ETF Trend Trading Strategies Revealed

Money Management is an area full of misconceptions. Trading with stops would be most peoples interpretation, in reality that is just a small piece of the puzzle. Below is a short part of a free report I’d love to give you called How to Safely Double Your Profits in 2009 Trading ETFs.

ETF Trend Trading:

This extract is a tip that in reality could prevent a disaster with your trading account:

Using risk controls - What are the benefits?

It's vital for traders and investors to treat drawdowns with extreme caution. Drawdowns are simply the resulting drop in percent of your total account size, resulting from a losing trade or series thereof. Here's an example, imagine that after a few losing trades your $30,000 balance falls to $18,000; this means a drawdown of 18,000/30,000 = 40%. If I were to ask any trader with a new account, “In order to be back up to $20,000, what percentage return do you need to generate?” Many would answer, “Since I lost 40%, I have to make back 40%!” This couldn’t be more wrong! Note that after losing 40%, the trader now starts with a lower base, i.e. to undo the $12,000 loss, the return he needs to generate is 12,000/18,000 = 66.6%! This is the reason for sharing free training videos on my website to help squash some of the myths you might hear as a trader.

The chart below shows you clearly the amount of effort required to recover as your drawdown becomes greater.

Drawdown % - % Required to recover to break even

10% - 11.1% (You can do this easily with one good trend)
20% - 25% (This is also fairly easy to make up)
30% - 42.8%
40% - 66.6%
50% - 100%
60% - 150%
70% - 233.3%
80% - 400%
90% - 900%

This is the reason why good, professional money managers will risk no more than 1-2% per trade. There's no avoiding the fact that statistically you will have 10 losers in succession at some point, no matter how good you think your system may be! Based on risking only 1-2% per trade this is only a 10-20% drawdown and easily recovered. Almost all the training courses on trading and investing you may buy online won't reveal this. Most recommend you risk 5-10% per trade. This is very bad advice to follow as you will see.

Many of them also use arbitrary stop loss advice. For example, they say, “Place your stop at $100.10 because that is on the other side of a major support or resistance, trend line, MA, etc.”

This makes your risk based on the size of the stop. That is also wrong because the risk can be too large and it’s not the same risk on each trade.

Others say the opposite; 'risk only 2% total period and let that determine your stop.' Don't do this either because it is important you have the correct technical stop.

So what is the solution? It's simple, do both. Use a technical stop and percentage together. It works like this. Let’s say the technical stop is $100.10, but based on your entry price that is a 3% risk. Since your plan calls for a 2% risk you simply lower the number of shares you are trading. This lets you stay within your 2% risk and have the correct technical stop. This is exactly what most professional money mangers do.

So what if this lowers your profit due to trading a smaller number of shares! Have a close look at the sums above again... Ignore the old saying, “More risk equals more reward.” It isn't a reliable method to follow. You will find to your peril that more risk equals more risk! Think of it this way, Once you've lost your money your chances of making a profit are gone. Losing just 50% is a big problem because you would then need to make 100% to get back to even.

Warren Buffet says, there are only two rules in investing. Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1. He is definitely someone to pay attention to...

I have a third rule to add. Correct money management and position sizing must be mastered to insure your long term success.

There is good news.. This is easily done. I just revealed how you can use a % stop and a technical stop combination. If you want more of an explanation please visit my free video area on my homepage and click on the “Why have risk controls” video.

This system of entries, stops and profits taking is only half of your key to success. The other half is money management. If you get this part wrong you will lose your account every time regardless of how good your system is.

Click the link below for the newsletter on how to safely average 6% per month trading Exchange-Traded Funds.


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