Trading Plan for Traders

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.

10 Mistakes

  • Never, NEVER cancel a stop loss. I know, I know, every time you have a stop loss in the market, the market moves just enough to stop you out, right? Well it might mean that you should evaluate where you place your stops (this is where good trading journals come in handy), but once you’ve done your analysis and placed the trade, you need to be committed to the trade and your plan. The only adjusting you should do is to lock in your profits.
  • Always have your broker or your trading desk number handy, even if you trade electronically. This is really important for the day trader who is trading leveraged markets. It is easy to get a little too comfortable when your trading platform and internet connection are running smoothly, but once you drop your guard that inevitable lost connection will happen…a lost minute, even seconds could be an expensive lesson!
  • Always check your open orders. This can be done a few different ways depending on your trading platform, but if your intention is to be flat in the market, always double check!  (more…)

Neuroscience in Trading :Anirudh Sethi

Image result for Neuroscience in tradingTrading 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…)

3 Important contributors to lack of trading confidence

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.

Mastering the Trade, quotes by John F. Carter

masteringthetradeThe 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…)

Seven Things Successful Traders Do

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…)

Three Blind Men And The Markets


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…)

Probability in Trading

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…)

Trading is a business

Trading can be mastered if you concentrate your efforts on how you will react to price rather than desiring to predict it. Reacting is a business decision, predicting is an ego play.

Traders want to make money. Losses in the long run don’t matter. Forecasters (prophets) want to be right (ego). And that’s all that they are concerned about.

Don’t decide anything (ego), let the market do that job for you (business).

Like any other business you have a business plan and the financial portion of that plan is the most important.

In this business your inventory is stocks, bonds, futures or options. Like any other business you define what an acceptable loss is on an item and what is an acceptable profit for the risk undertaken. Like any other business if the item of inventory doesn’t do what you expected it to do, you put it on sale and liquidate it to raise capital to purchase inventory that will do what you want it to do. Your acceptable loss is your stop. Your money management system tells you how much that is. Your mark up is dependent upon your trading system and trading style. It doesn’t make any difference if you are a day trader or an investor. Like any business, some turn their inventory 10 times a day, some 20 times a year and some only twice a year. Your trading style and inventory volatility will tell you what your turnover rate will be.

Trading is a business and if you treat it as anything else you will be a loser.

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