Find stress-free trading with my 5-piece sanity toolkit

Most of us turn to the markets because we want our money to work harder, but ourselves to work less. So how come there are days when it feels like a grind?

This collection of resources and techniques will ensure you can follow the markets, without the stress and worry that’s too often associated with risk and reward.

1. Trailing stops

I got a perfectly reasonable question from a Heikin Ashi Mountain member this week: Why would I bring my stop level in so tight, that I’m almost certain to get knocked out by the smallest market wobble? (I paraphrase – he put it a more elegantly than that.)

But it’s a question I ask myself every time I get a trailing stop level hit.

Trailing stops can cost us money, because trades that would otherwise go on to win, get bumped out by the tighter stop level.

However, they are a very important sanity tool.

By employing trailing stops, we can reduce drawdowns and – even if gains are more modest – they should be smoother.

This won’t just help your sanity – it’ll also make you richer in the long term.

2. Drawdown limits

Drawdown limits are a powerful tool to get you ‘away from the table’ during a losing run. Too many traders find themselves backed into a corner, feeling like they’ve got to ‘win back’ losses before the trading day is out. But a good drawdown limit should see you walk away from a losing run before you hit too much pain.

A drawdown limit involves setting a limit on how much you’re prepared to lose in a day … a week … a month. When you hit that limit, you stop trading until the end of that period.

Often, a string of losses is telling us that market conditions just aren’t right for our strategy today. By walking away, we’ll be able to come back the next day afresh, without any significant wounds.

If you don’t want to stop trading completely, you can look at reducing your risk – a strategy I’ll explore next …

3. Reduce risk

If you feel your sanity being pushed to its limits by your trading, it’s a sure sign that your risk levels are too high.

It’s tempting to risk more on trades, simply because we want to hit our profit goals more quickly. But I’d urge you to consider the slow and steady approach. Take a look at the examples in this post of the huge difference in volatility between risking 0.5% and 2% or 5% …

How volatility drag can wipe you out

And if you’re worried that a low risk-per-trade won’t get you to goals quick enough – take a look at this race which popped up on my feed earlier this week …

Reducing risk on trades can also be an active response to a drawdown, as mentioned above. This is less cautious than halting trading on your drawdown limit, but also a good way to hold onto your capital, and your sanity ….

It’s a technique used by the original Turtle Traders: each time you lose 10% of your trading fund, you reduce the notional size of your account by 20%.

How does that work?

Let’s say you had £10,000 in your account, and were risking 2% per trade, that would be £200 risk per trade. But if your fund reduced to £9,000, you’d cut your risk by reducing your notional fund size by 20%, to £8,000. So you’d be risking 2% of £8,000 = £160.

If you drawdown further, to £8,000, then you’d reduce your risk again, risking 2% of £6,000.

It’s a financial form of ‘battening down the hatches’ in rough times, and is a great way to preserve your wealth.

4. Scale in and out

Scaling in and out means adding funds to a winning position (I don’t recommend adding funds to a losing position) or taking partial profits from a winning trade, while leaving the rest to run.

These techniques can be very helpful in managing risk, and allowing us to push profits further than we might otherwise be comfortable with.

Here’s an example of a scaled-in trade …

I buy into GBPUSD at 1.3000. When the trade hits a profit of 100 pips, I’m going to tighten my stop to breakeven, and buy again. My profit target on both trades will be 1.3200. My stop distance on each trade will start out at 100 pips, risking £200 on each part. The stake size for each trade will be £2 – so the combined risk for both trades is £400. However, when the price hits level ‘B’, triggering the second half of the trade, I’m moving my stop level up to breakeven, so the first half of the trade becomes ‘risk-free’.

And an example of scaling out …

Here I’ve opened both halves of the trade at A, so have full risk of £400. However, I’ve taken 50% of the profits at B. If I tighten in the stop level on the second half of the trade as well, I can make the second half effectively risk-free.

Scaling in and out doesn’t make us more profit than if we’d let these trades run 100% to the level ‘C’. But they do make that journey to ‘C’ less stressful, and reduce the chance of getting a full loss on a trade – again, it’s about smoothing out bumpy returns.

5. Awareness

The final tool in maintaining your sanity in the market is to stay alert to changing conditions.

The two questions to ask yourself are:

• In what market conditions does my strategy do best?
• What are the current market conditions?

If your strategy requires trends, and the market is stuck in a sideways pattern … you should be expecting to get bum signals.

If your strategy relies on volatility and the market is stagnating … again, you’ll struggle to hit your targets.

Of course, markets are always changing, and we don’t know what’s around the corner. But being aware of where we are right now, means you can react faster when a losing streak means you need to conserve profits … and when the market is singing your tune, you can rake in the profits.

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