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Profit Maximization Process: Learn How to Become A Better, Smarter, & Safer Trader In Any Market


“It’s the same process some of the world’s best traders have used…”

Welcome to Profits Run, your one-stop resource for learning how to become a better, smarter, & safer trader in any market. It doesn’t matter what you like to trade – stocks, options, exchange-traded funds (ETF’s), or foreign-exchange (Forex) – we’ll show you the safest, quickest, and easiest ways to do it.

Whether you’re a beginner or an expert trader, our training materials can help you achieve your trading goals.

You see, at Profits Run, we kind of do things backwards compared to how most people think money is made in the markets.

Most trading educators, television personalities, so-called “gurus”, and even brokers focus on this question: How much money can I make? Then, they kind of address the topic of risk management, or protecting your account, if at all.

But that’s a very dangerous and risky way to think, because the key to building sustainable wealth over time is to do the complete opposite.

That’s why we teach our students to first ask this question: How much money can I lose?

That may seem counterintuitive, but because there’s no such thing as a trading method that always wins, the key to growing your portfolio is to control risk. And that’s why you need to know the maximum amount of money you can lose before you even place a trade.

That way, no matter what happens in the markets, you’re protected at all times. By controlling the maximum amount of money you can lose, you have the potential for unlimited profits.

At Profits Run, we primarily focus on technical analysis techniques in trading the markets, which focuses on studying past market data, such as price and volume. This differs from fundamental analysis, which focuses on the underlying qualitative forces that affect the strength of the economy, industry groups, and companies.

So, using technical analysis, we’ve developed a simple process that you can follow so that you, too, can have the potential to build sustainable wealth trading any market.

It’s called the Profit Maximization Process.

Let us show you how it works…

The Process

This is the same process that many of the world’s wealthiest traders have used to amass huge fortunes in the markets. They use it because it works. Plain and simple.

This process works for small accounts and for large accounts. It works for beginners and for experts.

The reason this process works is because it’s based on simple mathematics that you can’t argue with. Every step of the process was designed to reduce risk and maximize your odds of success.

This has nothing to do with gambling, guessing, or “hot tips”. It has everything to do with methodically analyzing cold, hard data and then using the results of that analysis to your advantage.

Read this Start Page carefully. Read it multiple times and commit it to memory.

This is the stuff they don’t teach you in school. Heck, this stuff is hardly taught anywhere.

Learn the Steps to the Profit Maximization Process

The following flowchart outlines the Profit Maximization Process.

Download an Adobe Reader (PDF) version here.

Print out this PDF version and hang it on the wall next to your trading computer. If you plan to execute this process, you’ll want to reference it often.

When you’re actively placing trades, you’ll need to constantly remind yourself of the Profit Maximization Process. Otherwise, you’re wasting time and money.

This is a warning: You will be tempted to skip steps in this process. When you have a string of big winning trades, you will be tempted to change the rules and risk too much. When you have a few losing trades in a row, you’ll be tempted to give up and look for yet another “can’t lose” system. If you can ignore this temptation, then you will have the potential to become a very wealthy person trading the markets over your lifetime.

So, keep that mind, and never deviate from this process.

A flowchart of the Profit Maximization Process is pictured to the right…

Here are the steps:

  • Get Ready
    1. Decide What You Want To Trade
    2. Select A Broker
    3. Pick Your Charting Software
  • Choose Time Frame
  • Create Watch List
  • Place & Manage Your Trade
    1. Look for setup conditions
    2. Confirm that market is deliberately trading
    3. Determine position size
    4. Place entry order
    5. Place initial stop order
    6. Place exit orders

We’ll examine each of these steps in the process on this START HERE page and point you to the resources we have available to dive deeper into each topic.

Some of these resources are freely available on the Profits Run blog. Other resources are for sale in the form of training programs or are available as part of our Profits Run Insiders program.

Pay close attention. Let’s begin…

(If you already know what you want to trade, have a broker, and also have charting software, you can skip ahead to Choose Time Frame.)

Get Ready

If you’ve never traded before, you need to get ready and set up the basics first. Once you complete these initial steps, you’ll only need to repeat them if you want to switch brokers or set up different charting software.

And by the way, if you’re already an experienced trader, some of this might seem very basic to you. If that’s you, make sure you read this entire article, because as we dive deeper into the process, I’m willing to bet you’ll pick up some tips and ideas that can have a huge impact on your account.

Step 1 – Decide What You Want To Trade

The first step in getting ready is to decide what you want to trade, also known as your “trading vehicle”. Most people are familiar with trading stocks, but there are other lucrative choices available, too, such as options, exchange-traded funds, or foreign exchange.

There’s no right or wrong choice – it’s really up to you, and you can make money with any of these.

Let’s quickly review the pros and cons of each choice.

  • Stocks
    • Pros: Greater opportunity for ROI via dividend yield and capital gains when bonds are priced high and interest rates are low. Can be better than commodities because a strong company that creates wealth can grow at a rapid rate and take the stock up with it, but commodities do not have that leveraged opportunity. A way to offset inflation.
    • Cons: Market risk, stocks can drop in price, a company can meet with unexpected bad news sending the shares much lower, a geo-political event can cause the general market to crash, fiscal and monetary abuse by the government can cause the general market to crash.
    • Account Size: Due to commissions and diversification limitations, larger accounts (> $10,000) are recommended.
  • Options
    • Pros: Can control the same number of shares for 10 cents on the dollar, strictly limited risk buying calls or puts, many options strategies to choose from to take advantage of varied market conditions, very high return rate potential, can use to generate income on stocks that are already owned, a way to buy stocks at a discount.
    • Cons: Most options expire worthless, can be very risky if position size exceeds prudent risk management rules (over-leveraging), must overcome bid ask spread to become profitable.
    • Account Size: Ideal for smaller account sizes (< $10,000) and any account size for that matter.
  • Exchange-Traded Funds (ETFs)
    • Pros: A wide variety to choose from, a way to diversify out of stock specific or unsystematic risk, trade like stocks, many of the same pros as stocks but minimizes stock specific risk, very low administrative expense.
    • Cons: Don’t always measure up to their stated purpose. For example, can lose money even if the stocks the ETF owns go up.
    • Account Size: Same as stocks except diversification can be achieved buying one ETF.
  • Foreign Exchange (Forex)
    • Pros: Highly liquid markets, only a few to monitor (8 major pairs), many tradable trends in all time frames, ideal for day trading and end of day trading alike, no commissions, open 24/5, not subject to company-specific risk.
    • Cons: Can be very volatile, subject to unexpected changes in government monetary and interest rate policy, have to pay the bid ask spread on both ends of a trade, some Forex brokers are not reliable.
    • Account Size: Ideal for very small accounts (< $5,000) and larger accounts alike.
  • Futures (Commodities)
    • Pros: Very low margin requirements. For example, 1 Soybean contract (5,000 Bushels) worth $50,000 can be bought for a margin of $3,300 and 1 e-mini Soybean contract (1,000 Bushels) worth $10,000 can be bought for a margin of only $950. The e-mini contracts are ideal for smaller accounts. Several e-mini futures markets are highly liquid. Markets are in a tradable trend much of the time with significant price movement. With proper use of leverage, very high return rate potential.
    • Cons: Can be very risky if position size exceeds prudent risk management rules (over-leveraging), with unexpected news can trade limit up or down for several days against your position with no way to exit.
    • Account Size: Ideal for smaller account sizes (< $10,000) and any account size for that matter.

Trading Vehicle Resources

Here are some of our training programs and products organized by trading vehicle.

Stocks

  • Market Mastery — Our flagship stock trading program includes 4 unique methods for identifying ongoing profit potential in the best stocks on a shorter-term, end-of-day basis (1 to 3 weeks in duration).

Options

  • Options Income Engine — Learn how to buy monthly call and put options with our unique filtering capability that automatically finds both the safest stocks and ETFs as well as the best options to trade. Trades are 4 to 6 weeks in duration, on average.
  • Options Profit Mastery — If you want to truly master options trading, this is the most complete training program you’re likely to find. Just about every options strategy you’d ever need is covered, along with the ability to find the best trading candidates.
  • Instant Options Income — If the idea of having the potential to get an extra “paycheck” every Friday sounds appealing to you, this video advisory service will show you how it’s done by using credit spreads on weekly options. Trades are 1 week in duration.
  • Options Profit Accelerator — With this advisory service, our team of trading experts picks out their best monthly call and put options to trade each week. Trades are 2 to 4 weeks in duration, on average.

ETFs (Exchange Traded Funds)

  • Portfolio Prophet — Learn how to trade ETFs in your portfolio on an end-of-day basis where the goal is to go after longer-term trades (3 to 6 weeks in duration).
  • ETF Income Engine — This program uses a 4-method approach to go after end-of-day profit potential in the best ETF markets. Three of the methods go for shorter-term trades (1 to 3 weeks), and one of the methods has you in on Monday’s open and out on Friday’s close.

Forex

  • Forex Profit Accelerator — This program reveals 4 separate methods for going after profit potential in the forex markets using a unique approach to trading these 24-hour markets on an end-of-day basis. Trades are 1 to 2 weeks in duration, on average.
  • Forex Income Engine — If you like the idea of fast-paced trading, then this program is for you because it shows you how to day trade the best forex pairs using 3 distinct trading methods designed to go after quick profit potential. Trades are 5 to 10 bars in duration, on average.
  • Forex ProfitCaster — For this program, we developed a highly visual and innovative method that uses triangular patterns to spot profit potential in the forex markets across multiple timeframes. Trades are 5 to 10 bars in duration, on average.
  • Forex Profit Multiplier — If day trading forex is too hectic for you, but you’d still like to trade more than once per day, this program is perfect because it’s all about trading off of 4-hour bars on the 8 best forex pairs. Trades are 5 to 10 bars in duration, on average.

Commodity-Based

  • Real Wealth Income Generator — This program is all about going after profit potential in stocks and ETFs that are based on real assets, including gold, silver, and energies on an end-of-day basis using 3 separate trading methods. Trades are 1 to 3 weeks in duration.

 

Step 2 – Select A Broker

After you decide what you want to trade, the next step is to choose a good online discount broker.

You deposit money that you want to trade with your broker, and they allow you to place trades using the money that you deposited with them. In return for this, you pay a commission to the broker each time a trade is made.

If you’re trading Forex, in lieu of a commission, you instead pay the broker the difference between the bid and ask prices.

Any funds that are not tied up in open trades can be withdrawn at any time, and of course, you can add more funds to your brokerage account, too. Some brokers also allow you to write checks directly against the funds in your account.

In the old days, before the web, you would call up your broker and place your trades over the telephone. You’d hang up, and then wait for a call back confirming whether or not your trade was entered into (or “filled”, as traders say).

These days, of course, you’ll be placing your trades online using the broker’s trading platform. These platforms vary from broker to broker, but all good brokers will offer the same core functionality. So once you learn how to place trades with one broker, you should have little trouble placing trades with a different broker.

CAUTION: It is very important that you use a broker that gives you the ability to let you trade the way you want to trade. Many amateurs and beginners have very basic brokerage accounts that they use for the obsolete and outdated “buy and hold” investing strategy. If you are unable to place the trades that are required by your trading method, you must find a new broker.

Believe it or not, some people won’t do that and will remain stuck with a broker that inhibits their ability to trade. If you find yourself in this position and are unwilling to switch brokers, you should give up on trading altogether. You must be willing to use the tools that give you the biggest edge in the markets. Fortunately, switching brokers is not a big deal and is very easy to do. And, many traders have multiple brokerage accounts.

 

Step 3 – Pick Your Charting Software

Once you have a broker, the next step is to pick your charting software. This is a dedicated piece of software that has robust analysis capabilities, the most important of which is the ability to scan thousands of stocks and ETFs and apply custom filters to them. We’ll talk about this more under Create Watch List, below.

Most brokers give you very rudimentary web-based charting capabilities that let you apply basic technical trading indicators. These are good to get a quick glimpse at recent price action, but if you’re serious about having the potential to build wealth, you really need to be using dedicated charting software.

Once you have decided on charting software, you should plot the indicators that your trading method uses, and then ideally save a template that you can pull up whenever you want to examine a chart.

There are an infinite number of trading methods you can use. The Profit Maximization Process is a framework that you can use with any trading method. But for demonstration purposes, here are some common indicators that we’ve found useful as part of the methods we’ve developed over the years at Profits Run.

  • Moving Averages – Help smooth out fluctuations in market prices in order to visually spot short, intermediate, and longer term trends. For example, a 50-day simple moving average is calculated by adding the closing prices for the past 50 days and dividing by 50. A 50-day exponential moving average is calculated the same way, except the front end closing prices are weighted more heavily than the back end closing prices.When considering a long trade, we want the moving average for the expected timeframe of the trade to be going up and the close of the past several days to be above the moving average and vice versa for a short trade. Typical settings are 20, 50, 100.
  • Stochastics – Help identify oversold markets in an uptrend and overbought markets in a downtrend. The idea is that the market will return to the mean of the predominant trend from these extreme oversold and overbought levels. These extreme levels can be good entry points if confirmed by price action.Slow Stochastics is the most popularly used form of stochastics because it smooths out the raw stochastic readings. A stochastic formula is somewhat complicated, but essentially a stochastic reading is the relative position of the current bar’s close in relation to the high and low of the past X number of bars, typically 8 to 14.For a long trade, we want an uptrend and the stochastics to be below 20 and for a short trade, we want a downtrend and the stochastics to be above 80.
  • Volume – Is a measure of a market’s liquidity, used only as a stock filter criterion. The higher the volume, the more liquid the market, and the better fills you will get entering and exiting the market. Volume is simply the number of shares or contracts traded in a time period.When considering a stock trade, either long or short, we want the 50-day average daily volume to be 500,000 or greater.
  • Average True Range (ATR) – Is useful in setting profit targets and stop loss levels. The true range of a bar is the high of the bar – the low of the bar, unless the high is less than the previous bar close in which case the true range would be the close of the previous bar – the low of the bar OR unless the low is greater than the previous bar close in which case the true range would be the high of the bar – the close of the previous bar. The average true range is simply the addition of the true range for a number of bars divided by that number. Typical settings are 10 or 20.
  • Average Directional Index (ADX) – Is useful in helping to identify non-trending markets. When the ADX is below 20, markets are usually in a sideways trading range. The ADX formula is fairly complex, but is essentially measuring the degree of trendiness of a market. Typical setting is 14.When considering a trade, we want the ADX to be above 20.

Here’s a sample chart of AAPL showing these common indicators plotted. The blue line that follows the price action is the 50-day simple moving average. The other indicators below the chart are labeled.

Contrary to commonly held beliefs, the more indicators you use the less likely you will succeed. The key is to use only a handful of indicators in conjunction with price action together with uncommon tactics to gain an edge in the markets.

Charting Software Resources

Here are some of our favorite charting software solutions you might want to check out. We’ve used all of these at various times in our training videos and trading programs.

 

Choose Time Frame

The next step is to choose the time frame you want to trade.

There is seemingly no end to the number of different market time frames that you can choose from such as long-term (years), intermediate-term (months), short-term (weeks), very short-term (days), and day trading (hours or minutes).

Successful traders have emerged in all time frames. Some focus on the long-term only, others on day trading, and still others on all combinations between these two extremes. The point is that you have the potential to build wealth in any of these time frames. The key is to select the time frame that is best suited to your personality and situation. Of course, you will need a good trading methodology that applies to your time frame.

Let’s take a look at the different types of time frames most commonly used by traders.

  • Scalping – This style centers around taking profits on small price changes, typically right after a trade has been entered and has become profitable. To be successful in this style, you need to have a strict exit strategy because one large loss could wipe out the small gains that have been obtained. Having the right tools, such as a live data feed, a direct-access broker, and the time to place many trades is required for this strategy to be successful.Scalping achieves results by increasing the number of winners and sacrificing the size of the wins. This style is all about quantity over quality.
  • Day Trading – Day traders are in and out of a position during the trading day. Entry occurs at or after the open of the day and exit occurs before or on the close of the day. Day traders are looking for big one day moves in the market that provide sufficient profit opportunity relative to the risk of being in the market for just a few hours.Next to scalping, day trading is the most demanding form of trading, as you have to react on a second by second basis in order to take advantage of abrupt moves in the market and at the same time protect your account from unreasonable risk.
  • Swing Trading – This type of trading is very popular for those that want to be active in the markets but don’t want or have the time to monitor the markets during trading hours. By using technical analysis to look for stocks with short-term price momentum, a swing trader will look to capture gains in a stock within a few days to a week or two at the most. Generally speaking, a swing trader is only interested in a market’s price trends and patterns.When using swing trading you must act very quickly to capture the maximum profit potential in a relatively short time frame. Larger trading firms use larger size trades, and therefore do not use this method.Therefore, individual traders are able to exploit such short-term stock movements without having to compete with the major traders. Unlike day trading, swing trading does not require you to monitor the markets during market hours and is therefore far less stressful. All analysis and order entry and trade management can be done at your leisure after the market closes for the day and before it opens the following day.
  • Position Trading – This is entering into trades with a much longer trading horizon than is the case for swing trading. This style of trader is one who holds a position for a much longer period of time (weeks or months). These long-term traders do not worry about small fluctuations, as they believe their long-term investment will pay out in the long run.
  • Investing – On the far end of the time frame spectrum is investing. This type of trader typically holds positions for months or years and is, in general, someone who still believes in buy & hold.

We’ve found that the “sweet spot” time frame that gives you the best return for the actual time you spend managing trades is either swing trading or position trading. Definitely some form of “end of day” trading, where you only need to place and adjust your trades after the markets close, usually in 10 minutes or less at a time.

However, we do have students who are solely day traders who have the potential to do quite well in the markets, as well. The only time frame that we advise our students to truly avoid at all costs is the “investing” time frame of months or years.

Time Frame Resources

 

Create Watch List

A Watch List is a short list of markets that you are considering trading. It should not be a surprise that not all markets are equal. In fact, most markets are downright unpredictable and dangerous to trade. That’s why you need to filter out the most risky markets to find those that give you the best odds of success.

So, you start with the universe of all available markets within your trading vehicle. For example, if you’re trading stocks on the U.S. exchanges, then you start with the 8,000+ stocks available to trade. On the opposite end of the spectrum, if you’re trading Forex pairs, then the universe is much smaller, with only several dozen available to trade, and really only 8 major pairs to consider. Or, if you’re day trading a single stock, your watch list is just that one stock.

There are many different ways to find the lowest-risk, highest-potential markets. Here’s one of the processes we teach our students to use for stocks & ETFs.

First, we need to find those stocks and ETFs where the ‘Daily Volume’ is greater than 200,000 and the ‘Beta’ is greater than 1.10. We are going to show how this works with ETFs; however, this process can also be used just as easily and effectively with stocks.

Here’s how to do it.

This is a typical, very good charting software package, TC2000, where we’re going to use their scanning feature to select the best of the best ETFs that offer the highest probability, lowest risk trades.

First, we want to scan all ETFs. We’re doing this for the U.S. market.

You can do the same thing for London, Australia, and Toronto.

Okay, now let’s initiate the scan.

You can see here, it pulls up 1,529 U.S. ETFs.

You ask yourself, “Wouldn’t it be nice to know which, out of these 1,529 ETFs, offer the highest probability, lowest risk trading opportunities?”

Of course, the answer is, “Yes.” Furthermore, you can’t trade them all anyway, so wouldn’t it be nice to trade just the best?

Well, you can – here’s how.

You can do this by selecting ‘Add Condition’.

Next, we’re going to add ‘Volume’ and then ‘Edit Condition’. We’re going to require that the ‘Daily Volume’ be greater than 200,000. So, just type in 200,000 and click OK.

Let’s do a scan.

Suddenly, we’ve narrowed the list down to 213 ETFs. That’s eliminating 1,300 ETFs, just by that one filter! And remember, this process can also be applied to stocks.

Now, why do we want to only trade the higher volume stocks and ETFs? Because the price action offers many more tradable trends than the lower volume stocks and ETFs. But that’s not enough. We still want stocks and ETFs that move. In order to do that, we’re going to ‘Add a Condition’ called ‘Beta’.

Beta is a measure of how these move, relative to the general market. In this example, we want to look at ETFs whose price action moves greater than the general market by at least 10%.

So we’re going to load in a Beta of 1.10. Stocks and ETFs, whose price movement is the same as the general market or less, just don’t offer the same opportunity for profits. Scan, and now you see that we are all the way down to 80 ETFs.

These are the best of the best, out of 1,500, just by applying those two filters.

What that means, furthermore, is that you are shielding your account from unnecessary risk by trading those other stocks and ETFs, even before ever putting a trade on. That’s very powerful information! And you can do this with almost any good charting software.

Next, we want the price action to have moved 20%, up or down, within the past year. Now this is a further filter that goes beyond the Beta filter. While the Beta filter is very helpful for the near-term market action, this filter demands that the stock or ETF has proven itself as a big mover over the past 12 months.

To do this, we have to create a new condition. Let’s call it “ETF 20% Filter”. If you are using this for stocks, you will want to change the name accordingly, and this can be named whatever you like. Just be sure you name it something you can remember.

In order to do this, we’re going to create a formula where we take the max high price over the last 250 days, which is about a year’s worth of trading, minus the minimum low price of the last 250 days, divided by the closing price, and that has to be greater than 20%.

That’s our formula – very simple. Now we can add it to our scan.

Next, you will need to ‘Add a Condition’. Here’s our ‘Volume’ and ‘Beta’ scans.

We’re now going to select our formula, ETF 20% Filter, and click ‘Scan’.

Now you see the total number dropped further from 80 to 66, further refining an already excellent list of ETFs.

You’re going to want to run this scan every night after the market closes to make sure you have the most up-to-date list of stocks or ETFs for consideration.

 

Place & Manage Your Trade

So now you’re ready to trade. You have your Watch List and it’s time to apply your trading method.

Of course, there are an infinite number of ways to trade the markets, but any good trading method will have steps similar to what you’re about to learn here. At Profits Run, we’ve developed many different trading methods over the years that our students use every day.

Regardless of what method you use, every time you sit down to trade, you’ll be following these steps, or at least some version of them.

When following these steps, refer to the colored shading in example chart above in the circle. The section shaded in yellow is where you’re deciding whether or not to place the trade. The thin slice shaded in blue is the day you actually place the trade. The section shaded in red is where you would take a loss. And the section shaded in green is where you would take a profit. This is an easy way to visually look at any chart to kind of give you an overview of the different steps we discuss below.

 

Step 1 – Look For Setup Conditions

So now you’re ready to trade. But you can’t just go and blindly enter a trade, even in the markets that made it to your Watch List.

This is where the first part of your actual trading method kicks in, as you analyze the markets and look to see if any of them meet your setup conditions, which are a specific set of market behaviors that further indicate the likelihood of the market moving in the direction you think it’s going to move.

One good setup condition to consider for a long trade is when the 50 day simple moving average is going up and the market has sold off so that the %K stochastics < 25.

 

Step 2 – Confirm Market Is Deliberately Trading

This is one of the more powerful concepts we’ve ever taught and it bears repeating. Here’s what this means.

This a chart of a market that is definitely trading deliberately.

Description: market_deliberate_generic.png

This is a market with no price gaps from one day to the next. You see the continuum here? There are very few unusually wide range days. When you see a day that is an unusually wide range day, this indicates uncertainty and higher risk in the market. This is a non-deliberate kind of price action. But you see there are very few of those on this chart. The rest of the days, from day to day, look pretty much like those that preceded them, in terms of the high compared to the lower range of the day. They’re all within a fairly tight range from one to another.

Now, a market does not have to be going up in order to be deliberately trading. It can just as well be going down, as long as you do not have too many big price gaps from one day to the next, or several unusually wide range days. This is the kind of market that you want to trade.

Now let’s compare that to this chart. This is an example of a market that is definitely not trading deliberately.

Description: market_choppy_generic.png

Can you see the difference? This one is just hopscotching sideways with huge, unusually wide range days. You see this all the time, with ETFs in particular, especially the lower volume ETFs. I think you can readily see that applying even a great trading method to this kind of price action is just too risky and is not going to give you much profit opportunity. So there’s no point in exposing your precious capital to these kinds of markets.

What most people do when they try to place a trade is they just apply whatever method they’re using, without regard to understanding deliberately trading markets. Even if they have a proven trading method, the odds are stacked against them if they attempt to trade in non-deliberately trading markets. But if they only trade in markets that are deliberately trading, the odds are overwhelmingly in their favor.

This is why a fatal flaw that most traders suffer from is thinking that they can trade any kind of market and have the same chance of winning, which, as you’ve just seen, isn’t the case. While the filters that we previously discussed will filter out most of the non-deliberate markets, you can apply this knowledge as a final check to make sure that, by visual inspection, you are only considering trading deliberately trading markets.

When it comes to trading, there is no such thing as a crystal ball, so you need to maximize your odds of success. That’s why a deliberately trading market is such a big deal.

Articles About Deliberately Trading Markets

 

Step 3 – Determine Position Size

Here’s where most traders get into big trouble – they risk way too much of their account on a single trade. And when the next inevitable losing trade comes along, their account takes a big hit.

This is easy to avoid if you follow our step-by-step position size formula.

Here’s a position size formula calculator you can use right now. Go ahead and play around with it…

And here’s how it works…

First, start with your account size. For example, let’s say it’s $30,000.

Next, plug in the maximum percent of your entire account you’re going to risk. If your account is less than $5,000, risk no more than 5%. If your account is greater than $5,000, risk no more than 2%. So in this example, we’d use 2% of $30,000, or $600. This is the maximum amount you plan to lose if the trade is a loser.

Now, if this was a long trade, that doesn’t mean you’d buy only $600 worth of a stock. You’d actually buy quite a bit more. But what this does mean is that you want to have no more than $600 at risk through the prudent use of a stop loss order (we discuss this in Step 5, below).

But for purposes of this example, let’s say the planned entry price of the stock you want to trade is $20, and you plan on putting your stop loss order at $18. This means that if the stock dropped to $18, your position would automatically be sold with just a $2 loss per share ($20 minus $18).

So you’d plug in $2 in the “Planned risk per share” field of the formula, and then divide your $600 planned risk by $2 to get the maximum number of shares you should trade, which would be 300 in this example.

So if your entry price is $20 and you can buy 300 shares, you’d be putting $6,000 into this trade. But because you have a stop loss order set at $18, your maximum loss would only be $600.

That is a very powerful concept that eludes most people. And if you did nothing else but apply this one concept, you’d be positioned to totally avoid the account-crippling losses that wipe out most traders during big market crashes.

 

Step 4 – Place Entry Order

There are several different ways to place an entry order.

  • Market Order – This is the simplest and fastest way to get your trade filled. This tells your broker to buy or sell immediately at the prevailing market price, whatever it may be. You may or may not get the price you want, but in a liquid market, you’ll probably get a price close to it. However, there is no guarantee of a specific price.You would want to use a market order to enter a trade when you want to be sure that you will get filled on your entry order. This could be the case when you have a particularly strong setup or you feel strongly about getting into a market or when you are placing a longer term position where the specific entry price is not that important.Also use a market order when exiting a trade using a trailing stop because you want to be sure that your exit order is filled.
  • Limit Order – This type of order tells your broker to buy or sell at a specific price. Your order will not be filled unless you get your price or better.You would want to use a limit order to enter a trade when you do not want to chase a market higher, meaning you are not willing to pay more than the limit price. You may miss some entries this way, but that is OK, because there is always another opportunity in some other market.Limit orders are also used as profit target orders, where you wish to exit a trade at a predetermined profit target, meaning you are unwilling to sell your position unless the market reaches your limit order.
  • Stop Order – This type of order tells your broker to buy or sell only after a specific price level has been reached (the ‘stop level’). Once that level has been reached, the order automatically converts to a market order.You would want to use a stop order to enter a long trade when you want the market to confirm the expected up move, by trading higher through your stop price before getting filled. With a stop entry order, if the market does not move higher and continues to sell off, you avoid getting into a market that would otherwise have put you into a losing position.Stop loss orders and trailing stop orders are designed to limit the initial risk in a trade and then reduce that risk and begin to lock in profit as the trade moves favorably.

Here’s a very effective stop entry order you should consider using for a long trade.

  • Buy at the highest high of the last 3 bars stop. With this order we are buying into a strong uptrend after a sell-off, as soon as the uptrend resumes.

 

Step 5 – Place Initial Stop Order

The purpose of an initial stop order is to protect your capital. As soon as your entry order is filled, you should immediately place an initial stop order. There are no exceptions. You should always place a stop loss order.

If the price of your stop order is hit, you exit the trade with a small loss and you go on to the next opportunity. Otherwise, you are trapped in a bad trade that may only get worse.

Here’s a very effective initial stop order you should consider for a long trade:

  • Sell at the lowest low of the past three bars (LL3), minus a buffer. The buffer could be 1/2% of the LL3 price or it could be 1 ATR, or based on your own technique. The buffer is required because most traders set their stops right at the LL3 and those stops are often triggered just as the market resumes the uptrend, leaving you behind.

Here’s an example of where an initial stop order could go:

 

Step 6 – Place Exit Orders

Once you have entered a trade and placed your initial stop order, you next have to place your exit orders.

There are many ways to exit a trade, but we recommend using a 2-step scaling out process. This is designed to take some profit as quickly as possible while still giving your trade room to move in your favor, giving you a theoretical infinite amount of profit potential.

This is one of the most powerful ways to pull profits out of the markets while protecting your account at the same time.

Here’s how it works:

    • First, enter a profit target limit order to sell 1/2 of your position at a pre-determined price. For example, you might set your profit target at 8% above your entry price.In the chart above, the entry price was $40.00. You could’ve set your profit target to sell 1/2 of your position at $43.20. As you can see, on the day the profit target was it, the market opened at $43.50, above your profit target, thus getting you filled.
    • As the market moves in your favor toward the profit target, you also want to cancel your initial stop order and place a trailing stop order, which will get you out of the market at a higher price than your initial stop order. There are several ways to calculate a trailing stop – one technique is to base the trailing stop on the lowest low of the past three days, less a buffer.In the chart above, you can see three days after entry day, we moved the trailing top up to $40.20. This means that if the market came back down and broke through that level, the trade would exit.One of the first goals you should have for every trade you place is to move your trailing stop up to breakeven as quickly as possible, or the price at which you entered the trade. That way, the worst you can do is break even on the trade with little impact to your account, thus preserving your funds.If your profit target has not yet been hit, your trailing stop should be to exit 100% of your position. However, if your profit target has been hit, exiting 1/2 of your position, then you need to adjust your trailing stop to exit 1/2 of your position.So, continually moving up your trailing stop as your position moves in your favor, you lock in more and more profit until the market moves against you, taking out the remainder of your position with your trailing stop. This is how you let your “profits run” in a safe and deliberate manner.

 

Conclusion

That concludes the Profit Maximization Process.

No matter what you trade or how you trade it, you should follow some version of this process.

Incidentally, this process is a great way to evaluate any trading method you run across. As you’re evaluating the method, make sure it includes all of the components outlined above.

This is the exact process we use at Profits Run when we develop any of our trading programs. These programs go into much more detail, and include video training, reference manuals, trading blueprints, trade alert software, and personal coaching.

It’s important to remember that there’s no one right way to trade for everybody. Trading is a very personal endeavor, so you need to use a trading approach that fits with your personality and your own personal trading goals.

Once you zero in on the types of trading that you like, also keep in mind that the best way to go after as much profit potential as possible is to have multiple trading methods. That way you’ll be able to trade in all sorts of market conditions. Just like the world’s best golfers play with a full set of clubs, the world’s best traders use a full set of methods to build wealth slowly over time.

So, we hope you implement every step of this process every time you trade. Most people who actively trade the markets do not follow this process, and that is one of the major reasons that most people lose.

By always trading with the Profit Maximization Process, you will automatically have an edge over almost every other trader on the planet, and that should give you a great shot at having the potential to build sustainable wealth trading any market.

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