The Components of a trading plan:
1. Entering a trade: You must know clearly at what price you plan to enter your trade. Will it be a break through resistance, a bounce off support, or a specific price, or based on indicators? You need to be specific.
2. Exiting a trade: At what level will you know you are wrong? Loss of support, a price level, a trailing stop, or a stop loss? Know where you are getting out before you get in.
3. Stop placement: You must either have a mental stop, a stop loss entered, or a time stop alone, or a time stop with an indicator.
4. Position sizing: You determine how much you are willing to risk on any one trade before you decide how many shares to trade. How much you can risk will determine how much you can buy based on the equities price and volatility.
5. Money management parameters : Never risk more than 1% of your total capital on any one trade. (2% maximum for aggressive traders who can handle bigger draw downs.)
6. What to trade: Trade things you are comfortable with. Swing trading range bound stocks, trend trading growth stocks, or trend following commodities or currencies. Trade what you know.
7. Trading time frames: Choose your time frame, are you a day trader, position trader, swing trader, or long term trend follower? If you are a long term trend follower do not get shaken out of a position in the first day by taking profits or getting scared out, know your holding period and adjust your plan accordingly.
8. Back testing: Do not trade any method until you review charts over a few years to see how you would have done, or for the really savvy run software back testing on historical data for your system for as much as can be quantified. There are also precooked systems like CAN SLIM, The Turtles Trading System, and many Trend Following Systems that can be found online or purchased. You need to enter your trading knowing you have an edge.
9. Performance review: Keep a detailed record of your wins and losses with profits and losses. You need to be sure that your method is working in real trading, review this after each 20 trades. Also if you had any issues with discipline then learn from your mistakes or make needed adjustments to improve your system.
10. Risk vs. Reward: Enter high probability trades where you are risking $1 to make $3, or trade a system that wins big in the long term through trend following.
Trading is an interesting field to say the least. It revolves around a great deal of decision making, and a lot of choices which will have diverse effects. What is responsible for the decisions made? Naturally, the trader’s thoughts and considerations in relation to his or her trading experience. So, to a certain extent neuroscience comes into the picture.
Neuroscience refers to the way the brain works, along with its cognitive functions. In fact neuroscientists focus their studies on the human brain, and how it has an impact on behavior and thinking functions.
Financial decisions are very important, and it goes without saying that they are affected by the individual’s financial literacy, experience as well as cognitive constraints. Decisions are also affected by one’s level of confidence, level of objectivity, and the element of risk involved. The amount of money involved is also prevalent, as the higher it is, the bigger the risks are and the more cautious one is more likely to be, as long as greed and over confidence do not cloud one’s decision. Thus, there are several factors which all have an effect on the decision that is finally made.
Therefore the neuroscience behind trading decisions is a very complex matter. Despite efforts to try to understand how the brain works and how it effects trading psychology and the subsequent decisions made by traders, one cannot say for sure how it all works out as there are so many factors and issues involved. There are however some patterns and trends that were noted after neuroscientists conducted certain studies in this regard.
For instance, there is a general belief that traders invest in a diversified portfolio in order to limit risk, and once this is done, they are less pressured to make substantial trading decisions since they have their investments spread out quite well. There are others who prefer to take bigger risks because they want to stick to certain stocks only, because they have a belief that they are going to do better off that way. Evidently in this case pride and confidence comes into play. (more…)
1) Not putting in the work – When we try to borrow ideas from others, we never really deeply understand those ideas. The process of independently generating an idea ensures that the idea makes sense to us. That gives us staying power during temporary periods of adverse price action;
2) Negative self-talk – When we focus on everything we could have done better and everything we did wrong, we create mini failure experiences for ourselves over time. Our self-talk reflects our relationship with ourselves. How can we feel confident in who we are and in what we do if we’re constantly tearing ourselves down?
3) Not playing to our strengths – Many traders attempt trading styles that don’t match their personality and cognitive strengths. Over time that generates frustration and erodes confidence. Trading frequently when we function best as big picture idea generators inevitably exposes us to noise and randomness.
The quotes below are provided by John F. Carter, master day trader; pulled directly from his new book Mastering the Trade.
I had just completed this book today evening and this is 2nd time read this book.
This may be the best quote of all:
“The financial markets are naturally set up to take advantage of and prey upon human nature. As a result, markets initiate major intraday and swing moves with as few traders participating as possible. A trader who does not understand how this works is destined to lose money”
“The financial markets are truly the most democratic places on earth. It doesn’t matter if a trader is male or female, white or black, American or Iraqi, Republican or Democrat. It’s all based on skill.”
“A trader, once in a position, can deceive himself or herself into believing anything that helps reinforce the notion that he or she is right”
“…professional traders understand this all too well, and they set up their trade parameters to take advantage of these situations, specifically preying on the traders who haven’t figured out why they lose”
“…markets don’t move because they want to. They move because they have to.”
“After all, the money doesn’t just disappear. It simply flows into another account – an account that utilizes setups that specifically take advantage of human nature.” (more…)
1. Develop information avenues for market conditions and upcoming events
There are many factors that go into driving price action. Quite a few of these things are publicly known and broadcast far in advance. Find yourself a website that offers a calendar of upcoming economic events that can have an affect on currencies you trade. There is always the threat of getting whipsawed out of a position that looks pristine with the impact that news has on the markets.
Listening to analysts and advisers can provide insight on circumstances you may have overlooked. On the other hand, you want to be careful about basing your trading decisions on the information provided by one or two other people. Each trading you decision you make needs to be the right one for you, for your strategy, for your profitability. There are a lot of analysts out there and not all of them have a good grasp on what they are talking about.
2. Strive for consistency to generate repeated, positive results
Humans are creatures of habit. Working to turn your habit into instinct will provide a significant edge in your trading analysis. How do you do that? Repetition. A trader must continuously practice their method, edge, and trading circumstances to make it a natural extension of themselves. One could look at a martial artist as a metaphor for this practice. The martial artist practices, practices, and practices more to make their maneuvers an extension of their person so they don’t have to think about them when the time arises. Traders should do the same to incorporate their trading plan and practices into successful execution. (more…)
A Hindu folktale tells of three blind men encountering an elephant. “It’s a tree,” says one, stroking a leg. “No, no, it’s a snake,” says another, feeling the trunk. “No, this must be a house,” insists a third, spreading his arms against the bulk of the elephant’s body.
All three had a different perception of the elephant based on the part they examined, and all three conclusions were wrong. The elephant was larger and more complex than any of the men realized.
A similar tale is told everyday in the market. Each market participant has different needs, agendas, histories, perceptions, and sees the market completely differently. As with the three blind men examining the elephant: (more…)
The indulgence of probability
Probability in day trading is an extremely flexible and equally subjective authority. It is one such aspect that provides for a comprehensive room in terms of making decisions and analysing the potential effects of the decision as well. It can be envisioned as a semi-mechanical process which is based on an automated system comprising of various probabilities that depict two possible results at the end of it all.
Application of the laws of probability to determine market curve
The laws of probability are majorly applied to the stock market arena in speculating the growth curve. One of the most common examples is the influence of present growth on a stock. For instance the laws of probability in stock market confers to the fact that a stock is expected to underperform following an adverse growth session since major players tend to reap in the benefits without further risk involvement.
The substantial loss is incurred since major proportions of the people seemingly think alike and want to either cash out with the profits they have made or simply by virtue of the fear of losing money. Either way the scenario is completely structured owing to the presumptuous thinking of the common people and the misguiding statistical analysis with probability at its core.
It is therefore easily understandable that probability plays a comprehensive role at the crux of shaping the stock market manoeuvres. Probability in day trading is completely speculative yet self-induced as well. In an easier and subtle language it can be envisioned as a pseudo element that helps to shape the movements. It is significantly a common entity that is extensively present at the back of the mind in each trader.
Probability based trading (more…)
AFTER TWO HOURS OF TRADING, ASK YOURSELF: “DO I FEEL GOOD ABOUT MY TRADING TODAY?” Once two hours have passed, Cook says a day trader should have made at least two, or perhaps more, trades, “but enough to evaluate what you have done.” If the trader feels good about the day’s trading, continue. If not, stop trading that day.