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Trading is all about making money and one of the most asked questions is “How can I make more money?”.
There are mainly 5 different ways ‘to make more money’ in trading .
We will lay out the possible problems that you might run into and what to be aware of when trying to increase your trading performance.
Range of industries
Trade More Instruments
Once you have a tested and proven trading strategy, the most obvious thing to do to get more trades and increase your performance is to add more instruments to the ones you are already trading. Whereas this seems like a smart thing to do, it brings a variety of problems that will not only not increase your performance, but will undoubtedly result in a lower trading performance. The reasons why just adding more instruments to your arsenal and keep doing the same things won’t work are the following:
- Different instruments behave differently regarding overall volatility and general price behavior. Therefore, the stop loss and take profit strategies that work on one instrument, may not work on another one. Whereas one instrument follows certain patterns accurately, a different instrument may not respect technical rules at all, or respond to a different approach.
- Furthermore, adding correlated instruments increases risk to your overall trading performance. When trading correlated pairs, price moves similar and, therefore, the outcome of trades will be similar. In short, by trading correlated instruments you mainly just increase risk due to a greater exposure.
The graphs below show the percentage price change of 4 different instruments, three of them are big US corporations and included in the Dow Jones Index. You can see that although they are included in the same index, the way they move and behave is significantly different. Thus, taking one profitable strategy and blindly applying it to different instruments will not automatically result in an increased performance.
Trading lower timeframes
The next thing on the list when thinking about increasing trading frequency and trading performance is just to change to trading lower timeframes. Isn’t it obvious that when you get one signal every few days on the daily timeframe, you should see a potential setup daily on an intra-day timeframe!? Trading lower timeframes seems an easy way to get more trades and, potentially, more winners, but is it true? Here is what you have to keep in mind when moving down timeframes:
- The price action on lower timeframes is completely different. Intra-day spikes can be significant and the impact of news announcements can result in large price spikes that do not change overall direction, but shake traders out of their positions.
- The psychological pressure increases and the likelihood to fall for emotional trading errors rises sharply. When the time between trade setups is small and traders see markets moving rapidly throughout the day on lower timeframes, they are more prone to revenge trading and interfering with their trades.
- A solid trading plan is key when trading lower timeframes. When markets move fast, a piece of unexpected news surprises the markets and things get hectic, you do not have the luxury to sit back and think long about what to do. You need to have a trading plan in place that tells you exactly what to do and when to do it. If you do not have a trading plan, trading lower timeframes is an impulse game.
Increasing Position Size
Improving your position sizing is a great way to take your trading to the next level. You can not only increase your equity growth, but you can also limit and regulate drawdowns by applying a better position sizing technique.
Pro:
- You do not have to study new instruments and you do not have to add the psychological pressure that comes with trading lower timeframes.
- Once you have a tested and proven strategy, taking a larger position can increase your overall performance.
- You can limit drawdowns and reduce account volatility by following a flexible position sizing strategy.
Cons:
- Only when you have tested and evaluated your strategy, you can increase your position size. If you haven’t collected data about your performance, increasing position size will result in a disaster.
- Only when you KNOW, and by this I mean tested and calculated, your actual winrate and the likelihood of losing streaks, you can adjust position size. Only if you can answer the following questions you should think about increasing your position:
- What is my winrate?
- How likely are 6, 7 or 8 losing trades in a row?
- Every trader will experience a losing streak of 6, 7 or 8 trades. Can you deal with losing 30% of your account on 8 losing trades when risking 4% per trade?
Adding a Second Strategy
The fourth possibility to increase trading performance is by adding a new trading strategy. By adding a new trading method you do not have to worry about correlated instruments increasing your risk, lower timeframes adding psychological pressure and increased position sizes that could ruin a trader, even with a profitable trading strategy. But, and there is always a but, adding a new trading strategy does not only have positive aspects.
- Learning a new trading strategy can take months or even years and it may interfere with your current trading performance and your focus.
- Is the new trading strategy really completely different? If not, you are likely to get similar trading signals and, therefore, not add an independent variable, but increase the frequency of similar trades.
- But, if one trading strategy performs well in a trending market, adding a trading method that allows you to trade range bound markets profitably will get you the best of both worlds.
Improve Your Current Strategy
All previous points have their pros and cons – some have more cons, some less. But what if there was a way to increase your trading performance without having to worry about potential problems or traps you might run into? Although improving your current trading strategy is easier said than done, there are only few, if any, downsides to increasing your trading performance this way. The following points can serve as a guideline how to follow through:
- Tweaking your current trading strategy involves a lot of data tracking, analyzing and trial and error. In short, it includes all the things most traders do not like to do, but that will make the difference between the average losing trader and the professional winning trader
- Possible ways to tweak your trading strategy is by optimizing entries, stop loss and take profit placement, trade management, holding time and being aware of emotional and psychological shortcomings.
- Improving your trading strategy takes a lot of time and trying different approaches. Each time you change a parameter, you have to collect new information and data from a sample size of trades before you can evaluate whether the change increased the performance. This process takes a long time and requires a lot of work from you which is the reason why, although it is the best way to make more money, few traders will do it.
Risk Only What You Can Afford to Lose
Before you start using real cash, make sure that all of the money in that trading account is truly expendable. If it’s not, the trader should keep saving until it is.
Money in a trading account should not be allocated for the kids’ college tuition or paying the mortgage. Traders must never allow themselves to think they are simply borrowing money from these other important obligations.
Losing money is traumatic enough. It is even more so if it is capital that should have never been risked in the first place.
Strategic & tactical planning
Use Technology to Your Advantage
Trading is a competitive business. It’s safe to assume that the person sitting on the other side of a trade is taking full advantage of all of the available technology.
Charting platforms give traders an infinite variety of ways to view and analyze the markets. Backtesting an idea using historical data prevents costly missteps. Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, like a high-speed internet connection, can greatly increase trading performance.
Using technology to your advantage, and keeping current with new products, can be fun and rewarding in trading.
Strategy development
You can transform your business to a revenue-producing asset that lets you work as much or as little as you want.
Strategic plan development
Research beyond the business plan
In addition to knowledge of basic trading procedures, day traders need to keep up on the latest stock market news and events that affect stocks—the Fed’s interest rate plans, the economic outlook, etc.
Assess how much capital you’re willing to risk on each trade. Many successful day traders risk less than 1% to 2% of their accounts per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200 (0.5% x $40,000).
Set aside a surplus amount of funds you can trade with and are prepared to lose. Remember, it may or may not happen.
Day trading requires your time. That’s why it’s called day trading. You’ll need to give up most of your day, in fact. Don’t consider it if you have limited time to spare.
The process requires a trader to track the markets and spot opportunities, which can arise at any time during trading hours. Moving quickly is key.
A strategy doesn’t need to win all the time to be profitable. Many traders only win 50% to 60% of their trades. However, they make more on their winners than they lose on their losers. Make sure the risk on each trade is limited to a specific percentage of the account and that entry and exit methods are clearly defined and written down.
Successful traders have to move fast, but they don’t have to think fast. Why? Because they’ve developed a trading strategy in advance, along with the discipline to stick to that strategy. It is important to follow your formula closely rather than try to chase profits. Don’t let your emotions get the best of you and make you abandon your strategy. There’s a mantra among day traders: “Plan your trade and trade your plan.”
Before we go into some of the ins and outs of day trading, let’s look at some of the reasons why day trading can be so difficult.
Day trading takes a lot of practice and know-how, and there are several factors that can make the process challenging.
First, know that you’re going up against professionals whose careers revolve around trading. These people have access to the best technology and connections in the industry, so even if they fail, they’re set up to succeed in the end. If you jump on the bandwagon, it means more profits for them.
Uncle Sam will also want a cut of your profits, no matter how slim. Remember that you’ll have to pay taxes on any short-term gains—or any investments you hold for one year or less—at the marginal rate. The one caveat is that your losses will offset any gains.
As an individual investor, you may be prone to emotional and psychological biases. Professional traders are usually able to cut these out of their trading strategies, but when it’s your own capital involved, it tends to be a different story.