What It Takes to Be a Profitable Trader Part 1 by Adam Khoo

Madame Koo and I'm the sound of wealth Academy a trading investment school where we empower retail investors to profit like the professionals and how you trade as a professional trader so in this video this lesson I'm going to be focusing on what it takes to truly be a consistently profitable trader so whether you're beginner was losing money or you've been trading for some time but you're not making money consistently I believe that this lesson is going to show you the keys on how you can become a lot more profitable consistently so what does it take to be a profitable trader well it takes three things that have to work together the first thing is you have got to have a trading system with a positive expectancy I'll call you a statistical edge in the market so what it means is that you know if you keep trading over time you will always make money if you watch my previous video on trading like a casino it's kind of being a casino that you know in the long run the house always wins the casino always wins because they have a statistical age in the markets so your trading system has to have that positive edge in the market so let's break it now first and foremost what is a trading system a trading system is a specific set of entry and exit rules based on a sound methodology of how the marketers work well first and foremost I can tell you that 90% of traders do not have a trading system right they buy and sell randomly you know based on news or based on emotions or based on rumors or a method right for example you know they read the warmth assets buying IBM vehicle buy IBM they are reading that this guru said it goes going on they're shorting goal so if you don't have a consistent set of entry and exit rules you can make consistent profits and perform consistently so what do I mean by a trading system so here are a few examples of some simple trading systems that are pretty common okay one of them is a trend following swing trading system based on equities on daily candles now this methodology is based on the fact that a market strand stocks trend for example on an uptrend it tends to continue going up but on an uptrend prices don't go up in a straight line what happens is they will have an impulse retrace impulse retrace impulse retrace this is a methodology in the market and often times when the price retraces it tends to retrace to a moving average which acts as a support level so in this case this swing trading system is based on a retracement to a moving average like the 50 moving average so for example if you look at a break clear trending stock like a is you can see that impulse with a retracement impulse retracement impulse retracement so once you see a repeatable pattern in the market you can build a trading system around that pattern but again your entry and exit rules have to be consistent so let's look at an example of that so in this case what are our entry rules for this trend following system first we want to see the 20 exponential moving average above the 50 moving average which means the red line above the blue line because this is an indication that the trend is a clear uptrend next we want to see price retracing and testing the 50 moving average and I know it's hitting the 50 and bouncing off whether 50 becomes a support level so in this case you can see the rich impulse is retraces and test the 50 so that is the second criteria the third criteria is we want to see the stochastics below 30 which means this full stochastics has to be below the 30 level because when it's below 30 tells us that the price is temporarily oversold and it's due to bounce so that the probability that's going to bounce up and continue the uptrend so once you have all these conditions that are met you can put your buy order so again where you buy it's got to be a specific price okay so we place our buy entry three cents above the bullish candle so in this case after the price has bounced off the moving average this is the first bullish candle we see so we will place according to our rules our buying order or entry price three cents above that candle which would be 36 50 in this case now next question is when do we exit against could be specific right in this case we either exit with a loss or we exit with a profit so we will place a stop loss order 3 cents below the swing low price so where was a recent swing low during the retracement you'd be somewhere over here that's a swing low so we place our stop loss 3 cents below the swing low in this case it would be a 35 30 so this means our risk per share would be one dollar 20 cents so for every share we buy if it is our stop loss and it's a losing trade we lose a dollar 20 per share that's the maximum we can lose so that our maximum risk hence our our distance next where do we exit with a profit we will place a tick profit target at to our above the entry price so if we are risking 120 that's one our distance watch to our distance to 40 so big profit would be 240 plus 36 50 that will give us 30 890 so that's where we will exit with a profit so this is what I call a very specific trading system so when we enter the trade the only two outcomes in either shipped off stop-loss where we lose a dollar 20 per share or one our assets our target price where we make $2 40 cents or 2 R in other words we're risking $1 to make $2 for this system now here's another example of a trading system and this trading system is that using a different methodology from the first one the first one was based on trend following we follow the trend but markets don't trend all the time right there times and markets goes sideways stocks go sideways so when stuff goes sideways you find that stocks tend to revert around a mean so this is known as a mean reversion swing trading system so for example you take a look at coca-cola this is a period of time when coca-cola is going sideways so when the stocks going sideways and you're doing trend following it's not going to really work you've got to use a mean reversion system so one of the again a simple common trading system is one using Bollinger Bands which is the upper band and the lower band and an interesting repeatable price pattern you see is that prices tends to move between bands so when it reaches the upper band it has to go down a bit upper band goes down hit the lower band goes up upper band goes down and it ding-dongs between the bands so that's a real people price pattern again we can build a trading system around that phenomenon all right so again you need specific entry and exit groups so here's an example of a trading system that utilizes this methodology so the entry rule would be when the price touches the lower Bollinger Bands so in this case it has to touch the lower Bollinger Bands over here over here and over here now so that's the first condition the second condition is when it touches or it goes out of the lower Bollinger Bands we have to see a bullish reversal and all stick passes for example like a bullish pin bar or a one-way soldier or a morning star pattern that you can watch from my earlier videos so in this case you can see does it meet that criteria yes it does because the price goes down keeps the lower Bollinger Bands and we see a bullish pin bar over there so that satisfies the two entry conditions so where do we place our buy order again specifically we place our buy order three cents above the bullish reversal candle so in this case we place our buy order over there three sends a birthday candle $43.80 in this case so that's where we enter now when we exit once again always remember in a trading system you either exit with a profit or with a loss so you're going to set a stop loss price so we're going to set an exit price three cents below the reversal candle which will be three cents below this candle in this case it will be 43 25 so what's the risk we are taking per share so if we buy it forty three eighty and it fails and hits our stop loss we would lose fifty five cents per share that's the maximum amount we can do per share and that's our risk or one hour distance so next when we exit the profit we will put a profit target at two are above the entry price so once again one hour is fifty five cents to our would be a dollar ten so a target price would be forty three eighty plus a dollar ten that will give us a target price of forty four ninety so in other words there are only two outcomes again it either hits the target price if the price goes up as we anticipate we make a dollar ten if it goes out goes down in terms of your losing trade to lock the losing trade we fifty-five cents or 1r so here's an example of a trading system showing you two fairly common trading systems but understand that they're literally hundreds of trading systems used by different traders and trading systems can be on different instruments for example there trading systems on stocks on Forex on options among futures and their trading systems that are based on scalping which means your trade lasts for a couple of minutes and you look at five minutes or a one-minute candles your trading system could be based on day trading or intraday trading where you're looking at hourly candles and you enter and exit within a day or it could be based on swing trading where it's based on daily candles and your entry and exit happens over a couple of days and we've been trading systems you have got trend-following systems and mean reversion systems to different methodologies so what's a trend-following system a trend-following system is one where you buy with the trend or you sell the trend so for example on an uptrend in this case this is an uptrend what you do that's right you buy on the uptrend you buy when you retraces to a support level and you buy before it continues the uptrend so you enter over here and you may exit over there that is a long trend bowing system if it's on a downtrend like that go down we trace down retraces and when you retrace this to a resistance level you would like to do a short sale and enter as it goes down so you profit as it moves down that's known as the trend following trading system what's a mean reversion system a mean reversion system could be one where the price goes sideways like that it's going sideways and what you do is you editor over there and you exit over there or you ends over here you do a short and you exit over here and you cover your short reversion system could also be one when the prices on an uptrend like this case but it goes to a point where it goes overbought at the high of the uptrend so you would do a short sale so you would sell on the uptrend because you believe that you will revert to the mean of the trend so you will enter over here you do a short sell entry over here and you would exit somewhere over here to buy back your short position to make a profit or if you see a downtrend in this case but the price plunges and it's oversold what you do is you take a buy long position and you answer when it goes up you exit you sell for profit before it continues the downtrend so this is what is known as counter trend trading your trading against the trend because it is a mean reversion system so the point is I gave you hundreds of trading systems and you have to choose one that fits your personality and fits your lifestyle and that's all the one the things that we do in our training program we teach you all these trading systems and we help you to find one it that suits your personality and your lifestyle now is having the right trading system important of course it is extremely important like I said your trading system has to have a positive expectancy but you know what I can teach you my best trading system you can learn the best trading systems for the best professional traders but you could still end up losing money because trading systems only make up 10% of your success 30% of your success comes from correct position sizing or money management so as position sizing all about it's about knowing how to calculate specifically how many shares to buy or how many shares to sell or how many contracts to buy or sell it can be based on your emotions or based on guess oh it's got to be a mathematical formula and in position sizing you have to always consistently you risk a small percentage of your capital I repeat you have to risk a small percentage of your capital consistently and it gotta be between 1% to 3% of your capital so why is this important because no matter how good your trading system is matter how good you are as a professional trader you can't have winning fits all the time it's impossible its cover you can't run a business without cost you can have sales and cost that leads to profits right so let me give a metaphor in any business you have got sales you have got cost of goods sold and sales minus cost would be you got the right profits for example if I have a shop and I'm selling clothes selling t-shirts right and I'm selling a t-shirt for $10 now it cost me $5 to make that t-shirt or to get it from a supplier what's my profit my profits $5 ok now as a professional trader we look at trading as a business so when we have a winning trade when we have a winning trade that is kind of like our sales when we have a losing trade it's kind of like our cost of doing business for example in the previous trading systems I showed you when we win we win to our right when we lose we lose one are we always risk one to make two or more why so even if we are right half the time for every win if we have a loss what happens we are still making one hour in profit so our profit margin is 50% just like any other retail business so here's the thing if your trading system has a win rate of 60% which is pretty good for trading system you have to be able to preserve your capital in the event of losing streaks which are inevitable why because in a trading system where your win rate is 60 percent or 50 percent for the manor you will not always see a win and a loss and a win and a loss and a win and a loss does it always happen that way sometimes you could get a string of losses in a row it's a fact of life and sometimes you may also get or you will also get a string of wins in a row and it is inevitable so it's kind of tossing a coin right so usually it's also going to get a kiss and the tails and hit the tail but you will come to a point of time when you get a string of tails in a row it will happen Austria your heads in a row so when that happens if you risk too much of your capital you may get wiped out before the winds come about so take a look at some statistics over here you can see that in your trading system has a win rate of 50 to 60% the probability of a losing streak is 12 to 16 which means that if you trade after a while you will come on of time when you get 12 to 16 16 losses in a row or 12 to 16 wins in a row so imagine if you were to reach 10% of your capital on a trade and you get 12 losses guess what your wiped out game over you can't rate anymore and that is why we only risk 1% to a maximum 3% for trade so even if we have a news industry it doesn't affect our capital very much we preserve our capital so that when the winning streak comes we make it all back in a whole lot more so how do you size your position so how do you calculate the number of shares to buy so that you always reach the same percentage of your capital well let me teach you the formula so first and foremost let's do a review we always risk a fixed percentage of our capital for every single trade so for example you decide to risk 1% per trade and we call it 1r and again our stands for risk all right so when you have a losing trade you lose 1% or you lose one R when you have a winning trade you win 2% or more right two or more so the formula to calculate the number of shares to buy would be as follows you take your risk per trade which would be 1% in this case x your existing capital and divide it by your risk per share also known as your 1 hour distance so this is your risk percentage or also known as your our percentage which in this case would be 1% multiplied by your capital which could be anything for example $10,000 10 gram divided by your risk per share this would be a one-hour distance which is the distance from your entry price to your stop loss price based on your trading system so let's take a look at an example over here so in this example I'm buying a stock at $8.50 and I place a stop loss at 790 so again how do I decide where to place my buy entry and where to place my stop loss well this all depends on your trading system which are using and I gave you a few examples earlier on ok so that's your buy entry that your stop loss so what is your risk per share your risk per share would be 70 cents or we call it your one-hour distance next where do we put our profit target well your profit target has to be always at least more than 2 times your risk so in this case if we are risking 70 cents we should aim to sell it at a profit of at least 140 so with this we can then calculate the number of shares to buy so let's use the formula let me draw it up for you so first we say I will reach betray which in this case is 1% so 1% multiplied by our capital imagine your capital is $10,000 right and you reach 1% of $10,000 what's 1% of $10,000 the other is a hundred dollars right so which means that in any trait you take the maximum that you can lose is $100 now how you know what is our risk per share our risk per share is 70 cents so every share we buy we are risking 70 cents and we can afford to take a total of $100 of risk so how many shares can we buy well the answer is you take $100 divided by 70 cents and that will give you 143 shares so this means your position would be $1.60 multiplied by 1 for 3 which means you would buy one thousand two hundred three nine dollars worth of Bank America shares in this case so is this the risk that you're taking no that is the position sign what is your risk your wrist is $100 so understand that your position is not equal to your risk this is your true risk which you're taking so in other words if it hits our stop loss it turns out they're losing trade we will lose 1% of our capital or $100 if it is our profit target we will get 2% return on our capital or $200 so to continue with this lesson please click on part 2 of this video and I'll see you on a next lesson

Channel: Adam Khoo

Views: 407,370

Keywords: adam khoo, adamkhoowealth1, wealthacademySG, stock trading, stock investing, technical analysis, ETFs, exchange traded funds, CFDs, wealth academy, AKLTG, stock trading strategies, trading psychology, stock trading for beginners

Id: jwS9yKUpIAo

Length: 24min 6sec (1446 seconds)

Published: Fri Feb 17 2017