THE HAnDbook of TECHnICAl AnAlysIs■ (^) Will you risk more per trade if the system is guaranteed to make money?
■ (^) Imagine your trading system has a winning percentage of 34.6 percent and
you are currently making money with a two‐to‐one reward‐to‐risk setup. To
make more money, would you be willing to risk 2 to 5 percent, assuming that
your system continues to perform consistently?
■ (^) Do you start re‐optimizing your technical‐based parameters once you suffer
losses?
If your answers were affirmative for any of these questions, then there is a very
high probability that your trading account may experience risk of ruin over the
long term. The main problem is that the reasons for a trading account losing may
not always be obvious to most traders and, as a consequence, they have no way to
address issues that they are not even aware of within their trading systems. Traders
in this situation resort instead to changing brokers, markets, timeframes, oscilla-
tors, and even trading strategies in the hope of finding a system that finally works.
As you will see, the most effective solution is usually an adjustment based on
money management parameters rather than on the never‐ending re‐optimization
of oscillator and indicator settings.
We also need to ask the following question: What is the main goal or
objective of a directional trader or directional trading system? The answer to
this important question is simply to do whatever it takes to position oneself
with the highest probability of profiting and lowest probability of losing over
the longer term. Furthermore, there is no such thing as guaranteed outcome
or success in an essentially semi‐random and uncertain market environment.
What a trader needs to do, and indeed the only thing that can be done, is to
somehow severely skew risk in the trader’s favor. This represents the only ob-
jective of any trader or trading system. The trader is not there to make a profit
per se, but rather to control the risk associated with generating a profit. In
fact, no directional trader can ever profit in the markets if the markets remain
flat, regardless of how many orders are being placed in the markets (with the
exception of collecting option premiums). To make money, the markets must
move. Hence, it is actually the market’s job to make money. All any trader
can do is position him- or herself in the markets and wait. All a trader can
control is what he or she can control, which is risk. Individual traders cannot
control market action and, as a consequence, cannot exert any control over the
amount of profit that can potentially be made. But losses can be controlled and
contained. Money management is all about planning what to do should the
worst‐case scenario unfold. We shall refer to this as applying the worst‐case
scenario principle (WCSP).
In Figure 28.1, we see that a balanced trader requires mastery over three criti-
cal areas of management:
- Money Management
- Trade Management
- Trader Management