Last updated on May 12th, 2020
One of the biggest problems for certain types of trader is not the ability to make money, but the ability to take losers way bigger than are planned for. The issue with this is, the big loser you take every so often has a big impact on your expectancy and if the timing is unfortunate, it can really hammer your account equity.
This is why, the day trading rule “Respect your equity curve” is so crucial.
Erratic performance in trading is an equity curve killer. If you frequently take large losing trades, your win rate is poor or your Risk:Reward ratio is poor then you are likely to have trouble maintaining consistency.
For the latter, the rule “Run your winning trades and cut your losers” is obviously going to apply, although many traders do still struggle to implement this principle.
With erratic performance you might get this:
instead of this:
And the big issue with the first curve is that when you go to increase your trading clip size, you’ll be in serious trouble if you hit a drawdown.
Power of Numbers
Trading really is a game of numbers. Pay attention to these numbers and you can make a decent or even fantastic living from it. Neglect their importance and at best, you might find yourself treading water for a number of years and wondering whether any of this was really worth your effort at all.
Tracking and understanding the performance of your strategy and making small incremental adjustments to it over time can help you to create a solid trade plan to make the most out of every trade.
Another important variable in performance is the ability of the trader themselves to perform. Going through the roller coaster ride of a volatile equity curve can be both emotionally and physically draining.
If you’ve ever been through a period where you’ve experienced erratic performance you’ll appreciate how much harder it becomes to be consistent in your execution from one trade to the next. It can certainly lead to a trader losing faith in either the market they are trading, their own strategy or even their own ability to perform.
This can be one of the root causes for what we often see in the industry of people “system jumping” from one product to the next or the latest and greatest indicator. Having steadfast belief in the strategy you have decided to trade is absolutely essential if you’re going to be able to execute it properly.
Respect Your Equity Curve
Even if you’re not making vast sums of money on each trade to begin with, it’s far easier to scale up your business by increasing the position size that you trade if you have a steady equity curve.
This is how you’ll end up making good money. So it’s your responsibility to protect and respect your equity curve as a priority so that you give yourself the best possible chance to trade big size.
And finally, if you don’t currently know what your equity curve looks like, I suggest you start keeping a trade log immediately!!