Applications of Theoretical Concepts: How do Traders fail?
Some traders, who are relatively not new, do understand the concept of the 1% loss principle and position-sizing and can also do a reasonably good technical analysis. However, they commit mistakes while applying these concepts to reality and thus do fall for losses and revenge trades. These traders fail to convert “theory” into “practice.” This blog discusses these common mistakes and how the traders could avoid such mistakes while converting their theoretical concepts into practice.
How do the traders fail?
As stated earlier, the traders now know the 1% loss rule, position-sizing, and the importance of risk management. However, traders get confusion in applying these concepts. For example, let’s consider the 1 percent loss rule. Most traders wrongly understand that the 1% loss rule means putting all portfolios in a single trade (which they identified through technical analysis) and in a single coin while setting the loss level at 1%. They forget to consider several issues. For instance, the 1% principle does not mean what is stated above. Secondly, the crypto market is very volatile, and up to 5% variation is normal. So, it is obvious that such traders with this wrong understanding and application of the 1% loss principle will make losses every time the market goes down because their stop loss is set at 1% lower than the entry price level will get hit.
This all discussion indicates that if a concept (such as 1% loss or position sizing) is not properly understood, or if understood but not properly applied, it will not benefit the trader. In the subsequent text, we try to simplify the theory to practice conversation part by recommending the use of trade setup in the Trading View platform.
Setting a Trade setup on Trading View
A trader did his technical analysis and found that a particular coin would move up, and he could make some money from this coin. So how should he get into a trade-in that coin? We explain the entire process in the following.
First, he should use the Trading View platform irrespective of which trading platform (e.g., Binance, Kycoin, or other platforms) he is using for trading. The reason for suggesting Trading View is that it provides traders with some built-in tools (free of cost) to help traders set their trade setup, position size, and risk levels. In other words, it allows traders to apply their theoretical concepts with much ease and accuracy.
The trader should go to Trading View and open the chart of the coin he wants to trade (assuming he has already done his technical analysis and is expecting that the trade is worth taking). Then he should open the long opening position from the tool menu of the Trading view and should apply it on the chart as shown in the following Figure 1.
It is now visible that the long position consists of three lines (Figure 1c). First is the entry-level (the middle level) on which the trader is going to enter the market, the stop loss level (lower level), on which the trader is going to exit the market (in loss) to avoid more losses or to minimize losses, and the take profit level (top-level), a level at which the trader can cash out his profit.
As our platform big advocate of using a 1% loss rule (for beginners), in this trade setting up, we will suggest that the trader set his loss level to 1%. At the same time, if he double clicks the long position shaded area, a new dialogue box will open, as shown in Figure 2.
This dialogue box will help the trader to set his position size. For instance, if he has $1000, he can fill the relevant information with his risk-reward ratio (ideally based on his win-ratio) and set a loss rate at 1%. You are advised to read our earlier blog for more details on manually calculating position size and the 1% principle. However, while using the Trading View Platform, you do not need to do things manually, but it is settled down automatically.
How will Trade Setup help?
The trade setup will help a trader in several ways. First, the trader can keep a snapshot of it, and thus he will keep a record of his trades for later use and for knowing later about his trade (like why he entered the trade, what was the price levels and how it went the way he thought or the otherwise). This record-keeping can also help him to know his win ratio too. Second, this setup gives a complete entry route to a particular trade. The trader never gets stuck. He knows when to enter and when to out from a particular trade. Third, these setups ensure loss minimization. If the trade goes in a loss since the trader is following the 1% loss principle (along with position size), he is not losing more than 1% of his total portfolio in a single trade. Last but perhaps most important, such a setup ensures that the trader cash out his profit. In search of getting more and more profit, the traders wait to reach the peak of the candle as greed has no limit. But it frequently happens that the market suddenly starts downward, the trader thinks it will revert to the earlier top, but it does not; thus, the trader loses and fails to cash out a significant profit. With a defined profit level at the start of the trade while setting up a trade setup, the trader knows beforehand when to exit the market if it goes up. Thus it ensures that the trader enjoys the profit from its trades.
Written by
Dr. M. S. Afridi