AT T GRANTS NEW MEXICO

You should never place an exit order before you know that your entry order is filled. When you trade open outcry markets (non-electronic) you might have to wait a while before you receive your fill. By that time, the market might have already turned and your profitable trade has turned into a loss! When trading electronic markets you receive your fills in less than one second and can immediately place your exit orders. Trading liquid markets you can avoid slippage, which will save you hundreds or even thousands of dollars.

Principle #3: Realistic expectations.

Losses are part of our business. A trading system that doesn't have losses is "too good to be true". Recently I ran into a trading system with a whopping winning percentage of 91% and a drawdown of less than $500. WOW!

When looking at the details it turned out that the daytrading system was only tested on 87 trades and - of course - curve fitted. If you run across trading systems with numbers too good to be true, then it's probably exactly THAT: Too good to be true. Usually you can expect the following from a robust trading system:

· A winning percentage of 60-80%

· A profit factor of 1.3 - 2.5 · A maximum drawdown of 10-20% of the yearly profit.

• Use these numbers as a rough guideline, and you will easily identify curve fitted systems.
• Principle #4: Maintain a healthy balance between risk and reward. Let me give you an example: If you go to a casino and bet everything you have on "red", then you have a 49% chance of doubling your money and a 51% chance of losing everything. The same applies to trading: You can make a lot of money if you are risking a lot, but then risk of ruin is very high. You need to find a healthy balance between risk and reward.
• Let's say you define "ruin" as losing 20% of your account, and you define "success" as making 20% profits. Having a trading system with past performance results let you calculate the "risk of ruin" and "chance of success".
• Your risk of ruin should be always less than 5%, and your chance of success should be 5-10 times higher, e.g. if your risk of ruin is 4%, then your chance of success should be 40% or higher.

Principle #5: Find a system that produces at least five trades per week.

The higher the trading frequency, the smaller is the chances of having a losing month. If you have a trading system that has a winning percentage of 70%, but only produces 1 trade per month, then 1 loser is enough to have a losing month. In this example, you could have several losing months in a row before you finally start making profits. In the meantime, how do you pay for your bills?

• If your trading system produces five trades per week, then you have on average 20 trades per month. Having a winning percentage of 70% - your chances of a winning month are extremely high.
• And that's the goal of all traders: Having as many winning months as possible!

Principle #6: Start small - grow big.