Most of us would like to have big winning trades. The kind of big profits that wipe out any losses in one go and boost your trading fund to fresh highs.
But, unless you’re following these simple rules, you’ll never get those kinds of returns …
Making friends with tail risk
Tail risk is all about extreme outcomes. The ones where you make a huge loss … or lose a huge profit. They don’t happen very often, but, when they do, they have a big effect on our financial health (either positive or negative). (You can get more information on tail risk in an earlier post HERE.)
In the real world these might be called ‘black swan events’ … but the markets have proved themselves to have ‘fat tails’ – i.e. these ‘extreme’ events happen more often than we’d expect.
That’s bad news when we lose money on them, but good news if we can win.
And these aren’t little winners – they are the big ones.
So, how do we capture these big wins?
The answer is surprisingly simple … we just have to ensure our profit targets are generous enough. If we’re forever grabbing at small profits, then we’ll never get to enjoy the big windfalls. So, we have to follow trends, and let our profits run.
But isn’t that being too greedy? Won’t that leave us vulnerable to market reversals, and losing all our profit?
Of course, letting profits run needs to be done in conjunction with risk management – specifically, bringing in a trialing stop loss to protect your profits.
So, there we have it … the formula for a successful strategy:
- following longer term trends over a period of weeks
- generous profit targets to capture big winners
- trailing stops to manage risk
These simple steps mean that we can tap into that shaded area on our distribution curve …
But there’s one more vital component needed …
Nice balanced distribution curves only form where we have a large sample size. If you only place, 10 … 20 … even 50 trades, you won’t see this kind of picture. So, you have to stick with it long term to start enjoying the statistical upper hand that this kind of trading offers.
So it needs to be simple enough to stick with long-term, not taking too much of your time or energy.
And that’s exactly the kind of trading I want you to be enjoying in 2018.