The Way to Trade Better: Transform your trading into a successful business
John Piper, the author of The Way to Trade, has written a sequel: The Way to Trade Better: Transform your trading into a successful business (Harriman House, 2016). The book is most useful for the beginning trader, but there are some ideas that even a more advanced trader could experiment with.
The five pillars of success, according to Piper, are focus, right style, right trading, right size, and making these winning habits. He discusses trading systems (two that he uses are explained in appendices), money management, psychology, and good and bad habits. Incorporating the pillars of success, he offers a guide to trading professionally within a year.
The most interesting chapter, at least to me, was the one on money management. Piper details a method based on his ZeitGap trading system, which has a high percentage of small winners and a low percentage of large losers, using a 52 point stop. He asks how much you should risk on the next trade if your previous trade was a winner. His suggestion is that you increase your trade size in such a way that, if you get stopped out, you never lose more than half of the prior profit in addition to the normal loss. So, you divide the amount of money made in the previous trade by 50 (simpler than dividing by 52), and then halve that result so you’re risking only half of that previous profit. Let’s say that you had a profit of $150 betting $5 a point. Dividing the profit by 50 and then halving that gives 1.5. The next time you should bet $6.50 a point.
To add a little extra juice to your trade, you could divide the amount of money at risk into two equal parts. The first part is calculated as above. For the second part you could use a tighter stop than the standard 52 points. The example he uses is placing the second stop five points beyond the high or low of the first five-minute bar. In his example, this would be a risk of 17 points.
How far should you push your luck with this method? Piper writes: “[T]he odds mean that every successive profit is less likely as the string gets longer and longer, but each independent result has the same probability as usual. Nevertheless you may feel it worthwhile to be more cautious after the third/fourth/fifth trade and become less aggressive.”
Oh, and what if your previous trade was a loser? It’s probably time to push the reset button and start back at the beginning.