Small Money, Big Deal

We are often told that the big money always put risk control in the first place.

Small lots, multi-strategy, back-stage forced liquidation or third-party risk control… These are some of the risk control methods for funds management that are known to all.

However, there might be some misunderstandings. Although the big money attaches great importance to risk control, it never means that they put trading abilities to the second tier. However powerful the risk control methods are, they will not work if based on awful trading.

For big funds, choosing a strategy is trading, which may sound a lot like Followers on Followme. The basic operations are very similar too. Yet the judgements of the big funds are not simply based on certain strategies. Relying on a large number of strategies that they know and the quantity of capital that they have to test, the big funds can compare strategies not just from trading abilities (trading ability ≠ rate on return), but also the correspondent trading environments which are also integral parts of trading.

No strategy can survive the market volatilities and one-sided market without a bruise. Good traders always choose the market environment with great caution. If they are not sure whether it is good timing for trading, they would rather let go of the potential profit.

Big funds are fully aware of this when choosing among good strategies. For volatile markets, the Martin strategy which uses a small amount of capital and large stop-loss is suitable. And for the one-sided market, trend trading is a better option. When dealing with critical incidents in an emergency, instantly placing bets on high-risk strategies is also another option to mitigate the capital volatility other than stop loss.

Previously, we have been talking a lot about big funds. In effect, for most people learning forex trading, when you are starting with 0.1 lots or even 0.01 lots, you can also operate like big funds. It’s nothing more than simple math. The drawdown rate is here. For $200, trading 0.01 lots allow you 2000 points of drawdown and 0.1 lots for 200 points. When only trading with $2000, the best starting point to manage your position is 0.01 lots. So, the hardest part is not managing your position, but managing your desire. After all, you will always find that others’ ROI looks better.

Is trend trading the same as guessing the direction? According to Dualism, the subjective idealism and objective materialism are two totally independent worlds where the neutralizing conditions are extremely strict. In my opinion, the neutralizing condition looks quite like the power of capital.

Anticipation is the main method of guessing the direction. There are many indexes on the market, but to attach too much importance to anticipation is to idealize the future market, which may easily lead to pure speculation. After all, most people have no capacity to break the dualism theories. Back to the current situation, the trader needs to realize that market behaviours will decide the price trend. That said, breaking through the current trend objectively is the key to anticipate the trading trend.

Trend trading is based on clear capital distribution and market entry judgements while holding positions after that is another story.

Considerations of the scale of the market period will decide how many K-lines are used to define the trend. Taking M30 as an example, 96 K-lines of two-day observations will help you to find out the short-term trading rules. Similar logic or opinions are often found in day trading and trading of similar kinds. For day trading, it is painful to have the market watched all-day. But when leaving the number of trading behind, we might think about taking a mid-to-long-term approach like H4 or even D1, expanding the K-line to two weeks or even one month, and combining that with the overall trend of over six months.

Once holding the position, other than stop loss and stop profit and making judgements on when to leave the market, here are a few of the other situations to be considered of.

Holding time

The holding times for long-term, mid-term and short-term trading vary, but it is best to keep the time under 30% of the anticipated period. For example, when using one-month K-line to predict the trading, the trader should close the position within 10 days. For day trading, however, there are even cases when the market changed completely after the trading started, invalidating the anticipation of the last environment.

Market Contingency

Trading is not always predictable. Market contingencies are one of the cases that often catch the traders off guard. Often, day-traders or short-time traders don’t need to deal with contingencies. At most, it just hit the stop-loss point and that’s all. But as mid-to-long-term traders may suffer more from stop-loss and stop-profit, so if the contingencies go against the original trading plan, it would be very necessary to call in stop-loss in advance.

Events

Events might overlap with contingencies, but most of the events will be noticed in advance and are therefore predictable but cannot be quantized. Even so, being able to speculate is very powerful in short-term trading. For mid-to-long term trading, however, the risks will increase once again.

In the end, trading is not about the volume of funds. If you are trading by yourself, remember to always follow the rules even if you are trading with a very small amount of funds. Also, it is not necessary to question or limit your tested trading methods just because you are trading at a large volume. Good trading is always worth good capital.