Archives of “Day trading” tag

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10 Greedy Characteristics

  
  Education
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1.  You find yourself forgetting your rules.  Which during day trading is the last thing you want to happen since your profit margins are often based on smaller movements.

2.  When reviewing your pre-market plays, every stock looks like a winner.

3.  Shortly after opening your position you see a price target that is much higher but you have no justification for the target.

4.  Trading feels stressful all of the time.  From the minute you get up in the morning, until you close your last position.  Instead of approaching trading with a calm head, you have a constant feeling of fighting and living on the edge.

5.  You stop reviewing your trades.  If someone were to ask your win/loss percentage over the last week you would have no idea; however, you would know how much money you need to make for the week.

6.  You abandon limit orders and start placing more and more trades at market.  Most of the times this will occur when you are trying to get into the position, because you can’t stand the idea of not being in on the winning trade.

7. You start to over trade.  If you normally put on 3 trades per day, you will now find yourself placing 6 or more trades per day.  This sort of behavior will run its course as the increase in trading activity while abandoning your day trading rules always points to losing money. (more…)

Confidence, Discipline and Consistency

  
  Education
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While day-trading is a great way to make a living when you are consistently profitable, it can also be the worse career choice if you consistently lose. Continue forward with system development, or working towards effective risk management, money management, or mastery of your trading psychology. Trading psychology means the big 3: discipline, confidence and consistency.The trading psychology takes precedence because it is needed to make sure that the other two are followed.

It takes a skilled trader to understand execute all of the things that are needed to be successful and earn a significant amount of profit doing this alone. Money Management is essential to preserve your trading capital and is simply a set of rules that governs how much money you have at risk. Take control of your trading Psychology and adhere to strict discipline in trading your developed and refined Trading System.

Building confidence on the system is extremely important as that is the only reason why you stick to the system during bad times. Day trading requires focus and discipline on the part of the trader with a high degree of risk tolerance since losing trades are numerous. (more…)

5 Mistakes -Traders Always Do

  
  Education
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Over trading

Most new traders think that they must always be long or short the market. They lose a lot of money during certain market stages like corrections, high volatility, or bear markets. Sometimes the best position is cash. Sometimes the best trade is no trade. Sometimes their is no signal just chaos. Profitable trading is taking signals for trades that have good odds for success and the right risk/reward ratio for your win rate expectations. Cash is a position in itself. The less I trade the more money I make.

Ignorant of their own ignorance

The more you don’t know, the more sure you are that you know everything. New traders many times do not understand the danger of big losses. They also do not understand the mental and emotional strain of having on trades with real money in real time. A lot of hubris and arrogance is born out of not being humbled by the markets. Looking at historical charts and past history is nothing like holding positions in real time.With skin in the game and not being able to see the hard right edge of the chart as it unfolds is a different experience than theories, back tests, and reading trading books. The real traders I know that have a ton of experience are humble and know that they don’t know the future. (more…)

Trading Mathematics and Trend Following

  
  Education
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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…)

Market changes mind like a girl changes clothes

  
  Education
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changingcloth

The current market is unique. It has never been so volatile; therefore the danger and the opportunities have never been so plentiful. No one has ever traded in such market, so past knowledge and experience may only be a hinder to adopt faster in the new environment. No system is profitable all the time and traders with 20+ years of profitable track record are in the process of realizing that. In time of extreme changes survives the one, who is more flexible, not the stronger one.

Conventional wisdom will bring you only losses. You have to learn to think out of the box. Conventional wisdom says that in bear markets you should be only short or neutral. In case you absolutely have to have long positions in your portfolio, you should choose among the stocks with highest relative strength – the ones that somehow managed to weather the storm. Wrong.

Market is so volatile that it takes stops out on a regular basis, shaking out both long and short swing traders. Percentage stop losses don’t work in this environment. If you are going to survive and thrive, you need to decrease your trading horizon and the size of your trading. I remember that about a year ago, I found out that many, who were swing traders at the beginning of their careers at some point switched to day trading. I wondered why and started asking questions.

Markets are made from people. In theory everyone could be profitable if there is a continuous flow of fresh money into the market. Recently this has not been the case. Someone has to lose. In order to be profitable you need to follow a very simple rule – to buy only what you could sell later at higher price and to sell short only what you could buy later at lower price. Like the owner of a small shop, you should not buy inventory that you personally like, but stuff that could easily be sold this season. Yes, stock traders are in the retail business and their products are called stocks. I realize how unscrupulous such way of thinking may sound and that it contradicts the initial purpose the market were created, but this is the reality.
Initially markets were created:

  • To offer an alternative exit strategy (therefore motivation) for entrepreneurs;
  • To provide new means of cheaper financing for business’ expansion;
  • To allow ordinary citizens, who don’t have the idea, the will or the necessary capital to start their own business, with the opportunity to participate effectively in the economic growth of the country/the world.

All those things don’t matter anymore. Markets have long turned into a speculation arena, where everyone tries to outsmart the other.

Short Selling

  
Analysis, Education
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Recommended 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.

5 Trading Frustrations and Solutions

  
  Education
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Top Trader Frustrations

  1. I cannot trade my plan!
    • You need to develop the skill to execute your trading plan under duress.
    • Use visualization exercise to see yourself successfully executing your trading plan during the day. The greater level of detail a trader uses in their visualization exercise the greater its effectiveness.
  2. I cut my winning trades too early!
    • Have profit targets
    • Take partial profits
    • Measure each day the missed profits that you could have obtained if you didn’t miss a setup, or if you didn’t cut your winning trades too early.
  3. I am not consistent with my trading
    • Establish a playbook with setups that work for you, and setups that don’t work for you.
    • Define the risk that you should take in setups based on whether they are A+, B, C setups (based on risk/reward and % win rate).
    • Track the amount of risk that you are taking on similar trades, so that the results can be properly analyzed. Risk 30% of your intraday stop loss on a A+ setup, 20% on a B setup, 10% on a C setup, 5% on a Feeler trade.
    • Do a trade review
      • Did I trade the best stocks today?
      • Did I recognize the market structure?
      • Did I push myself outside the comfort zone?
      • Things I did well
      • Things I could improve
  4. I cannot find a profitable trading system
    • Trading is a probability game, setups don’t work all the time, so don’t keep trying and throwing away trading setups without thoroughly testing them.
    • Get exposed to lots of different setups and trade the setups that make the most sense to you and works best for you.
  5. I lack the confidence to take trades
    • Have a detailed trading plan, place orders in advance in possible.
    • Put on feeler trades with 5-10% of the risk that you normally put on. Once you start to become more comfortable you can then put on your regular trades again.

Discipline & Passion

  
  Education
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All successful day traders need discipline, once you have a plan stick to it. When day trading you can lose money as well as make money, as losses can result in an end to your career you need to manage your risks, know where to set your limits and stop loss orders accordingly. Once you have met your objectives do what you planned don’t let greed or fear take control of you. 

Day trading involves being passionate about the market, a good day trader never switches off tracking the market day in and day out following news globally, analysing charts and looking at quote screens. This all has to be processed as quickly as possible, this is of course is what will give a good day trader an edge. 

20 Naked Truth For Traders

  
  Education
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1.    You have to have passion for learning to trade; passion is the energy that you need to take you to your goals.

2.    You have to have the perseverance to keep going after you want to give up.  90% of new traders quit when they were very frustrated while 100% of successful traders didn’t quit until they reached their goals

3.    New traders spend too much time looking for what to trade instead of focusing on who they are as traders.  You have to know who you are as trader first then you can start building your trading system.

4.    Traders have to be able to manage their stress by trading inside their current comfort zone. Traders have to grow themselves and trade size step by step.

5.    The vast majority of new traders fail simply because they did not do their homework before they started trading.

6.    A trader has to build a trading system that matches their own personality and risk tolerance levels.

7.    A trader that chooses to be master a specific type of trading method or trading vehicles has a much better chance of success than the traders that just dabble in many different things and never make much progress.

8.    A trader has to write a good trading plan while the market is closed to guide their trading while the market is open. (more…)

2 Ways to Fail at Trading

  
  Education
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Misunderstanding how trading works. Trading is a game of probabilities. No matter what methodology you are using—fundamental, macro or technical; highly quantitative, intuitive, seat of pants, or blend; long term, short term, daytrading—at the end of the day, the expected value of your trades has to be positive, or you aren’t going to make money. There is no free lunch. Though you may get lucky (or unlucky) on a set of trades, over a large set of trades, the Law of Large Numbers rules with an iron fist. There is no way to “game” the system. You can’t take small trades with tiny risk, you can’t sell time premium, you can’t find some magic technical pattern. Yes, all of these things can be part of a working methodology, but that methodology has to have a positive expectancy. To put it simply, it has to work. (Now, you can see that points 1-4 are really basically the same point!)

 Be overconfident. Markets punish hubris and overconfidence with remarkable consistency. (Victor Niederhoffer has written poignantly on this subject.) Overconfidence can hit in many ways. Industry statistics show that most small trading accounts lose money, so, you have to ask yourself, why will you be different? (Hint: answers like “I have a passion for markets. I was successful in this business or this sport. I’m a driven, detail-oriented person,” are probably not strong enough answers. Dig deep. Why will you succeed where so many others have tried and failed?) Overconfidence can creep in in other ways too. After a long string of winning trades, some traders are tempted to get more aggressive and increase their risk… and now they are trading too big, so bad things happen. There’s a sweet spot here—you have to have a degree of confidence, you can’t be afraid, but you have to stay humble. If you don’t, the market will make you humble, one way or another.

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