By Tony Beckwith

Professional traders want to make money, amateur traders want to be right…

Let’s be clear about this - traders can fail for many reasons (and, unfortunately, the vast majority will fail)…professional, psychological, physical or some combination of all three. Traders who win have mastered the vital skills necessary to function well in all categories. They will take the money in markets away from the failures, as they always have.

Professional traders follow a process…
Without a disciplined and logical process, a trader has very little hope of staying in the game let alone making any money – which is, in case we forget, the whole point of the activity!

MTPredictor™ has designed trading software primarily to give traders, both new and experienced, a disciplined and controlled process to follow. It takes them from stage one of finding a trade set-up, to the second stage of assessing its potential reward versus the money risk involved in taking the trade, through stage three of working out how much money to risk (to prevent overtrading or undertrading) and on to the final stage of managing the trade with patience and confidence - right from having the order filled to exiting the position.

Find a trade…
The process has to be simple, understandable and committed to a trading plan which you review regularly. Ideally, you need a way to identify a trade set-up the same way every time and without confusion. One example is to focus on finding the simple ABC correction-to-trend, arguably the simplest part of Elliott wave theory because it has the beauty of being unambiguous – that means there are none of the typical Elliott wave arguments over what pattern it is, how it fits into bigger patterns, whether smaller patterns fit into it). Not only does it allow you to enter a trade with a small, controlled money risk, it also provides definite and unshifting profit targets. These are clearly important in enabling you to calculate the risk/reward on a trade before risking any of your precious capital.

It goes without saying that one of the best places to enter a trade is after a correction to a trend as you are then positioned for any resumption of that prior trend. And, fortunately for us, simple ABC corrections happen on all liquid, freely-trading markets, from lightening-fast tick charts all the way up to monthly charts. MTPredictor’s Real-time and End-of-Day scanners automatically identify these corrections and tell us if they are completing in decent price support (long set-up) or resistance (short set-up). This allows us to concentrate time and energy on the real elements of trading – risk control.

Assess the potential reward against the definite risk…
If you have definite profit targets, you can calculate your risk/reward. Your potential reward is the distance from your entry to the 1^st profit target and your definite risk is the distance from your entry to your initial protective stop. You can decide if it is above a certain minimum, for example +2.0x. This is critical because your win/loss ratio is almost certain to fall below 50/50 over time, such that you have more losing trades than winning trades (just ask the successful traders at the big banks and institutions about win/loss!).

You then need to be taking steps to ensure that your winners are making you at least 2x your money risked on those trades compared with your losers - which are losing you 1x your money risked (-1R in risk multiple terms). This also means the size of your winners is directly related to the size of your losers. Again, this is vital otherwise you have no way of knowing how many consecutive losses you can fund from a previous winner – yes, a string of losses is inevitable. As leading trader educator Van Tharp of the Van Tharp Institute (http://www.iitm.com/) says succinctly “losses as large as 20% don't require that much larger of a corresponding gain to get back to even. But a 40% drawdown requires a 66.7% gain to breakeven”.

Money management – do it or fail…
Money management, more accurately termed position-sizing or bet-sizing, is absolutely essential. Again, as Van Tharp says “Poor position sizing is the reason behind almost every instance of account blowouts”. This is precisely the reason why position sizing as explained by Tharp is central to risk control at MTPredictor and is made easier by having defined entry and stop triggers for trades based on the extremes of signal/reversal bars. For example, consider a long trade set-up with a +2.0x minimum potential risk/reward. Using the standard fixed fraction (important phrase) position sizing, you have a ready method to decide how many shares, contracts or lots to actually trade. Divide a fixed % risk of your account - say 2% if trading leverged instruments such as futures or forex (and contracts for difference or spreadbets if in the UK or Australia) or 0.5% for unleveraged products such as equities – by the money risk per share, contract or lot.

For instance, say you are risking 2% of a US$20,000 account on each trade. That means $400 per trade. If your trade set-up is on, for example, a US E-mini S&P 500® futures contract, with an entry price of 1400 and initial protective stop of 1398...your initial risk of loss is 2 full points x $50 per point = $100. $400 / $100 = 4 contracts can be traded. Simple, yet vital.

Run the winners, cut the losers!
This is exactly what almost all amateur traders have real problems doing. So the answer is to have a method of forcing you to stay with your winning trades as long as logically possible, whilst cutting your losing trades at a pre-defined price.

If you are trading off a simple ABC correction on your chart, profit targets can be determined based on the length of the correction and the length of the prior trend that it may be correcting. Targets for the trend, if it resumes, to aim for.

If you are only taking trades with a minimum potential risk/reward of +2.0x to start with, then you can use the profit targets to take profits on your trades – because you know they are at least +2.0x risk/reward themselves. Mission accomplished.

Alternatively, you may rightly use the 1^st profit target to determine whether your minimum risk/reward outlook is +2.0x, however choose to trail, say, a volatility stop as your exit strategy. Welles Wilder’s Average True Range has been developed into just such a trailing stop at MTPredictor, adjusting continuously for price volatility and often keeping profitable trades open for longer. As long as such a plan is inscribed in your trading plan and not used on an emotional whim, that is fine.

Again, to quote Van Tharp, "Trading and investing are very simple processes and we human beings try to make it into something much more complex.” Keep it simple!

Tony Beckwith is Sales & Marketing Director at MTPredictor Ltd., the trading software firm which strips Elliott wave down for professional, risk-controlled trading.