What is something that I can do to improve my trading?
In this episode of 2 Traders Podcast, Darren and Walter reveal insider tips on simplest ways to improve your trading. Darren goes about his three easy methods for improving your trading results. Darren offers his “3 easy methods” for completely shifting your perspective on your trading systems.
According to Walter, there is one easy way to change your rules and improve your trading as a “side effect” but, can it really be that simple? Also, how do you find a good trading strategy? He also talks about a very special method of managing risk and how this helped a lot of successful traders.
You will also find out about the mighty power of one simple tool that you can use to create successful trading habits. All these and more in this episode…
Download (Duration: 23:33 / 26.9 MB)
In this episode:
00:59 – stress test
05:03 – devour everything
07:33 – fixed fraction
10:13 – drastically different
13:22 – often neglected
16:24 – the need to be right
19:12 – hard and fast profit
21:43 – pre-flight checklist
22:40 – checklist
Look at how much you are risking. [Click To Tweet].
We are built psychologically to not want to add to our winners. [Click To Tweet].
Step out of your comfort zones and do something different. [Click To Tweet].
Darren: Think about it, make your decision, and then think again…
Announcer: Two Traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.
Walter: Welcome to the Two Traders Podcast. Walter here and I’ve got Darren on the line. Hi, Darren.
Darren: Good evening, Walter.
Walter: We are going to talk today about the simplest way to improve your trading. Now, I am really interested to get your thoughts on this, Darren. Would you like me to go first or you want to go first?
Darren: Let me go first because I’ve got some quite short punchy ideas on this.
Darren: For me, three simple things. One is question everything. Go through how you trade, list down all the things that you believe to be true, question them and examine them. Try and stress-test them, try and prove them to be wrong.
That is the first one, question everything. The second one is always think twice. Whenever you are making a decision, always think about it twice. Think about it, make your decision, and then think again.
Almost the same as rule one but just question that instant four process because your first four is very often wrong. The third one is simply to use checklists. Checklists when you are trading and checklists to use prior to trading to make sure that you are following some rule structure, basically, keep you ordered in your trading.
For me, just three simple things like that will make a massive difference.
Walter: So, how did you come up with these? Where do they come from?
Darren: I stole it. There’s a lot of really good information from really talented, intelligent traders out there. It is really a case of digging around and listening to people. Seeing if what they say make sense and then testing those ideas yourself.
There is a guy called Michael Mauboussin. Have you heard of him?
Darren: Brilliant work! He’s written a couple of books, one’s called “Think Twice” and one’s “The Success Equation”. He just explains very simply how to be a good investor, a good trader. I’ve got a lot of ideas from him. Denise Shull as well.
Generally, all of those ideas I’ve learned from other people. Well, I’d like to say they were my ideas but they are not.
Walter: Got it, okay. I would say the simplest way I think to preview trading is to change your rules for risk. This is the area that will most drastically affect your equity curve, is doing exactly what you are doing, taking the same bias and same selves and the same exits.
Everything you are doing right now you could do exactly as you are doing. The only difference is the way that you manage your risk and the way that you decide how much of my account should I put at risk for this given trade.
That is probably the one area that will most drastically improve your trading. If you get into this, you could see exactly why this is. Why, in fact, you can take like an average or even below average trading system and turn it into something really exceptional just because you are changing the way that you are managing your risk.
This is something that I’ve been really getting into the last 3 or 4 years and I’ve just seen it over and over. I’ve seen the data, you can take a random system which is basically, in theory, has no edge.
In theory, you can argue that but you are just randomly taking entries in the market. If it’s got a solid risk management backing it, it will make money. What does that tell you? Or, you can have a system that has a negative expectancy.
That is not going to make money and if you tack on a really good risk management system to it, it will not lose that much money. It will not blow up your account so it’ll stay right around break even or something like that.
It is just fascinating to me that you can do that. That you can literally take a system that loses money and not blow up your account if you do it right. These things are funny to me but I think that is probably one area.
Darren: How do you go about getting a good risk strategy, then? How do you break it down to layman’s term? How are you doing that? Is it just the case of not risking too much on your trades or is there something else going on there?
Walter: It gets quite involved but, basically, what I’ve done is I just devoured everything I can on the books and the courses on the subject. There is a really good game, too. I am… Actually, I want to create a game. Kind of behind the scenes here of what we are doing and maybe it’ll be out by time you listen to this podcast.
What I want to do is create a game for forex traders too because I want to make these things really obvious. Probably, the easiest way to make it obvious is to just show you in the form of a game.
That is what you are doing as a trader. You are applying rules of the game. That is why game theory and probabilities are so important when you are talking about risk management.
To break it down to the layman’s term, there’s a couple of different things that I would suggest. First, you have to just familiarize yourself with all of the different methods that you can use to manage risk.
For example, shared traders, they often think in terms of risk. They think of “Well, I’ve got $10,000. With this $10,000 I have to divide it up, buy different type of shares”. That is basically their risk management.
Now, when you get into futures of forex, we see it a little bit differently and we often think in terms of percentage at risk. “I am going to risk x percentage on this system or on this next trade”.
Those are very simple ways of looking at it and, in fact, there are many different other ways of looking at it. I would suggest that anyone listening to this, if you are interested with this, you should read Ryan Jones’ book “The Trading Game”. Have you seen that one, Darren?
Darren: No, but I’d like that.
Walter: Yeah, it’s a good one. Ryan Jones has something that was very different to what everyone else is looking at at the time. Basically, what he put forward was his idea. I think he is dead now.
I think he died over the last couple of years but I am not a hundred percent sure on that one. I think he did die. Basically, what Ryan did was he setup this idea of Delta. If you are getting into risk management, you’ll run into Ryan’s idea because they are very love-them-or-hate them. They are well discussed.
Ryan Jones’ idea, so he came up with this idea of Delta. Whereas, when you are using which most futures traders and forex traders used, it’s called the “fixed fractional method” which is basically you’re saying “I’m going to risk one percent on every trade” or “I’m going to risk two percent on every trade” or whatever that amount is. That is the fixed fraction that you are risking.
Ryan’s method is called the “Fixed Ratio”. I’ll give you a concrete example. What Ryan did, let’s say he had $10,000 account and you’re risking 5 mini lots. So, you are risking 5 mini lots on your trade and you’ve got a $10,000 account.
Now, as soon as your account goes up one delta, and delta is something that you get to define, then you will up the increment. There’s two variables here: it’s increment which is how many more positions are you going to take.
In the case of this account, you’re taking 5 positions in the beginning with that $10,000 and then your delta is “How much does my account go up before I start adding more positions?”
If your delta is $1,000 then as soon as you get to $11,000, your increment kicks in and now you are able to take more trades. You are taking five contracts when you’re at $10,000 and you are still taking five mini lots when you are at $10,980.
As soon as you get to $11,000 and you’ve made all the hump — now you take for example $10 — so now you’ve got 10 mini lots or one standard lot. That is how Ryan set it up. People will argue against Ryan and say “Well, that means your risk is varying”.
That is true and it is actually a little bit more risky in the beginning because you might be risking 5% of your account, whereas with the old method, the fixed fractional, you are still risking 2% on every trade.
It actually varies with the fixed ratio that Ryan Jones put for. The other side of that is as you get into a larger account, what happens is the fixed ratio that Ryan Jones was the proponent of — supposedly the inventor of, I suppose everyone agrees he invented it — he is not risking as much as you would if you are using that 2% per trade rule.
You can switch back to that, if you want, as your account gets really big. It’s one of those things where the deeper you get into risk management, you can see all different types of ways in doing this.
You can run simulation studies and see “What would’ve happened if I use my trading system with Ryan’s method with my delta set at $500?” or whatever. You can get into all these stuff.
It is really fun to see kind of “what-if”. I encourage all traders who are thinking like “What can I do? What is something that I can do to improve my trading?” I would encourage you to look at how much you are risking and see different ways of tweaking that because it can lead to drastically different results.
Darren: Is that something that you would employ later in your trading education? Is this something that we should do from day one? Do you think it would be better to start with a simple fixed percentage or idea and then get a strategy, the kind where it works where you want to improve the performance of that strategy and then start looking at these ways applying with risk?
Walter: Yeah, I think so. I think it is a natural progression. I really do believe that we go from… As traders, typically everyone is different, but typically you can always find someone who does not fit this mold. Typically, we focus on the entry then we move to the exit and then finally we get into psychology and risk management.
I think the last phase of trading is psychology and risk management. In the beginning, it is all about finding that perfect entry, getting your win rate up. Then, it’s about trying to get those exits nailed down so that you maximize your profit or at least feel good about what you are doing.
In the end, it is at that point where you say “Yeah, okay. Alright, I’ve got to work on my head, what is going on here, and how can I change things with risk”. It makes a lot of sense, I think, to stick with the fixed fractional 2% rule or whatever you’ve decided to do.
You should be aware though that the amount that you choose, obviously, is going to determine the type of drawdowns you are likely to see. That is one thing that people don’t link up. They think “If I am risking 1% versus risking 2%, I can just get to my target twice as fast” or whatever.
If I am risking 2% or even faster than when if I am risking 1%. Well, of course, you’re also going to change the drawdowns that you’ll experience as well and you have to become aware of that.
If you are looking at risk management, the other thing that people can do is — which is quite simple, — is they could just add to their winners. I know that you’ve done a lot of this in your trading.
When you were doing a lot of four-hour stuff, I think you mentioned that before like this idea of adding to your winners and taking advantage of a winning trade, is something that traders tend to look at a little bit later on in their careers because it is something that they realized “If I am winning 45% of the time, it’ll really be nice if I could make those winners a little bit bigger”.
I mean, they are bigger now but they are bigger than my losers now. Obviously, I am making money but if there is some way that I can add to these winners that would also be a way for me to improve my profitability and change my results, the bottom line then, I agree.
That is also an area where you can totally change your results just by sending up a few different rules of “Okay, when do I add? How do I manage risk with multiple? If I add more positions to move to break even, is it the same size? If I buy 5 mini lots on the first entry, do I buy 3 on the second when I am adding to move to break even on those 5? How do I manage all that?”
All those things that you can work on are not really related to your entry. They are not really related to your exit. They are just sort of that risk management aspect of trading that is often neglected. That is an area that you can definitely improve.
If you’re coming along with your system and you feel good about it, this is an area that you can definitely work on and see some fairly significant results.
Darren: What is your feelings on this idea of rather than having a binary system where you are either, you are in a trade or you are out of the trade? This idea of making it where you place a part of your position on and then if the trade moves in your favor then you add a little bit more and so on and so forth. What is your feelings on that?
That is what you are saying about adding to your position but, generally, when I add to my position, I’ve already got a whole position on then I’ll see another valid setup so I’ll add a second position rather than breaking my initial position down into smaller pieces.
Walter: Yeah. I think, for me, it is a lot like exit. The way that I look at exit is you do not have to choose. You do not have to say “Okay, I am going to go for a 2 to 1 target on my exit” or, “I am going to go with the trailing exit here”.
You can choose both. You can do both. You can have a 2 to 1 and you can also have a trailing exit. It’s like “I’d like to have an exit that is 300 pips away but it would really be nice to have an exit 700 pips away”.
You can also use both. In that way, you may not hit them both but at least you allowed yourself that opportunity if the market does give you more profit. The same thing can be said for what you just talked about when you are adding position.
It is like in your strategy that you are trading now, you have built into it additional positions. But, like you say, you view it as a new signal altogether because that is what it is really.
It is a new signal but you just happen to have another trade that you took earlier in the same direction, presumably you are still running that original trade.
Darren: I’ve always thought that it wouldn’t make logic to me where traders would ignore systems that happened. What I say what were already in a trade that they haven’t TPed because essentially it is the same signal and somehow because you are already in trading profit, the new signal should be left.
That does not make sense to me because, essentially, what is happening is things are going your way, your signals are proven to be right and another one setup and you are going to leave it.
I think, obviously, their reasons are for risk reasons and they are using their risk control there. For me, if I am already in a trade, that is irrelevant. It is a valid system whether if it is happening at the same time or after I TPed the first signal. To me, makes really no difference.
Walter: I think also it is the need to be right. If you already bought the EUR at a dollar ten, 1/10, you’ll get another signal at 1/11, there is no real reason to buy and again because you could be wrong on the second one.
This is the same reason why you’ve built up all the psychological energy that you sank into this trade and then you’ll get another signal. It’s like “I cannot deal with this”. It is the same reason why when you get a trade and you are in the trade and then you get an exit signal when you are out of the trade, and that exit signal happens to be a reversal signal.
Let’s say that you sold the EUR and then you get an exit signal, you get out of the EUR when it happens also to be a buy signal on the EUR and you don’t turn around and buy there.
A lot of traders won’t do that because they were right. They took a trade, they were winner, they make money and now, they do not want to have this other opportunity to be wrong again.
They’ve sunk all this energy into that first trade and the second one is like and also they can be colored, they can be seeing the market from one point of view and they think that it is only going to the direction of their winning trade that they just closed.
There are a lot of different issues there but one of the reasons why — and you’ve touched on this — one of the reasons why traders do not want to add to position because they do not want to be wrong.
It could be related to risk as well. It’s ironic because many traders are more than happy to take a trade when the market has gone against them. Let’s say that I buy the EUR at 1/10 and then the market goes down to 1/09 and then I say “Well, if this was a buy at 1/10, it is really going to be a good buy at 1/09 so I am going to buy it now at 1/09”.
So they are adding to their losing position and many traders are much more comfortable, especially in the beginning, taking multiple positions when the market’s going against us.
They find it very difficult to take a positions when the market’s going for you or in your direction and it is ironic, isn’t it? Because it’s sort of like the way I see it, it is like going to a restaurant ordering food that you are eating and think “This is terrible, I’ll have another. Can I get another one please?”
It is the same sort of logic, isn’t it? Where you would want more of what doesn’t, what’s not really working. I think we are built psychologically to not want to add to our winners. It is one of the reasons why successful traders are able to get around this bias.
They are okay if they get stop out at break even when they add a new position. They are okay if the trade does not work out especially if you’ve got different strategies applied to the same trade.
Maybe you split that trade up and maybe one of them has — you are taking the same trade twice and one of them has a hard and fast profit target. The other one has multiple positions added or trailing exit or something different that’s meant to take advantage of a longer move or further move for you.
I think that, definitely, risk is an area that I would suggest that, for me, traders can really improve their result quite a bit. The thing is you don’t necessarily have to do anything different. You are doing the same thing. It’s just the way you are managing your risk.
Darren: Yeah. It is an area of trading that I haven’t really delved into and probably something that I should look at myself. That point about people adding to losing trades, I agree with you on that.
I see it all of the time. People are really very comfortable with having no stop loss and just adding to trade that is stepping down farther and farther away from their take profit. It’s really weird and it just highlights the fact that if something feels comfortable in trading, if something feels good, then your warning lights should come on because, generally, it is the worse thing that you could be doing.
Walter: I agree, absolutely. Let me ask you about this, Darren, about the checklist thing. Let’s say that you are a person who is a little bit disorganized, a little bit scattered and maybe kind of a creative type so you don’t do well with procedures, checklist and things like that. What can you do to set it up in a way so that you are taking advantage of the power of the checklist or something similar to that?
Darren: That is a good question, Walter. I think, really in this instance, this is one of the cases where you have to force yourself to do something that perhaps you are not good at or don’t particularly want to do.
You cannot have a checklist in your mind but really to see the benefits from it, it is about having that break in the four process and stopping to write stuff down and that highlights whether you are making errors or not.
It is like if you were to say what if you are a creative person but you wanted to be a pilot, would you forego your pre-flight checklist then? No, you wouldn’t because you’ve accept that it is an important part of safety when you are a pilot.
The reasons that it is a written checklist and pilots still rely on their experience is because it works and it also works in other fields like the medical field. Surgeons and such have certain checklist to do with hygiene and process.
I don’t think there really is a way around this. You just have to be more organized and you have to force yourself to do it because you want to be more successful and it is a proven way of improving your process, improving your execution and performance and improving your decision making.
For me, if you are going down this route then there isn’t really any way to do it. There is actually a really good book on checklist and if you could put it, I’ll give you the link for it and perhaps put in the shownotes, Walter, so people can check out.
My thoughts on it is it is one of those things where you really have to step out of your comfort zones and do something that you might not necessarily like or want to do.
Walter: Thanks, Darren. That is a great advice. It is interesting how trading forces us to confront our weaknesses and I think that is great advice. Will definitely stick that on the shownotes for the listeners that are interested in that. We shall see you next time. Take care, Darren. Bye.
Darren: Cheers, Walter! Bye.