Best Momentum Trading Course

David Jenyns and Stuart McPhee, well known, experienced traders, discuss the merits of keeping part of one’s trading float back from active trading.

David: We have a question: do you recommend having all your trading capital in active trades or should some be kept as cash, and if so what percent?

Stuart: For example, my super fund I always have roughly ten percent in cash because, and this is probably more specific to Australian taxation law, during the year you have an obligation to pay tax, pay as you go.

But having said that, if that isn’t a requirement for you and trading opportunities present themselves, there’s no reason to keep some cash set aside. Using nearly everything in active trading is a great idea in the trading system.

David: I’m in a similar frame of mind about that. If you’re looking to trade the markets and you’ve set aside your trading float that’s your intended purpose for the money assuming you have appropriate trading candidates. My gut feeling would be you should have, whenever possible, all your money invested. Obviously, it comes back to your system, making sure you are getting the signals. You don’t want to put your money in just for the sake of having all your money in.

But I don’t see any reason to limit, oh, I’ll keep ten percent of the trading float just sitting in the account, just accruing interest, not involved in active trading. It’s part of how you structure your wealth creation; you’ll have a certain amount allocated for your trading float, you’ll have a certain amount allocated for your real estate, you’ll have a certain amount for cash in the bank. I see that separate from my trading float.

Also with regard to backtesting you can see the utilization of your trading float. You can enter your trading float in before. You can see over a set period of time whether you’re fully utilizing or partially utilizing your cash and I always try to get as close to the top of that band as possible. So I’m as close to being maxed out as possible without being maxed out all the time.

If you’re maxed out all the time and new trading opportunities pop up and you don’t have any capital available, it’s going to throw out your backtesting a little bit because with trading opportunities or investment trading you may not have been able to open.

What is the least profitable scenario and the most profitable scenario and you find that gap widens the more you fully utilize your cash.

You don’t want to be maxed out as possible when you are doing backtesting. But definitely the major part of your float should be used for active trading or trade entry.

Do you want to discover why it is so important to have a trading system? Here’s a great opportunity to assess where you are with your current trading plan.

All top traders have an effective trading system. So many different kinds of trading systems exist. Certain ones get you to buy on weakness and sell on strength and others do things the other way round.

Many traders fail because they do not assess how well a trading system matches their temperament. Instead, they chase fads, searching for the “Holy Grail” of trading success; or they waste their money on the latest investing software or buying up the tapes of the latest self-proclaimed stock market guru.

The key is to develop a methodology that maximizes your strengths and minimizes your weaknesses. Nevertheless, how do you do that? First, define your objectives.

Ask yourself these questions:

1. How much money can I work with?

2. What annual rate of return do I want? (Note: the higher the return, usually the higher the risk).

Decisions such as these will have the largest impact on the style of your trading system.

For example, if your goal is cash flow and low risk, buying or selling at extreme levels (overbought/oversold) is an unlikely style. If your goals center on quick capital growth, high returns and high risk, then bottom picking strategies and gap trading may be your style.

I had one client that was a wiz at buying and selling on eBay. This person was a beginner so I suggested buying the trade closer to the 52-week low, then selling the trade when it foresaw a profit.

With this in mind, be sure to define your trading objectives as best as you can. Unless your trading system matches your own criteria, you will never make big profits. You need to ask yourself the simple question: “I am trading in the market because I want to __________”…

Answer this and you are well on your way to setting your portfolio objectives.

Creating a winning trading system suitable to your needs, that can react to the situation of any market means you are able to take your trading to the next level. Here are some pointers that have been invaluable during my time trading . . .

You have to keep the best trading systems– really super simple. Those same traders often complicate the best trading systems so much that they become nearly impossible to trade. This is usually accomplished through over optimization, adding far too many indicators. Instead, keep your plan your best trading systems as streamlined as possible. That way, it will be robust enough to trade across many market conditions. Through testing, I have found that over optimizing a plan will make it perform better on historical data. However, these plans usually trade worse in real time, thus taking away the goal to having the best trading systems.

Once your best trading systems are up and running, document it. All successful traders that I come in contact with document their plan – are my plans really the best trading systems or do I need to take some complicated bugs out of it? They have their exact trading methodology written down. The traders who lose money don`t have their trading methodology written down. You should clearly write out your methodology. Why is it so important? When you sit down and spell out how you perceive the market, you are accepting the fact that you might be wrong. You are beginning to accept responsibility. With this acceptance comes a renewed commitment and dedication to your system that will allow you out last the markets fluctuations. This is a key element to keeping your plan the best trading systems.

Of course, you should also employ excellent money management rules. Despite it`s importance, money management still remains relatively unknown by many traders and investors around the world. In fact, Dr. Van K. Tharp, a world-renowned leader in professional trading coaches and consultants says: “Perhaps the greatest secret to top trading and investing success is appropriate money management.”

You should look at trading as a business. To do this you need to learn some valuable statistics about your system. It`s the only way you can improve performance. How can you expect to improve something unless you know what it is you are looking to improve? You need to know your R multiples, win to loss ratios, expectancy, and other similar statistics. You can learn more about these and other vital statistics by reading Trade Your Way to Financial Freedom by Dr. Van Tharp.

With a back tested, robust and  best trading systems you can possibly have in your hands, and a good understanding of money management and the market, you will maximize your trading potential. Once you`ve applied these techniques, you will be surprised at how profitable the best trading systems you designed will become. Enjoy your success.