Millionaire TradersAlong the same lines, trading strategies should also be tested. If
you have a strategy that you think will work, review prior instances
of this setup in your charts, look at what happens on multiple
timeframes to make sure that the strategy creates more winning
than losing trades. As you review your charts, you will also get a
better understanding of how the assets trades. Then, test it live
because quite often execution will alter your results, especially if it
is a very short-term strategy or one that relies on breakouts. Only
after you have achieved positive results on both back testing and
live testing can you implement this strategy with larger or more
meaningful trading sizes.
- Always Use Stops
The biggest prevailing theme in our book is that our traders protect
their capital and protect their profits. Before putting on a trade,
they always have a game plan and are conscious of how much they
are willing to lose on the trade. Whether you are a new or seasoned
trader, you need to do the same. Rob Booker said it best when he
told us that he trades defensively. Indi Jones has a similar take
when he said that in trading, your capital is everything because if
your capital is gone, you will have no opportunity to recover. Most
of our traders will risk no more than 5 percent of their account on
a single trade. Although the majority of novice traders will agree
that this is the proper maximum risk to take, few will do more than
pay lip service to it. In order to truly appreciate the need to limit
your risk per trade, all you have to consider is that if you lost 25
percent of your capital, in order to return to your original equity
value, you would have to earn 33 percent. Alternatively, if you lost
75 percent of your capital, you would have to return a whopping
400 percent just to get to breakeven.
Protecting profits is just as important as protecting capital.
Nearly all of the traders who we interviewed will scale out of their
positions because they realize that the last 15 to 20 percent of your
position can account for a significant portion of your total profits.
Since most asset classes are trending, smart traders will realize
that if they catch a breakout move, the move can last for a long