Archives of “January 30, 2019” day

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The Farmer and The Calf: An Investment Story

  
  Education
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This story is about a farmer who received a calf from a rich man. Hopeful that the calf will be able to help him have a better life, the farmer did his best to take care of it. But as the calf grew, so did the farmer’s expenses.One day, he said to himself, “I don’t want to wait anymore for this calf to become an ox. I’ll just sell it and buy several sheep which are easier and much cheaper to take care of.”And so he did just that.After several months, he realized that breeding sheep were not as easy as he thought. And so he said to himself, “It takes too long for these sheep to give birth. I better just sell them and buy myself several hens which can lay eggs for me everyday.”And so he did just that.The plan worked very well, he was earning good from selling all the eggs. Life improved for the farmer. But after several months, the hens started to lay less and less eggs until one day, the hens couldn’t produce anymore.The farmer was devastated. In his anger, he cooked all the hens and had himself a feast.Later that week, he remembered the single calf that started it all and realized that after all his hard work, nothing had changed in his life.

Sun Tzu's Art of War to Trading

  
  Education
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Sun Tzu’s Art of War is a classic piece of work that is widely read and applied to many fields, due to it’s fundamental nature that is highly adaptable to many areas of our lives. In this post, I extracted parts of the work and applied to trading and in doing so, hope to introduce the important trading concepts to you. I have also group and categorize them for easy understanding.

To put it in the context of trading, I have rationalised the following terms:
– General = You, the trader
– Battle = Trading the market/making a trade
– Men, Soldiers = Your capital, dollars!

ON WINNING IN THE MARKET

“Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose.”

Calculations are to be made prior to any trade. What is the risk-reward ratio? What is the stop loss level and the amount that I am willing to lose? What is the size of position to take? How much leverage can I take? If the price moves to $XXX, what action should I take? What is my price objective? What is the proabability of winning? These are just questions that need to be answered and determined BEFORE a trade is made. THE BATTLE/TRADE IS WON BEFORE IT IS FOUGHT/MADE.

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.
If you know neither the enemy nor yourself, you will succumb in every battle.” (more…)

9 Rules For Risk Management

  
  Education
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Rule No. 1- Do not venture in markets and products you do not understand. You will be a sitting duck.

Rule No. 2- The large hit you will take next will not resemble the one you took last. Do not listen to the consensus as to where the risks are (that is, risks shown by VAR). What will hurt you is what you expect the least.

Rule No. 3- Believe half of what you read, none of what you hear. Never study a theory before doing your own observation and thinking. Read every piece of theoretical research you can-but stay a trader. An unguarded study of lower quantitative methods will rob you of your insight.

Rule No. 4- Beware of the nonmarket-making traders who make a steady income-they tend to blow up. Traders with frequent losses might hurt you, but they are not likely to blow you up. Long volatility traders lose money most days of the week.

Rule No. 5- The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you alone put on. (more…)

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