long is my reward is double that of my risk as well as my risk being less than 2% of my current account balance. The same would apply to an upward trend. All of the above would be applied in conjunction with the market strategy that I have learned.


The second method would be high risk high reward which would usually only be used by people with large account sizes and who are skilled as well as confident enough to pull it off. This is trading at the maximum allowed position size according to margin. It is high risk because as you enter with this large position, you have to catch spread, and the market absolutely must move in your favour. This is because if the market moves against you even by only a few points you would be risking a large percentage of capital and the market has barely moved!


In other words, if you trade at max position size (which most people should not be doing anyway), your stops are extremely tight( in one min trading it would be 5 to 10 points before exiting immediately without hesitation) and your take profits would hold until the market moves one candle against your current position ( if markets is moving down and you are profitable, but the next candle closes against you, close out) Remember that with big positions there is big money to be made and even more money to be lost, which means every point counts. Trading like this is incredibly stressful and more than 3 losses can be very detrimental to capital.


Trading like this should not be done often, but rather when you are 100% feeling the market and even then no more than a few trades so that you can avoid making it a habit.


The best way to trade ( In my opinion so far) is to watch the market for a while before you start actually trading. Trading is like sport, you need to warm up your mind for the process ahead. Thinking for hours on end takes mental strength and focus so you must be watching the market move for at least 30 to 60 min before entering trades. This allows your mind to get into the game and focus up on the market, instead of random things. You are in the market to make money, and you must focus entirely on doing so.


No thoughts of today’s setbacks at work.

No thoughts of the party this weekend.

No thoughts of other people who annoyed you.


It must only be you and the market, always.


Now that you are focused you must on every trade you take, decide what the risk to reward is, then determine if that is worth it to you, and only then enter. Bear in mind that if you have doubts for any reason it could be better to wait for another signal or even not to make the trade. Saving capital is always the main goal and if you don’t feel the trade, sitting out and waiting for a new set up is the right call.


Let’s say you did not take the trade and it worked in your favour, never get upset for missing trades you thought would work. Rather take it as a win, because it shows you read the market and next time you can enter with no fear. Having a fear of missing out on a trade is like jumping straight into the deepest part of the ocean – even if you are not the best swimmer – out of fear that it is going to dry up. Never worry about missing a trade.

On the other hand, let’s say you take the trade and it goes against you. When do you get out? When do you hold?


This is why it is important to calculate risk before entering and put your stop in at an amount you are comfortable with losing. Do not extend your stop once you have placed it. Take your small loss and catch the next trade (it is small compared to holding for another 20 points and taking an even bigger stop). Holding stops makes you focus on the money rather than the market and you can miss potential trades.


Let’s say you bought and the market is zig zagging downward. You keep waiting for the change in direction so you hold your trade further and further down until you decide to finally get out. Rather than losing 20 rand by closing the losing trade and taking the stop, and then reversing and entering a short to make 60 or profit of 40 in the short, you have now lost the opportunity as well as doubled your loss because you did not stop out where you were supposed to.


Get into the habit of holding winners not losers. “Losing saves capital” is a better mindset to be in than “holding double the risk for half the reward”.


Trading according to trend is always a good idea. Buying at bottoms and selling at tops always decreases risk and increases potential profitable opportunities.


However, you never actually know if it’s a top or a bottom which is why you calculate your stop to suit your trade. The market usually tells you if you pay enough attention.


For Example:

Note that these are only indicators. Not triggers


A Candle pattern where the next or current candle confirms or completes the pattern is a good indicator of an upcoming reversal

  • 50 Stochastic in over bought and over sold region ( above 80% and below 20% with signal line close behind)
  • Candles getting smaller after large previous candles ( not always reliable so only an indicator of potential. Usually, smaller candles with no patterns just means a neutral market, but if it looks to be at the end of a trend and the stochastic is confirming over buy/sell and is on a previous support or resistance level, you can enter with a small risk and put your stop on the lowest wick and take profit at previous resistance or however many points you are comfortable with so long as your reward is always larger than risk.)


These are methods that I am currently using and experimenting with which I have learned from Steve Nison’s lessons and I apply them in conjunction with what I have learned from Patrick and Warren on both short- and long-term charts

This is what it looks like to Trade the bottom to a previous support level. I am in at  10 cents with a risk of R6 and a reward of R30. Although I am aware that the gap is quite large to fill so I might move my profit later according to what the market does going in that direction. Assuming it does hit my stop I will wait for the next confirmation in either direction and do the same: put my stop on a high wick or a low wick depending on my indicators, triggers, trend, and risk to reward.


Dylan Peacock, Novice Trader

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