REST — The Key to Success in Financial Investments
In order to be profitable in any form of investment, a trader needs to put every defining factor into perspective. Although the market is dynamic in its nature, it is important for every trader to have some established rules that govern their trading. This means that by fixing some aspects of your trading, you are indirectly taking care of your emotions, and thus giving yourself an edge to succeed in your chosen investment. “REST” above stands for Risk, Entry, Stop-Loss, and Target, and in the following paragraphs, I will explain why it is important to fix the above parameters if one aims at becoming successful in trading.
This is one easily overlooked aspect of trading. It is nothing but wise for any trader to be conscious of the risk that they are taking in any particular trade. Before taking a position, traders need to know how much money they might lose, and make sure it is within their comfort zone before they place the trade. Without proper risk management , traders cannot make defined claims on the profitability of their trading approach. For example, a trader might be over- risking during a losing streak or under-risking while they are scoring home runs. There are many different models of risk management in the investment world; however, there is one very nice model that requires a trader to risk a fixed percent of their equity in any trade that they take. The aim here is to increase your profitability during winning streaks while reducing your potential losses when the losing trades surface. This is the model that I personally use for my trading and it works well.
Based on the experience that I have garnered over the years, I have come to believe that it is also very important for traders to have a fixed entry for their trades. This might sound a little confusing; nevertheless, it is pretty simple. Anyone who has been around the block for a while should know that round numbers are good levels of support and resistance. These are numbers that end in 50 or 00; for example, 1.4200, 1.4250, etc. The reason behind this is that most of the big investors tend to base their entry and exit at round numbers, thus causing a change in market bias at those price levels. That being said, not all round numbers serve as entry prices, but when they are in the neighborhood of a bullish or bearish confluence, they tend to serve as near perfect entry levels.
Before entering a trade, it is important to have predetermined stop-loss levels and actually place the stop-loss order while you are placing your entry order. Under no circumstance should you move your stop-loss further away from entry price after you have entered a trade. If there is need to trail your stop-loss, it should be towards the entry or against the direction of current market bias as a way of minimizing potential loss. One big mistake a lot of traders make involves the idea of mental stop-loss. This basically means that the trader determines a stop-loss level; however, they don’t actually place the stop-loss order but are willing to manually close the position should price get to that level. Please, this approach is not acceptable in the world of profitable trading. I mean, if you already know the price level you are willing to exit your trade, why can’t you just place it as a stop-loss order? It is that simple. Market volatility can change instantaneously, thus moving price hundreds of pips in a couple of minutes. For example, on 6th September, 2011 during the SNB intervention, the Swiss franc pairs moved more than 800 pips in less than 5 minutes! Imagine you were using mental stop-loss and stepped out to go and get a cup of coffee just to come back 5 minutes later and see your live account in red. Remember, such news is not usually posted on economic calendars. So, be warned. And, of course, don't even think of trading without stop-loss order.
Just like in the case of stop-loss, it is also necessary to have a predetermined profit target level before entering a trade. Don’t let your emotions take charge of your trading by deceiving you to believe that the current market volatility will continue in your favor past your target level, thus causing you to get greedy by modifying your target in search for more pips or worse still, remove it completely. Fix your targets and make sure they are logical also. The market usually shows repetitive price patterns, and you can benefit from this by reading price action and setting your target levels accordingly.
It is only when you fix the “REST” above that you can have some rest and leave the rest to the market.