Cut losses short and let winners run

The Art of Cutting Losses & Letting Winners Run

For years, I was losing money because I didn’t get it. Not really. You hear it everywhere, it’s probably the best-known trader’s mantra in the world:

 

Cut Your Losers Fast And Let Your Winners Run

 

Often, people just skim over this line as something that’s probably true, without any second thought. We know what it means, but we don’t act on it. And we do this all the time in our lives: a smoker will occasionally think: “I should stop smoking”. Many people have this thought in their mind: “I should start exercising”. I should contact my friend whom I haven’t spoken in months. I should go on that world trip I’ve been planning for years.

 

I should cut my losses faster and let my winners run.

 

I really should

 

I should.

 

Yet, most of us don’t.

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Trader development plan

Why you need a trader development plan

 

I’ve learned everything there is to know about trading.

 

Says no professional trader, ever.

 

Not improving is deadly in this business. Seeing your P/L go south kind of deadly. Every trader who has made it has done so because of continuous learning. A desire to get better at the trading game. Every single one of those traders has a trader development plan. But what exactly is that?

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Trading chartbook

A chartbook can make or break your trading

Keeping a chartbook of trades you have taken might seem like such a random thing to do. A nice to have, for traders feeling nostalgic about past trades, maybe. You might’ve heard people talking about it, but I wouldn’t blame you if you didn’t think twice of it and just went on with whatever you were doing.

 

I’m here to say that such a collection of trade screenshots (sometimes called a playbook or chartbook) is much less trivial. It might even be crucial to your success as a trader.

 

Let’s try this experiment: do you keep a trading journal? If you answered “yes” here: well done! Now pick a trade from 3 months ago and look at just the numbers. From that data, you can probably see it was a winner of a loser, your R-multiple, stop loss and take profit placement, MFE and MAE and so on.

 

But without a chart screenshot,

  • can you tell what you could’ve done better on this particular trade?
  • if you could’ve entered at a better price point?
  • exited with more profit?
  • if there were chart patterns you missed?
  • if that new strategy idea you have would’ve worked out here?

 

No? That’s where a chartbook comes in. And it’s not even the only benefit of keeping track with chart screenshots.

 

Since keeping a chartbook, I found it much easier to stick to the good setups and avoid less than optimal setups. I know what to look for, but that visual double check using screenshots of past setups makes all the difference. But let’s first take a step back. What exactly is it?

 

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Forex Trading Strategy

How to create a new forex trading strategy

When people are looking for a new forex trading strategy, what they really want to know is:

  • How do I create a strategy that works?
  • How do I develop the confidence to trade a strategy I believe in?

 

The first question almost goes without saying. Without a working strategy, there’s no use in attempting to trade in a consistent and profitable way. The second question, however, is more subtle. My opinion is that if you have a working strategy but don’t have a deeply rooted belief that you can trade this strategy, you will fail.

 

Confidence in a strategy will make or break your results.

 

Richard Dennis confidence in trading

 

Fortunately, there is an answer to both questions: testing.

 

Before I ever use a strategy, I will have tested it for weeks. For months. It’s not an extremely difficult process, but it does involve a lot of work. During the years, I’ve tested 100’s of strategies. Most of them failed. Some of them, I could make work. The best ones, I’m trading today. Here are the steps involved to make it happen.

 

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Five whys of trading

Use the 5 Whys to become a better trader

A while ago, I read an excellent book called The Lean Startup by Eric Ries. The Lean Startup describes a new approach for startups, using concepts like building a minimum viable product (or MVP) as soon as possible, innovation accounting, pivots and more. It’s based on lean manufacturing, a production process pioneered by companies such as Toyota and Ford. A highly interesting read if you are interested in starting your own business.

 

The book also details the use of 5 Whys, a technique to explore cause and effect relationships when particular problems are faced. Its primary goal is to find the root cause of an issue, by repeating the question “Why?” five times. Each answer forms the basis for the next question. It takes about 5 iterations on average to get to the root cause of the problem.

 

Here’s an (fictitious) example. Suppose a machine stopped functioning:

  1. Why did the machine stop? There was an overload and the fuse blew.
  2. Why was there an overload? The bearing was not sufficiently lubricated.
  3. Why was it not lubricated sufficiently? The lubrication pump was not pumping sufficiently.
  4. Why was it not pumping sufficiently? The shaft of the pump was worn and rattling.
  5. Why was the shaft worn out? There was no strainer attached and metal scrap got in.

 

The root cause was that there was no strainer attached. If you didn’t ask the 5 whys, you might not ever fix that problem, but instead just try to patch up the resulting issues it caused. The idea is that you make proportional investments to fix each of the 5 whys. This way, the total investment in time fixing the issue won’t be too big but you should still see valuable improvements afterwards.

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5 things holding you back as a trader

Top 5 things holding you back as a trader

I’ve been trading for almost 10 years now. Over the years, I’ve spoken to many traders who are on the verge of making it. Almost there.

 

Technicals or fundamentals knowledge, check.

Willingness to be consistently profitable, double check.

 

Still.

 

These traders are about 80% in their journey to become a consistently profitable trader. Even here, the Pareto principle is doing its magic.

 

They’re like a semi-pro football player almost making it to the Champion’s League. Or the aspiring actor trying to get that big breakthrough role. The trader is missing some essential, but not always obvious elements, and here’s the thing: without proper guidance, some of these traders will be stuck in this state forever. If nothing changes, the next step is gradually losing money and/or giving up.
Which is a shame. These are the traders that have put in considerable effort already, but are somehow missing that something to pull them over the edge of consistency. Do you recognise yourself in this profile? Keep reading. See, once you are at this level, it’s not about knowing how to draw a trend line. It’s not about chart patterns and price action. Most traders in this state of limbo usually even have some trading system.

 

But something’s holding them back.

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Reasons why most traders lose money

5 critical reasons why most traders lose money

“Why do I keep losing money?”

 

This question used to keep me up at night.

 

Have you ever wondered this too? I have, over and over again.

 

Losing traderWhen I was still struggling to become a profitable forex trader, I was desperate for the answer. Not only that, I wanted to identify the various pain points that made forex traders lose money. Find a structured way to tackle them. I wasn’t going to be a losing trader forever, no way. So I started researching.

 

 

Why do traders lose out?

 

The short answer is of course because it’s really hard to be consistently profitable.

 

But why? There are enough traders with a proven track record, so it must be possible. During my search, I’ve identified 5 of the most important reasons why traders lose out. I’m pretty sure that at one point or another, I’ve been through them all. But once I started working on them, I noticed a real turnaround in my trading performance! I couldn’t believe this, it really worked.

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Trading like an astronaut

Why thinking like an astronaut will make you a better trader

Frustrating, isn’t it?

You are trading for a while now, learned the fundamentals, created your trading plan – but still lose money.

It’s like building a sailing boat and learning how to navigate it. Everything lines up and you set sail, only to have a big wave tip you over when you’ve almost got to your destination.

You feel you’re close to reaching your goal but every time, something’s holding you back.

 

It’s exhausting.

 

But what if you could change your strategy and become more resilient to those big waves? Implement changes in order to make the scales tip on the right side of the trading equation?

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