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Trading in Percentages

02/01/02 10:05:33 AM
by Archie Johnson

Having a system and sticking with it can be the key to successful trading.

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Do you ever second-guess your decision about entering a trade just after you put it on? How about after hearing another analyst's commentary that differs from your own view? Or maybe you begin to worry when the market moves against your position during normal price corrections? If so, you are not alone. All beginners and unsuccessful traders do it. It's only when you develop your trading methodology and trade in percentages that you transform yourself and become a successful trader.

To trade in percentages you must be confident with your trading system. You must have a trading plan in place that will take you out of a trade when you are wrong with minimal losses, and that maximizes your winning trades when prices move in your favor.

To illustrate, let's say that out of the total one hundred percent of trades you enter, your system produces fifty percent profitable trades and fifty percent losing trades. On the surface this would appear to be a breakeven system. However, if you cut losses short on the losers and let profits run on the winners, a system that produces a 50/50 win/loss percentage ratio is very profitable. One winning trade maximized to its fullest potential will make up for many small losses! If you trade this way the law of averages will ensure that you will be successful.

Successful traders already have their trading system developed, and they have determined the average win/loss ratio. They are not concerned with normal daily price fluctuations, or having several losing trades in a row as most new traders are because their percentage of profits is much higher on winning trades than the percentage of losses on losing trades.

Want some rules to trade by? Legendary trader W.D. Gann had 28--about half of them apply to trader psychology and trading in percentages. These rules are just as relevant in today's volatile market as they were when Gann originally wrote them in the 1940s.

(From "The Gann Method", John J. Blasic, Technical Analysis of Stocks and Commodities, June 1992)

1. Always use stop-loss orders.

2. Never overtrade.

3. Never let a profit run into a loss.

4. When in doubt, get out, and don't get in when in doubt.

5. Never average a loss.

6. Never get out of the market because you have lost patience or get in because you are anxious from waiting.

7. Avoid taking small profits and large losses.

8. Never cancel a stop-loss after you have placed the trade.

9. Avoid trading after long periods of success or failure.

10. Don't try to guess tops or bottoms. (Guessing is gambling - Vegas will pay better than the market.)

11. Don't follow a blind man's advice.

12. Reduce trading after the first loss; never increase.

13. Avoid getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake.

To become a successful trader you must develop a trading plan that fits your style of trading. You must test your trading plan both on paper and in real market conditions to become comfortable with your win/loss ratio, and maximize profitable trades and minimize losing trades. By doing this, you realize that your percentage of profits will outweigh your percentage of losses over a period of time. Therefore, you are no longer second-guessing trading decisions, or concerned about losing traders. You are now trading in percentages.

Trading selectively by taking only the best signals that your methodology suggests and trading in percentages will not only produce more trading profits, it will also produce a more relaxed and more focused trader. Remember, the unpredictability of the market is stressful in its own right - don't add to it with something you cannot control.

The day you can enter a trade based on your methodology without second-guessing your decision is the day that you become a successful trader. How long will it take? No one but you can answer that but when that day comes you will know it.

Archie Johnson

Title: Owner
Company: Virtual Trading University
Address: PO Box 410
Calera, AL 35040
Phone # for sales: (205) 668-2503
Fax: (205) 668-2503
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