- Well-defined objectives. Are you trying to beat a certain return hurdle, like inflation or an index? Are you trying to generate 5% or 50% returns per year? You have to understand what you are trying to do and then bend your investment process around it. The other way around isn’t possible.
- An understanding of the markets that you will be operating in. Stick to what you know. Narrow your focus so as to make the most of your efforts. You need to know everything about the markets where you’re taking positions.
- A clearly defined methodology for getting into and out of positions. This includes which indicators, news items, fundamental data points you look at and when you take action. This is your checklist—you should have it so well defined that you can be sure of the exact steps along the way. You need a game plan so that you stay consistent and disciplined and don’t get flustered under pressure. It should become automatic and engrained.
- This methodology must utilize your strengths and skills and suit your personality. A cerebral, research-driven economist should put that to work, instead of becoming a swing trader based on technical analysis. An adrenaline-fueled athlete should be an intraday trader, not be a long-term trend follower. Remember, every successful trader has a methodology of their own which plays to their strengths and their personality.
- This methodology has a positive statistical expectancy– the gains from winners more than outweigh the losses on losing trades. Use your own statistics and the Kelly Formula for a rough guide as to whether or not you have positive statistical expectancy. On average you want to expect to win on an individual trade, meaning that your expected wins outweigh your prospective losses. That doesn’t guarantee that you will actually profit on each trade, it just means that over a sufficiently large quantity of trades, you will come out ahead.
- A well-stated risk management policy for when you get out of losing positions and how you manage risk overall. Cut losers. Let winners ride. Many people have tried to overthink this rule and ended up losing as a result. Furthermore, you never want to put yourself in a position where you can blow up, so you need to be thinking how you can avoid taking excessive risk in the first place. Just remember Warren Buffett’s Two Rules:A framework for sizing positions. This is related to risk management— obviously, you don’t want to take a position that’s over a certain size, ever. But you may also want to size positions according to certain specific critieria, such as your conviction in the position or volatility in the market. Or they could all be the same size. Nonetheless, your methodology has to be able to address it and come up with a well-reasoned answer.
- Never Lose Money.
- Never Forget Rule #1.
- A framework for sizing positions. This is related to risk management— obviously, you don’t want to take a position that’s over a certain size, ever. But you may also want to size positions according to certain specific critieria, such as your conviction in the position or volatility in the market. Or they could all be the same size. Nonetheless, your methodology has to be able to address it and come up with a well-reasoned answer.
Archives of “Day trading” tag
rss10 Rules for Rookie Day Traders
Here is our philosophy around trading rules:
Rule should be designed to promote growth, not create limitations.
Rules should make YOU better.
Rules need to be second nature.
1. The three E’s: enter, exit, escape
Disagree, I can’t explain for proprietary reasons.
2. Avoid trading during the first 15 minutes of the market open
I agree that the first 15 minutes is risky but the most important thing to a new trader is lasting as long as possible. You are going to be better the more time that goes by, but you learn faster by doing. It is a tough balance.
3. Use limit orders, not market orders
Limits keep you out of the market, which is important. But they can also keep you in a market, which is of importance too.
4. Rookie traders should avoid using margin
Agree. Your winning positions should be larger than losing position, but a new trader doesn’t usually know which is which.
5. Have a selling plan
Agree. (more…)
The mark of a professional Trader
- It is my fault. I traded this position too large for my account size.
- It is my fault. I didn’t stick to my own risk parameters.
- It is my fault. I allowed my emotions to dictate my day trading.
- It is my fault. I was not disciplined in my trades.
- It is my fault. I knew there was a risk in holding this trade into earnings, and I didn’t fully comprehend them when I took this trade.
Books on short-selling
1) How to Make Money Selling Stocks Short by William O’Neil (Wiley, 2005) – [Technical, Swing & Position Trading]
2) Sell & Sell Short by Dr. Alexander Elder (Wiley, 2008) – [Technical, Day Trading]
3) The Art of Short Selling by Kathryn Staley (Wiley, 1997) – [Fundamental]
4) Sold Short by Manuel Asensio (Wiley, 2001) – [Fundamental]
5) Sell Short: A Simpler, Safer Way to Profit When Stocks Go Down by Michael Shulman (Wiley 2009) – [Macro]
The best way to become an effective short seller is by making it a habit of studying hundreds and even thousands of charts every week. Train your eye to see the setups, the accompanying volume, how the MA’s line up, etc. The only way to do this is with practice. Short-selling can become very profitable due to the simple fact that stocks drop faster than they rise (in most cases) and for me, it typically only takes about 1-3 days to make a decent profit of 10% or more.
Trade only the best setups to increase your odds. I do recommend the use of stop losses above key resistance areas due to the fact that losing short positions can cause serious damage if left unattended.
You Might be a Bad Trader if:
You Might be a Bad Trader if:
…You are 100% sure about a trade being a winner so you have no need to manage risk.
…You go all in on one trade and it will make you are break you.
…You like to buy deep out of the money stock options not understanding how bad the odds are on them.
…You love directly giving unsolicited advice to other traders due to not understanding they have different trading plans and time frames.
…You are so new to trading you think it is a place of easy money.
…You think traders that talk about risk management and trader psychology are silly and that you are above that.
…You brag to much about your account size and last trade, it indicates to me you do not understand the long term in the markets.
…You are very loud about your winners but never discuss your losing trades.
…You brag to much.
And You Might really be a bad trader if: If you attack trading principles that you do not even fully understand due to lack of real trading.
The Blind Traders and the Market
There is an old parable known as “the blind men and the elephant.” In this story, there are four blind men who are asked to determine what an elephant looks like. The first blind man feels the leg of the elephant and says, “The elephant is like a tree because it is large and round like a pillar.” The second man feels the tail and says, “The elephant is like a rope because it is small and coarse.” The third man feels the ear and says, “The elephant is like a fan because it is flat and thin.” The fourth man feels the trunk and says, “The elephant is like a snake because it is long and curves.”
A king comes to the four blind men and says, “all of you are correct.” The king goes on to explain that each one had drastically different descriptions of the elephant because they are all feeling different parts. So, they are all correct. The elephant has all the features described by the four blind men.
This parable is a good analogy describing different types of profitable traders. Many of the arguments that erupt between traders on social media are due to not understanding the others time frames or not understanding the other trader’s position sizing, stop loss level, or expected winning percentage. Also too many cult members of Elliot Wave, Trend Following, Market Profile, Day Traders, and option traders etc. think their way of trading price action is the only way when their way is only one of many paths to profitability. There are as many ways to trade price action to be profitable as there are profitable traders.
The elephant in the room is that profitable traders do a few things in common: (more…)
Trading Mathematics and Trend Following
Some quick points, to be making money, Profit Factor must be greater than 1.
- Profit Factor (PF)
- = Gross Gains / Gross Losses
- = (Average win * number of wins) / (Average loss * number of losses)
- = R * w / (1-w)
- where R = Average win / Average loss
- w = win rate, i.e. % number of winners compared to total number of trades
Re-arranging, we have
- w = PF / (PF + R)
- R = PF * (1 – w) / w
Sample numbers showing the minimum R required to break-even (i.e. PF = 1, assuming no transaction costs) for varying win rates.
- w = 90% >> R = 0.11
- w = 80% >> R = 0.25
- w = 70% >> R = 0.43
- w = 60% >> R = 0.67
- w = 50% >> R = 1
- w = 40% >> R = 1.5
- w = 30% >> R = 2.33
- w = 20% >> R = 4
- w = 10% >> R = 9
The style of trading strongly influences the win rate and R (average winner / average loser). For example, (more…)
Some behaviors that virtually guarantee losses in the markets
• Lack of discipline: It takes an accumulation of knowledge and sharp focus to trade successfully. Many would rather listen to the advice of others. They just want to believe, like Fox Mulder.
• Impatience: Some have an insatiable need for action. The day trading adrenaline rush and the gamblers’ high can have heroin-like addiction pull.
• No objectivity: Some are unable to disengage emotionally from the market. They create a virtual “lifelong” marriage to their trades. Divorce is not an option.
• Greed: A desire for quick profit blinds many from the diligent work needed to actually win in the long run.
• Refusal to accept truth: Some do not want to believe that the only knowable truth is price action. They feel more secure following cult leaders serving Kool-Aid.
• Impulsive behavior: Many jump into investments based on the morning paper or Good Morning America. Thinking that if you act quickly, somehow you will beat everybody else in the great race is a recipe for a messy failure.
• Inability to stay in the moment of now: To be a successful trader, you cannot spend your time thinking about how you are going to spend your profits. Trading because you have to have money is not workable.
• Stay open-minded: Come into the day knowing your future steps. Do not be stubborn when the market does not go your way. Cut your losses and follow your stinking trading plan.
• Avoid false parallels: Just because the market behaved one way in 1995, 2000, or 2008 does not mean a similar pattern today will give you the same result. A great example of this: The Hindenburg Omen. It is a technical analysis pattern that is said to portend a stock market crash. The problem: Sometimes it is right, sometimes not. You don’t want to bet your life savings on a coin flip.
Just Give Up These 10 Things If You Are A Trader
- Give up your need to be right: The market is always right, do not strive to be right in your predictions and opinions. Strive to go with the flow of the market.
- Give up control: No matter how long you watch a live stock stream, you have no power over the movements. Save your emotional energy by not trying to cheer on your positions and get wrapped up in every price tick.
- Give up blaming other factors for your losses: There is no mysterious ‘They’ causing you to lose money. Your choices cause you to lose money, or your system just had a losing trade. It is a free country and free market.
- Give up beating yourself up for losing trades: If you followed your trading plan, then there should be zero regrets involved in a losing trade. If you did not follow your plan and lost, then money was the tuition and you paid to learn the lesson. You must move on to the next trade.
- Give up your own opinions: If you took a trade based on your own opinion, you have to give up your opinion and get out if the trade moves to a place that proves you were wrong.
- Give up your inability to change your mind: The more you believe a trade just can’t miss, the more dangerous it is. It will cause you to trade too big and stay in too long. You have to always be ready to be wrong.
- Give up your past trades: Each trade is a new trade. Do not hold grudges against stocks and think they ‘owe’ you for past losses. Do not fall in love with a stock and hold it as it falls lower and lower.
- Give up letting your trading define your self worth: Do not let your trading define you. Diversify your life with friends, family, hobbies, and other interests. It is not healthy to become overly obsessed with the markets.
- Give up on losing trades quickly when your stop is hit: Your best trades will be the ones that are profitable from the start. If they immediately go against you, be prepared to be stopped out. You can destroy your trading account when you start the “It will come back, I just have to wait” chant in the midst of a death spiral.
- Give up on price targets let your winners run as far as they will go: In the right market conditions trends can go on to unbelievable levels. The big wins during these trends can make your entire career. If you set a predefined profit target, you will not miss the opportunity when it comes. Let a trailing stop take you out.