Thursday, December 26, 2013

Drawdown Dangers – What It Means To Traders

Drawdown is a word that is feared and hated by every trader, but it is an inevitable part of playing the markets. It is simply how much your account loses from its peak.

Suppose you start with $10,000 in your account, and after a succession of losses the account goes down to $7000. That means you have lost $3000, or 30% of the original starting $10,000, and therefore your drawdown is 30%.

Drawdown is relative to where your account peaks, so say you had a good run and built the account up to $12,000, then lost $3000 again, bringing it down to $9000. Your drawdown this time would be $3000 from $12,000, or 25%.

Maximum drawdown corresponds to the lowest your account ever hits. Sometimes you will see trading strategies detailing how much maximum drawdown is expected to be when using them – usually the more risky strategies will anticipate a greater drawdown while expecting a higher profit on average.

Drawdown is particularly dangerous because, the way statistics work, you must achieve a much larger percentage gain to recover to your starting position than the percentage you lost in the first place. In the example above, when your account fell from $12,000 to $9000 you had a drawdown of 25%. However to get back up to $12,000 you would have to make 33% on the money you have left.

If you lose 50% of your starting capital, then you need to make 100% on what is left simply to reinstate your original position. Thus it is easy for losses to run away from you, and if you are not careful you may find it very difficult to get back after a losing streak.

If you have a big loss, it can be tempting to change your tactics, and go big on the next trade that seems to be a sure thing, attempting to make your account back up quickly. This type of response to losses has caused the premature end of many would-be traders’ careers, and you need to avoid it and develop patience to reinstate your account.

This is why experts will tell you that you should risk losing only what seems like a very small amount of your account on any trade, say 2% or 3%. It may seem that this limits severely how much you can win, and therefore slows your progress in building your account up, but the alternative leaves you open to a succession of losses from which recovery will be impossible.

It is also important to point out that, depending what type of trading you do, risking 2% of your account does not mean that you can only stake 2%. Possibly you might stake 10% of your account, with a stoploss that limits your losses to 2%.

The other point to bear in mind is that if your account has suffered, you need to adjust the amount you risk. 2% of your account is a different amount if you have $12,000 than if you have $9000, and one of the secrets of successful trading is to focus on keeping your capital, and not on the amount you may win.

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Friday, December 20, 2013

Successful Trading Guideline: Additional Rules To Follow

Note: This is just a continuation of the previous post.

To keep your trading business going, it is important that you take it seriously to protect your capital. It is true that losses are part of the business but losing even the capital is not a good thing. Avoid unnecessary risks that can get you to ground zero as saving money as capital for your business doesn't come by easily. That said it is important to continue learning about the stock market because nothing is constant in it. Keep watch of current news on economics and politics and see how they affect the trading industry. This will help you make calculated moves with sure profits.

Knowing when to stop trading is another rule to follow as it can keep you from going bankrupt. The stability of the market is not the only aspect to consider here. Personal reservations like your health, lifestyle and psychological condition can affect the way you decide on making trades. Thus, it will be helpful just to stay put when your heart and mind are not on it. Lastly, refrain from using techniques which assure huge and quick profits. Rather, base your strategy on facts you find out from carefully studying the market. In connection to this, be ready to recognize the amount of money you might lose in this so as to avoid getting too emotional when faced with risks.

Wednesday, December 18, 2013

Successful Trading Guideline: Effective Rules To Follow

While loss is part and parcel of the risks that comes with trading, it can be reduced to a minimum and make investments manageable. No matter how big your trading account is it can be managed well if you have a reliable set of rules to follow. These rules are usually included in a trading plan. A trading plan tells you when to enter, exit and manage your investments.You can create your own plan by getting ideas from other traders. To see how it is going to work, you can do some backtesting before spending real money.
Besides following your plan up to the T, it is also important to treat trading as a business and not just a hobby. Thus, you must put your mind and heart into it. Spending less effort and time on it can take all your investment down in the drain. Think of yourself as a business owner. Ask yourself every time what a business owner must do to keep his company thriving and so that your efforts wouldn't go off the track. As you need to be focused on your trading, utilize technology to your advantage. Use it to chart platforms and come up with varied strategies. Download mobile software which can help you monitor everything anytime and anywhere with the use of your smartphone or mobile gadget.

Monday, December 16, 2013

Online Trading 101: Trading Advice For Beginners

Online trading is open to everyone who wants to give it a try. It can be very profitable or unprofitable depending on the efforts you decide to muster to make it work. As a beginner, begin with a comprehensive research. Research about all the options available out there. Perhaps, you are interested in the stock market. Do your best to look for companies that are most likely to grow and worthy to invest in.
Consider getting a broker. It is quite risky for beginners like you to do everything on your own.This will serve you best especially when you don't have a tried and tested trading strategy yet. Nonetheless, this shouldn't stop you from learning as much as you can. Read trading books and join online forums to discuss with other traders practices that work. Get a trading software that matches well the kind of trading you're in. Using the software, try trading a small amount on your own to learn the ropes of the trade. Keep an eye on the risks. Note also the strategies that are working on your end. Record them so that you can use them as a guide to your next trading adventures.