Keeping losses small and profits large by Steve Griffiths

Keeping losses small and profits large by Steve Griffiths


Steve Griffiths is a remarkable experienced trader that has been in markets for over 27 years. Steve spoke to Maria Goncharova of EXANTE and shared his trading strategies that allows you to maximize your profits whilst keeping your losses small.

Our traditional introductory question. You are in the markets since 1987, which is quite a while. What was your motivation for getting involved in trading?

I used to be a designing engineer, designing missiles actually. Having a mathematical background, I have decided I wanted to look at trading. I gave up my job in the middle of 1987 just before the “crash”.

Please tell us if you have experienced any “crashes” yourself in your trading career? What were your “ups” and “downs”?

Some people say that you have to get bankrupt 3 times before you can make success and learn what does work and what doesn’t. I had two attempts early in my career that helped me to try and develop strategies that actually worked.

I know that you diversify your portfolio and trade stocks, forex and indices. Please tell us, how do you choose instruments for your portfolio and what is your choice based on?

Through my career I traded a lot of things, but I actually prefer the US E-minis. I tend to trade those on a short time frame because they have very nice patterns that are very repeatable. I am trading those through the US day session.

So you prefer to hold your positions on longer or shorter terms?

During my career, I use to draw my charts by hand with paper and pencil, which probably seems very old fashioned nowadays. I worked on a daily charts in those days. Now I tend to like the shorter time frames.

Steve, how do you overall define successful and unsuccessful trading? At what point you say “well this is not working” and dropping the strategy?

That is a very interesting question, because most time traders tend to focus on percentage of winning trades to losing trades. But one thing I learned from early on in my career is that it is not necessarily the best way forward. Best way forward is keeping the losses small. So what defines for me is a drawdown. If your drawdown is 50% of your balance, this is a time when you have to stop and re-address your strategy. As I have mentioned earlier, such situation happened twice to me in the beginning of my career. You should always start with a small account, if it goes out of 50% than you are doing something wrong and you need to start again.

And, how long do you try your strategy in demo account and how easy it is for to take it to the real account?

I am very conservative and I believe most people should be so with their money. I remember that I spent about 6 months to go through all charts by hand, learning what to do and taking things slowly. Some people may say six months paper trading is far too long nowadays but I believe you really need to test any strategy before going to the real live market conditions. In order to know where the market is going you need to pass a long time in demo account, the longer the better.

Please explain what are the basic factors that you usually look at while trading?

As you have already said, I started 27 years ago and been trading for many many years and have seen a lot. One thing I have learned and I think is applicable now - there is a big difference between what amateur traders do and what professionals do. Most amateur traders tend to have a high percentage of winning trades, they like to be right. Professional traders don’t really care about that - they want to control their risk. In the beginning of my career I realized: because most amateur traders try to be right, most trading system and books are written to fulfill that need, in other words try to give people what they want. Typically 97% of amateur traders lose money, that is quite a shocking statistic and means the vast majority of amateur going of to the wrong thing. I stopped and said: “Rather learning how to trade, why don’t we look at what successful traders do?” In other words, mimic the successful traders. I looked through the books about what the successful traders were doing and it became obvious. What successful traders had in common - was risk control. Nobody knows what tomorrow, next week or year will bring. Just have a look on number of economic forecast that are wrong. You can’t predict the future and that’s what most people try and do. What can we do, is to control the point of entry - your initial risk, that is what you know here and now.

May be you can elaborate more on that? What do you mean by “risk” here?

Some people define risk as “ this trade is going to be right, this trade is going to be wrong”. As I have already said, we do not know that and can not control that. What I mean by risk is your loss. What do we actually really want as traders? Do we want to be right, do we want to forecast or do we want to make money? Making money is relatively simple. To make it, you have to put profits in your trading account, you have to take losses out and the losses have to be small in relation to the profits. Profits goes in, small loss comes out. Big profits goes in, small loss comes out. Like this your account grows. For this, you have to control your losses. A great technique to do this is a position sizing - this helps you to keep your losses small and consistent across all your different trades.

If you come in entry level you have a stop level that you should define and if your trade goes beyond that level - you stop out. You can not let losses go big, they have to be cut small. Your trading platform allows you to put in your account size and then indicate the percentage you can risk from every single trade. The point is, that percentage risk is the same and consistent and constant across every single one of your trades. If you indicate 1% of risk and you are wrong on your trade- you lose only 1 % and your losses are kept small each time. A lot of people teach that you have got to have a high percentage of winning trades and most amateur traders try to win 50, 60, 70 and even 80% of the time. It is very hard and almost impossible to have a strategy that has a high percentage of winning trades for a long period of time. Normally, if you want to win a high percentage of trades you have to come out very early in other words, take small profits. Many traders come to us with 80% winning systems and they are losing money. It all comes back to what I have already said. Most professional traders look only for risk control in their trades. If you do that, it actually means that you don’t have to make a high percentage of winning trades. You can have 40% or 35% systems and still make money. That is the first major thing I learned - I learned to unlearn what we want as human beings and unlearned to be right if that makes sense.

The basic thing I really want you to understand is, no matter what kind of strategy you are doing - you need to control your initial risk. You can do this on your spreadsheet, all you need to have is your entry level, stop level - if you find your trades being incorrect, percentage risk that you define from your account size - to keep your initial risk small and exactly the same each time.

In your personal opinion, what is the percentage in the market of amateurs and the professionals?

It depends, because most professionals you do not see. The vast majority of professional traders you never hear or see about. If you go to the most of the forums, you will be full of amateur traders looking for the answers. So it is difficult to gauge how many professionals are out there, but it is far less than the actual amateurs.

My last question: do you have any particular indicators or trade setups that you use?

Over the years I found that most or actually all of indicators are lacking. It is very difficult to define the trend by most of the indicators. My advice on this is to look at the higher time frame: weekly frames. We look on the trades in the direction of higher time frames.

How can we control our risk? I would like to share with you couple of trade setups that I like myself. They are my two favorite trade setups, developed 25 years ago and still haven’t changed. The first one is what I call VSA - a volume spike analysis, because the volume is spiking on a failure to follow through to new highs and lows. Great setup that plays the professionals against the amateurs. We have different colours on our volume chart and I am looking for a bar that has unusually high volume. Every time you have a break to new highs or lows, on increased high volume -  look what happens the next bar. If the next bar fails to follow through to new highs, in this case, what does this tell us? That the volume in the bar before was not actually “buying”, it was actually “selling”. This is a classic “bull trap”. We have “bear traps” on the downside and “bull trap” on the other side. That means that the professionals are selling into the amateur buying - that means that they are on the other side of the market. They are going to move the market in an opposite direction and are going to trap you all.

Another trade setup is an Elliott wave. I believe that half of the time markets are clear - and half of the time are not. Markets go through cycles, get “foggy” so you can’t see what is going on and the patterns are very unclear. Sometimes the patterns are extremely clear. I know that I can’t predict the markets, however coming back to absolute basics of what we need as traders is big profits and small losses. We need to uncover a tradable opportunity, uncover trade with a small control risk. So, I looked at Elliott trade and said: “What is the best trades setup in that?”. The best trades setup is the wave 3. Markets trend in 5 waves and correct in 3 waves, the strongest and longest wave is the wave 3. The most reliable Elliott pattern is ABC, that unfolds most of the time in the wave 2, so that allows you to identify the wave 2 most reliably most of the time. It then gets you to wave 3 that have the biggest move most of the time and that allows you to keep small controlled risk and have profits that are much larger than the losses. I nicknamed it a “holy grail” because it is a best setup. 

Source: webinar conducted by EXANTE and TradingView on 5 May 2015. 

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