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In today’s episode, you’ll discover how a retail trader like you can beat the pros at their own game.
So tune in right now…
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Forex Risk Management and Position Sizing (The Complete Guide)
Hey, hey, what’s up my friends?
In today’s episode, I want to talk about a retail trader like you can beat the pros at their own game.
Here are a few things that you must do to put the odds in your favour.
1. Remove the need-to-make-money syndrome
Traders often get involved in trading because they want to replace their full-time income, they want to get out of poverty, improve the quality of their life.
But here’s the thing, in trading, you’ll have losses and you’ll have winners, but hopefully in the grand scheme of things, your winners are greater than your losses.
So if you dived right into trading and wanted to quickly replace your full-time job to get a consistent income, then what’s gonna happen is that you’ll now be faced with the need-to-make-money syndrome. Because now, there’s no more safety net as you don’t have a job.
You have to force yourself to make money every single week or every month. If not, you can’t pay the bills.
When you have this need-to-make-money syndrome, you’ll tend to break your rules, widen your stop loss, average into your losers, and do things that are detrimental to your trading results. And that’s because you have the need-to-make-money syndrome.
You’ll be thinking, “Wow, I must make money from trading this month, if not, I can’t put food on the table.” And once you have that mindset, it’s a huge disadvantage to you.
If you think about this, how the pros like the hedge funds overcome this problem is because of the payout structure the hedge funds used in the past. What was very common was that they tend to use the 2-20 structure.
Every year without fail, they’ll take 2% of the management fee. And whatever profits that they make, they’ll take another 20% out of it.
What’s critical here is the 2% management fee because whether they make money or not in a year, they’ll still take 2% of the asset under management. If they managed a hundred million dollars, they are guaranteed a payout of $2 million.
The goal is to expand the pot that they are managing and they make more from the management fee. So they have something fixed, that can help them pay the bills no matter what.
The key thing is they have something fixed coming in, even though they’re trading in an uncertain environment. Well, how can a retail trader like you do something like this?
Well, it’s great if you have a set income from a business, from a job or whatsoever to help you remove that uncertainty from trading the market.
That’s the first thing – remove the need-to-make-money syndrome.
2. Have the flexibility to do anything
You can buy or sell your trades, in whatever markets you want and this is a luxury that the pros like a lot of our hedge funds, mutual funds, can’t have.
For example, long-only mutual funds can only buy to go long, they can’t go short. Because they’re long-only mutual funds. And there are funds out there who can only trade stocks because that is their mandate, their philosophy.
So you can see that you as a retail trader, you can pretty much trade anything that you please, be it forex, futures, CFDs or whatsoever.
You can use that flexibility to your advantage and also make use of the fact that you can do anything you want. You can even stay on to cash when you feel like the market environment is not favourable to you.
Whereas there are institutions out there which don’t have the luxury to hold onto cash maybe because they have a certain mandate to follow which forbids them to hold onto cash because cash doesn’t generate any returns, or they might have to buy something that has a crappy return or even a negative return.
So you as a retail trader, you have this flexibility to trade whenever you want to and how you want to. So make use of that flexibility, don’t think that you always have to be trading in the markets.
You have a choice to stay out of the markets when things are not favourable. Holding cash is a position in itself.
3. Focus on the higher timeframe
Stay away from the lower timeframe like the 1-minute or the 30-seconds charts because those are dominated by high-frequency traders who are faster, have more capital and better access to information than you.
And that is a domain that isn’t in your favour. If you go up to the higher timeframe, that’s where, you can level the playing field for yourself, because on that timeframe, it’s where high-frequency traders don’t want to get involved because it takes too long to see returns.
If you trade off the daily timeframe, you only have so little trading opportunities over a year. Whereas if you trade on the lower timeframe like the seconds chart, the minutes chart, you have much more trading opportunities.
Again, stay on a timeframe where you are not at a disadvantage, and that’s the higher timeframe chart, anywhere above the 4-hour timeframe. That’s where you won’t be competing against all these HFT traders.
4. Use tools to validate your strategy
In these days and age, technology has improved so much that you can get tools to help you validate the trading strategy that will provide you with an edge in the market.
Tools like AmiBroker to help you do backtesting. Then you have data feed providers like Norgate Data, CSI data you can use to validate your trading strategy to know whether you have an edge or not.
If you think about this, 10, 20 years ago, a retail trader won’t have these tools as they’re only reserved for the institutions, the big funds out there. But now for a few hundred dollars, you can access these powerful tools to know if you have an edge in the market.
Make use of these tools and technology to improve your trading, to find out what are the behaviours of certain markets and how you can exploit them. The tools are now out there, they are not expensive. They are within your reach. So make use of them.
5. Respect risk
The market doesn’t care who you are, what your background is or how much money you’re trading because if you don’t respect risk it’s gonna be a matter of time before you blow up everything.
It doesn’t matter if you trade for a bank. For example, Nick Leeson collapsed the entire bank because of poor risk management. Then we have Long Term Capital Management where many prolific traders and fund managers went belly up because they don’t respect risk.
What more of you, as a retail trader, all the more you have to respect risk. This is your hard-earned money that you’re managing so please respect risk.
With that said, I’ve come to the end of today’s episode. I wish you good luck and good trading. I’ll talk to you soon.