Trying to find the right trading strategy that will help increase your profits is incredibly important. Maximizing your stock market profits is done by minimizing the risk whenever and wherever you can. These two elements of trading go hand-in-hand.
This is such an overlooked aspect of trading but did you know, that you can actually increase your profits, simply by losing less on your losing trades? Well of course when I write that, it sounds painfully obvious. But is it really that obvious? I mean, think about it a second…when we get into a trade are we simply considering the hope surround the trade of making big bucks, or are we focusing instead on the risk and how we can keep it to a minimum.
Let’s continue on this thought that we are on here:
- Are you looking stock market profits as an individual trade;
OR
- As the collection of well-managed trades, both winning trades and losing trades, over a period of time?
If you are not looking at it from the latter perspective, you are in big trouble!
No worries though, because, this post focuses entirely on your trading strategy and what it takes to increase your profits in the stock market and your collective trades as a whole.
There is a handy Risk-Reward Table that will help you with increasing those profits – so be sure to want to download as well from my free resource library.
So let’s get going on this, shall we?
We all want to get out at the top – you do, I do, we all do. When we get out of a stock, what do we do? We watch the stock trade for a couple more days, may a couple more months, to make sure we get out at the high tick.
Oh, and it can sure wreck have on our trading strategy when we think we are making decisions that doesn’t result in us getting every last penny out of our trades.
Do yourself a favor: Stop trying to get out at the top!
I mean seriously, do you know how utterly stupid that is? How many times have you had a stock go up 3% on a breakout, you get all excited, thinking you picked a real winner, you go to the kitchen to grab a snack and find out it is only up 2% now.
You panic, you start to worry, but you say to yourself, “I’ll just wait for it get get back up to 3% and then I’ll sell it.”
Well there you go, you are trying to get out at the top, and the market doesn’t really care about rewarding you with that 3% you find yourself entitled to suddenly.
Instead, ask yourself whether the chart is starting to breakdown here or whether it is still valid. If it is valid, fine, raise your stop and stay in the trade. If the chart is breaking down, take the 2% and move on to the next trade – think about what you just did. You made a solid 2% on the trade. Sure, it was up 3% earlier, but that was not in the here or now, and you instead have an opportunity to build on that winning trade with your next trade that could be a winner.
You follow me so far?
Otherwise, before you know it, that chart that is breaking down, is now only holding 1% in gains, and then zilch, and then you are taking a loss. All so you can somehow recapture that 3% you think you should be given by the market. Don’t stubbornly take a loss simply because you want that 3% still. It is a slippery slope for individual trades, when you want to get out at the top. All traders want to get out at the top, but the real profits come when you protect the majority of what you have, get out with a profit and can move on to the next trading opportunity.
Related: Trading Psychology: 5 Trading Tips for Becoming Mentally Tough
This is key here, y’all. You have to know this stuff. If you don’t, your trading strategy will suffer and along with it, any and all of your profits from trading in the stock market.
First off, calculate the percentage of winning trades that you have had over the last three years. Mine is 52% – anything over 40% is usually a winning frequency. But it doesn’t stop there, because you need to know what the average loss that you take is, and then go about calculating what your average winning trade makes for you.
Once you have done that, then go ahead and calculate what is your average losing trade. For the purposes of this post, let’s keep it simple and say that you win 50% of your trades, you have 4% that you average on your winning trades, and 3% on your losing trades.
Your reward for every 1% risked is is only 1.33-to-1. That is simply not good enough. You need to be at least 2:1, if you are winning 50% of your trades. So you need to start identifying trading opportunities that allow you to place your stop-loss just 2% below your entry point. This will allow you to maximize your profits on your 4% average winners and your 50% winning frequency without putting more pressure on you to press your winners for more profits.
But all things being the same, let’s assume your average losing trade was 5%. That means, the flaw in your trading is that you are losing too much on your losing trades and that alone is what is keeping you from having a profitable trading strategy. It has nothing to do with your winning trades. So adjust the risk and stop-losses accordingly.
As for myself, I aim to keep my losing trades within a 1-2% average. In doing that, I’m looking to make a 3:1 return on my trades for what I am risking.
To help you with this important aspect of trading I’ve put together an extremely helpful spreadsheet that will help you to identify how much you should be risking on each individual trade.
It drives me nuts how people will buy a stock simply because it is bouncing while totally ignoring huge levels of resistance that is clearly marked overhead.
For example let’s say that part of your trading strategy is identifying inverse head and shoulders patterns following large sell-offs. That is a legit trade setup, and one that I personally really like. If you, however, are getting into one of these trades at $100, but there is multi-month or year long resistance at $102, then why would you get into it?
There is a very good chance that your stock that you are trading will not allow you to profit a great deal, because once that resistance level is reached, a lot of previous buyers that were trapped in that trade, are going to be looking to get out of the trade that they bought at $102 (i.e. resistance) and as a result, the stock will have a very difficult time pushing beyond the area being occupied by the bears. Therefore, even though you thought you might have had a 2:1 risk/reward you were really going into a trade that was never going to give you anything more than a 1:1 reward to risk ratio.
So be mindful of the resistance overhead. It comes in all shapes and sizes and it also goes for shorting stocks too. If you are shorting a stock that you have a 2% stop-loss on, but there is a massive multi-year support level just 2% below your entry price, you are not getting into a good trade at all, and no matter what the likelihood you think you have at success, the reward-to-risk ratio does not justify it one bit.
So don’t do it. Support and Resistance are real obstacles when they stand in the way of the direction you want a stock to take. When that happens, just move on to the next trade – there is no shame in it.
Putting Your Trading Strategy All Together
You see, sometimes, the key to improving your returns isn’t in finding a better chart pattern to trade or finding more volatile stocks, or getting rid of large caps and focusing solely on small caps. What it will really come down to, is how you are managing the risk of a trade and what you are doing to minimize the risk impact to your profits.
In the end, risk eats away at your profits. Keeping risk to a minimum will all you to maximize your profits on your winning trades. Those winning trades take a lot of hard work. Why then would you let it get eroded away, by risking equal amounts of risk compared to what you are bringing in on the profit side?
That’s why what I am telling you here makes sense and as a result you should thoroughly vet your trading results.
So, tell me, what are you doing to minimize your risk on your individual trades?
