1.Never enter a trade before you know where you will exit if proven wrong.
2. First find the right stop loss level that will show you that you’re wrong about a trade then set your positions size based on that price level.
3. Focus like a laser on how much capital can be lost on any trade first before you enter not on how much profit you could make.
4. Structure your trades through position sizing and stop losses so you never lose more than 1% of your trading capital on one losing trade.
5. Never expose your trading account to more than 5% total risk at any one time.
6. Understand the nature of volatility and adjust your position size for the increased risk with volatility spikes.
7. Never, ever, ever, add to a losing trade. Eventually that will destroy your trading account when you eventually fight the wrong trend.
8. All your trades should end in one of four ways: a small win, a big win, a small loss, or break even, but never a big loss. If you can get rid of big losses you have a great chance of eventually trading success.
9. Be incredibly stubborn in your risk management rules don’t give up an inch. Defense wins championships in sports and profits in trading.
10. Most of the time trailing stops are more profitable than profit targets. We need the big wins to pay for the losing trades. Trends tend to go farther than anyone anticipates.
Archives of “financial markets” tag
rss10 Things Traders Must Quantify
- What exactly is your entry signal going to be? What technical indicators will trigger you to enter a trade?
- What will the perceived edge for your entries be based on? Will you quantify your entries edge with back testing of through trading principles?
- Will you wait for an initial move in the direction of your trade entry or will you enter based on a technical indicator trigger?
- How will you trade in different market environments and trends? Will you have better odds of success buying dips in bull markets and shorting strength in down trends?
- What is the risk/reward ratio for the trade you want to take? How much are you willing to risk if the trade is a loser? How much could you make if you are right? Is it worth it?
- What are the probabilities that this entry will be a winning trade based on past historical price data and charts? With the winning percentage in mind how big do the winners have to be and how small do you have to keep the losers for the trading system to be profitable?
- Where should your stop loss be? At what price level will your entry be wrong and signal you to exit the trade with a loss?
- How big of a position size should you take based on your stop level and total capital you are willing to risk on this one trade?
- Is your position size small enough to enable you to hold the trade without emotions effecting your ability to follow your trading plan?
- When you open this trade in addition to your other positions, how much of your total trading capital is now exposed to loss if all trades went against you at the same time?
How Randomness Affects Trading Profitability.
1) If you ramp up your trading size, the increased risk over a random series of losing trades can devastate your account. Your trading size should not be a function of some high target return that you hope to make, but rather a function of the random strings of losers that you can survive.
2) Just because you’re going through a losing period doesn’t mean you’re trading a losing methodology. Changing sound methods in the middle of a random string of losing trades would be like a batter changing his swing after striking out a few times. That is what helps turn normal setbacks into prolonged mental and performance slumps.
The bottom line is that we can read far too much into short-term trading outcomes. Losing trades don’t necessarily mean we’re trading poorly and winning trades don’t necessarily suggest that we have a hot hand. We can gain knowledge from analytical mistakes and creative insights, but it’s also important to retain the wisdom that sometimes we will trade well and lose and other times we can trade poorly and win.
Not every move–of markets, or of profit/loss–is meaningful.
6 Key Ideas For Traders
1). The typical trader who is struggling will look for outside information that completes the puzzle or “holy grail” of trading. Go and look at yourself in the mirror. This is the missing piece in the trading puzzle.
2). Mental rehearsal (of both positive and negative scenarios), positive imagery, inducing a relaxed state of mind, and developing daily rituals can help put you in the flow state of mind for trading.
3). The most important question a trader can ask: “Am I acting in my own best interest right now?”. Menaker explains why this question will help you define your risk and maximize your opportunities and trading results.
4). The very largest traders are focused primarily on risk management. Accepting and managing risk is a big part of trading. Some traders have difficulty following rules in this area. We should spend time learning about the mental biases humans have against suffering losses (see: Prospect Theory) and become aware of these showing up in our trading. Keep a trading journal to highlight awareness of these events.
5). “If I was forced to rank the importance of [various aspects] of trading, setups would be at the bottom of the list. Position sizing, risk management, and psychology are really what’s going to keep you out of trouble and ahead of the game. The best traders understand this and have internalized it.”.
6). You need to learn to do more of what works and less of what doesn’t. While it sounds obvious, many traders have difficulty with this as their unmanaged emotions are interfering with their perceptions and trading process.
Teach Yourself to Be Great
Can you teach yourself to trade? Do you realize how important learning on your own is if you really want to be a successful trader? Everything about Kevin Bruce’s trading is self-taught. He started in the basement of the University of Georgia library: The school had old editions of the Wall Street Journal on microfilm. In the basement dungeon, he would compile his own record of the open, high, low, and closing prices for all markets. At the time, Bruce was actually working at a gas station at night, and between cleaning bugs off windshields and pumping gas, he had time to think and research–which is where he would analyze that price data. Bruce had a Texas Instruments handheld calculator that helped him sort through price data collected from the library. He figured out how to mathematically define a trend (in order to profit from its movement). It was a basic trend trading system. It was the same system he had used for the trading game in school with slight tweaks. Ultimately, it was the same one he would use with real money in the decades to follow.
25 Rules of Trading Discipline
- The market pays you to be disciplined.
- Be disciplined every day, in every trade, and the market will reward you. But don’t claim to be disciplined if you are not 100 percent of the time.
- Always lower your trade size when you’re trading poorly.
- Never turn a winner into a loser.
- Your biggest loser can?t exceed your biggest winner.
- Develop a methodology and stick with it. don?t change methodologies from day to day.
- Be yourself. Don?t try to be someone else.
- You always want to be able to come back and play the next day.Once you reach the daily downside limit, you must turn your PC off and call it a day. You can always come back tomorrow.
- Earn the right to trade bigger. Remember: if you are trading poorly with two lots you must lower your trade size down to a one lot.
- Get out of your losers.
- The first loss is the best loss.
- Don?t hope and pray. If you do, you will lose.
- don?t worry about news. it?s history. (more…)
The Art of the COMEBACK in Trading
Just about every new trader who launches into trading before doing the proper homework ends up ‘blowing up their account’ which is generally considered suffering a 50% or greater draw down from their original equity starting point. Some of the signs of being in danger is just trading your opinion with no regard to finding a proven methodology to trade. New traders in danger have no trading plan, no understanding of risk/reward ratios or even more importantly the odds of their own risk of ruin based on their position sizing and capital at risk in every trade. They also have no idea of what their advantage is over all other participants, they have no edge. The main angle of their trading is simply their own unwarranted belief in their own cleverness. Danger! Danger! This random trading is pure gambling and we know how few gamblers leave the casino with their winnings.
Many new traders, even many of the greatest legends of trading initially blow up their accounts, learn many lessons and do come back and win. Here are the 10 lessons that enable many losing traders to come back in the game and end up with six figure accounts or even millions from some simple changes in strategy.
- Risk no more than 1% of your total trading capital per trade. Use stop losses from your initial entry.
- Only enter a trade when you believe that the profit potential is much greater than the down side based on historical performance.
- Learn to read what a chart is saying, trade the actual chart action not your own beliefs.
- Create a defined trading plan listing what you will do before the trading day begins, position sizing, entry points, risk per trade, your watch list, etc.
- Discipline yourself to follow the plan you create.
- Trade a size you are comfortable with, one that does not bring in strong emotions that distort your trading.
- Treat all your capital as your money, do not get reckless with ‘the houses money’ after some nice wins.
- Be a smart trader not a random gambler. Treat trading like a business.
- Quit believing stocks are too high or too low, stocks are at all time highs or lows for a reason and tend to continual on that path.
- Trade with the trend because you do not have a crystal ball.
- Have a strong faith in your ability as a trader AFTER you have done your homework.
- Develop complete confidence in your trading methodology AFTER you have researched historical performance. (more…)
Book Review :Risk Management in Trading -by Davis Edwards
It is a commonplace that risk management is critical to trading success. What constitutes good risk management, however, is anything but commonplace knowledge. Was VaR the number that killed us, as Pablo Triana claimed, or is it a useful, perhaps even indispensable, tool? Should risk management teams have their separate turf or should they be integrated with the trading desks? And what do you have to know to be a risk manager?
Davis W. Edwards addresses all of these questions, with particular emphasis on the third, in Risk Management in Trading: Techniques to Drive Profitability of Hedge Funds and Trading Desks (Wiley, 2014). The book is a useful self-study guide for those who aspire to become risk managers; each chapter ends with a set of questions to test the reader’s knowledge, and there is an answer key at the back of the book. It also goes a long way toward satisfying the curiosity of those who want to know just what it is that risk managers really do. It does not, however, directly address the concerns of the individual trader who wants to incorporate sound risk management principles into his business model.
After three preliminary chapters (on trading and hedge funds, financial markets, and financial mathematics) Edwards gets to the heart of the matter. He discusses backtesting and trade forensics; mark-to-market accounting; value-at-risk; hedging; options, Greeks, and non-linear risks; and credit value adjustments (CVA).
To give you a better sense of the level of the book—and so you can test your own skills—here are a few questions from the quizzes.
Difference between Skill & Luck in Trading
Many times, good traders make the right trade but still lose, but it is okay because they will win in the long term because their method is tested, their risk is managed, and their mind set is right for long term trading success. They have developed the skills of a successful trader. Other times a new trader with no skills makes a trade based on a hunch and wins big, the danger is that the new trader will confuse luck with skill. The delusion begins with winning on a few trades, the new trader trades bigger, and bigger, until their luck runs out and they are wiped out. We need to all keep a good understanding of whether we traded will the right skill set or we just got lucky.
Traders with skill have large gains after 100 trades and are relatively quiet, traders that were lucky have huge gains after a few trades and are very loud, then very quiet for the next few trades that usually bring their account to zero.
Traders with skill risk 1% to 2% of their trading capital per trade and win in the long term, traders that are just lucky risk the majority of their account for a few big wins in the short term but lose in the long term when their luck runs out.
Traders with skill use a successful method with different stocks, currencies, commodities, future markets while traders with just luck are only successful with one lucky pick in one of those markets and when its up trend ends their winning streak ends. (more…)
Justin Fox’s The Myth of the Rational Market:Book Review
Justin Fox’s The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street(Harriman House, 2009) isn’t exactly hot off the press, but I discovered it only recently. It’s a fast-paced history, replete with interesting (sometimes chatty/catty) details, of theories about the financial markets from Irving Fisher to Robert Shiller.
The cast of characters is huge. I list them here to give a sense of the scope of the just shy of 400-page book: Kenneth Arrow, Roger Babson, Louis Bachelier, Fischer Black, John Bogle, Warren Buffett, Alfred Cowles III, Eugene Fama, Irving Fisher, Milton Friedman, William Peter Hamilton, Friedrich Hayek, Benjamin Graham, Alan Greenspan, Michael Jensen, Daniel Kahneman, John Maynard Keynes, Hayne Leland, Robert Lucas, Frederick Macaulay, Burton Malkiel, Benoit Mandelbrot, Harry Markowitz, Jacob Marschak, Robert Merton, Merton Miller, Wesley Mitchell, Franco Modigliani, Oskar Morgenstern, M.F.M. Osborne, Harry Roberts, Richard Roll, Barr Rosenberg, Stephen Ross, Mark Rubinstein, Paul Samuelson, Leonard “Jimmy” Savage, Myron Scholes, William F. Sharpe, Robert Shiller, Andrei Shleifer, Herbert Simon, Joseph Stiglitz, Lawrence Summers, Richard Thaler, Edward Thorp, Jack Treynor, Amos Tversky, John von Neumann, and Holbrook Working. (more…)