Overtrading

"The more you stake,
the more you make."

This suggests that the larger the sum of money you can put on a trade, the better. But in fact it is an invitation to overtrade.

The commonest fault with newcomers to commodity trading is that they nearly always stake too much on their trades.

It is true that the more you stake, the more you make - if the trade goes in your favor; but if it goes against you, then the more you stake, the more you lose.

So does that mean there is a right amount to stake and if so, how do you find out what it is?

First of all, it depends on the system you are thinking of trading. Every different system has its own way of behaving in the markets and its own risk characteristics. You can only find this out by running tests on the particular system with the parameters you propose to use.

After doing that, you have to introduce your own trading goals, so that the system is oriented towards them in the way it will trade. The "orientation" is achieved by finding what is known as the risk resonance of your system and this in turn determines the proportion of your capital you are prepared to stake on any trade.

There are special ways of doing all of this that are in-built into the methods used by the professional traders. It is essential for any newcomer to understand these methods before he commences trading.

So ignore all that stuff you may have heard about "loading the wagon when the signal is a strong one". That is just another invitation to commit a major and costly trading blunder.

Professional traders predetermine their risk strategies and stick to them.

 

Modus Trading
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Copyright David Bromley 2006
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