- Consider yourself a manager of bad trades. The profitable trades will look after themselves – sit back and let the profits run. However when a trade turns against you, cut your losses quickly and move onto the next trade.
- Find a trading strategy that works and validate it. You may design your own trading system, you may purchase a strategy or follow someone else’s advice but the key is to find a strategy that suits your personality. If you are comfortable and confident that your strategy works then you are more likely to stick with it when the losses come (and they will come!)
- Never second-guess your strategy. If your trading rules are telling you to exit a position…then get the hell out! Don’t presume you know more than the market. Don’t wait to see if a bad trade will turn around in your favor. It may, but it may continue to go against you and therefore create larger losses.
- Reality check: you WILL have losing trades. The goal is to make the losses insignificant so you are not taken out of the game and unable to keep trading. Large trading losses cause damage to your investment capital AND to you psychologically. It is very hard to step back up to the plate and take the next trade if you have a huge trading loss. Therefore, have a very clear risk management strategy and stick to it.
Archives of “financial markets” tag
rss13 -Trading Rules :Just Follow Them If U Can
Trading rule No 1. Never chase. Forget about the Rupee loss for a moment as the real damage comes from the distraction it creates.
Trading rule No 2. Wait for the break. Most traders buy inside the range, get impatient and as a result they sell on first sign of strength which ends up being the breakout.
Trading rule No 3. Don’t ride the ticks and Dollar profits. It creates emotional turmoil and is draining. Prevention is best cure. Takes the fun out of the game.
Trading rule No 4. Price action trumps everything. Management lie or mislead but price action (money flow) never lies.
Trading rule No 5. Sell the news or a least sell partials. Markets discount everything and over the long run you will be better off.
Trading rule No 6. Always stay in control. Do NOT put yourself in news related coin toss trades, where the risk cannot be managed.
Trading rule No 7. Mind your own business, avoid conflict. If you take offence because someone has disagreed with your trade, then you are such a precious little petal.
Trading rule No 8. Do NOT set targets as all this creates is a premature EXIT. Run a trailer and let that take you out. (more…)
4 Type of Market Cycles
1) Bottoming process – At market lows, we tend to see an elevation of volume and volatility and a high level of market correlation, as stocks are dumped across the board. Selling pressure far exceeds buying pressure and sentiment becomes quite bearish. At important market bottoms, we see price lows that are not confirmed by market breadth, as strong stocks begin to diverge from the pack and attract buying interest. At those bottoms, we also find a rise in buying pressure and a reduction of selling pressure, as fresh market lows fail to attract new selling interest.
2) Market rise – With the drying up of selling, low prices attract buying from longer timeframe participants as well as shorter-term opportunistic ones. The market rises on strong buying pressure and low selling pressure, and the rise generates sufficient thrust to generate a good degree of upside momentum. Volatility and correlation remain relatively high during the initial lift off from the lows and breadth is strong. Dips are bought and the rise is sustained.
3) Topping process – The market hits a momentum peak, often identifiable by a peak in the number of shares registering fresh highs. Selling from this peak generally exceeds the level of selling seen during the market rise, but ultimately attracts buyers. Weak stocks begin to diverge from the pack and fresh price highs typically occur with breadth divergences and lower levels of correlation. New buying lacks the thrust of the earlier move from the lows and volatility wanes. By the time we hit a price peak for the cycle, divergences are clear, volatility is low, both buying pressure and selling pressure are low, and sentiment remains bullish.
4) Market decline – Fresh selling creates a pickup in correlation and volatility, as short-term support levels are violated and selling pressure exceeds buying pressure. Breadth turns negative and the bulk of stocks now move lower.
Weaknesses and Strengths of Traders
Ambitious
Makes and follows long term business plan
•Unambitious
Will ignore long term business plan
•Calm
Will handle times of market volatility and make smart decisions
•Worrying
Will panic when markets are volatile and make stupid decisions (more…)
The Best 10 things George Soros Ever Said About Trading
On September 16, 1992 – later dubbed “Black Wednesday” — the day the British government abandoned the European Exchange Rate Mechanism (ERM), and the pound was devalued by 20% George Soros made over $1.2 billion on his short sterling trade and was dubbed “The Man Who Broke the Bank of England.” His Quantum Hedge Fund has returned about 20 percent a year, on average, since 1969. These are amazing results, and some of the best ever achieved. Many of the years he was personally running it he had 30% returns and two years returned an amazing 100%.
Risk Management
“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”
“My approach works not by making valid predictions but by allowing me to correct false ones.”
Trader Psychology
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
“The markets are always on the side of exuberance or fear. It’s fear and greed. Right now greed has the better of it, which is rather nice (for investors) as long as it doesn’t get out of hand,” (more…)
Hope & Fear in Trading
In trading most new traders allow hope and fear to dictate their trading. They have a losing trade and instead of selling it and getting out they instead hope it will come back to even allowing the loss to grow. Another error for new traders is that when they have a winning trade they fear that the profit will disappear so they sell for a small gain and miss the big trend in their favor. When hope and fear controls the trader they end up with big losses and small gains. A formula for ruin.
Instead the rich trader is fearful of losses getting bigger so they sell quickly when losing, risking a maximum of 1% of their capital on any one trade. Rich traders are able to think clearly and trade rationally knowing exactly what they are risking, when their stop is hit, they get out. This enables them to keep all their losses small.
When a trade is immediately a winner for a rich trader they hope it will run 100 points in their favor. Rich traders enable this to be possible with a trailing stop, they do not get out of a winning trade until a key price reversal has happened that tells them that the trend is actually reversing.
Rich traders are fearful of losses growing bigger and hope that their winners will continue on a monster trend. This mindset allows them to be on the right side of trends and avoid any huge losses. This is why the best traders in the world are trend followers and win consistently. Do you want to join their club? Then do not let fear and hope dictate your trading decisions use them correctly.
10 Keys For Traders
- First Things First
You sure you really want to trade ? It is common for people who think they want to trade to discover that they really don’t. - Examine Your Motives
Why do you really want to trade ? Did you say excitement ? Then don’t waste your money in market, you might be better off riding a roller coaster or taking up hand gliding.
The market is a stern master. You need to do almost everything right to win. If parts of you are pulling in opposite directions, the game is lost before you start. - Match The Trading Method To Your Personality
It is critical to choose a method that is consistent with your your own personality and conflict level. - It Is Absolutely Necessary To Have An Edge
You cant win without an edge, even with the world’s greatest discipline and money management skills. If you don’t have an edge, all that money management and discipline will do for you is to guarantee that you will gradually bleed to death. Incidentally, if you don’t know what your edge is, you don’t have one. - Derive A Method
To have an edge, you must have a method. The type of method is not important, but having one is critical-and, of course, the method must have an edge. - Developing A Method Is Hard Work
Shortcuts rarely lead to trading success. Developing your own approach requires research, observation, and thought. Expect the process to take lots of time and hard work. Expect many dead ends and multiple failures before you find a successful trading approach that is right for you. Remember that you are playing against tens of thousands of professionals. Why should you be any better ? If it were that easy, there would be a lot more millionaire traders. - Skill Versus Hard Work
The general rule is that exceptional performance requires both natural talent and hard work to realize its potential. If the innate skill is lacking, hard work may provide proficiency, but not excellence.
Virtually anyone can become a net profitable trader, but only a few have the inborn talent to become supertraders ! For this reason, it may be possible to teach trading success, but only upto a point. Be realistic in your goals. - Good Trading Should Be Effortless
Hard work refers to the preparatory process – the research and observation necessary to become a good trader – not to the trading itself.
“In trading, just as in archery, whenever there is effort, force, straining, struggling, or trying, it’s wrong. You’re out of sync; you’re out of harmony with the market. The perfect trade is one that requires no effort.” - Money Management and Risk Control
Money management is even more important than the trading method.
The Trading Plan- Never risk more than 5% of your capital on any trade.
- Predetermine your exit point before you get in a trade.
- If you lose a certain predetermined amount of your starting capital (say 10 to 20%), take a breather, analyze what went wrong, and wait till you feel confident and have a high-probability idea before you begin trading again.
- Trying to win in the markets without a trading plan is like trying to build a house without blue prints – costly (and avoidable) mistakes are virtually inevitable. A trading plan simply requires a personal trading method with specific money management and trade entry rules.
Traps and Pitfalls
Realistically, there are many ways to lose money in the financial markets and, if you play this game long enough, you’ll get to know the most of them intimately. Fortunately, a survivalist plan empowers you to avoid many of the traps and pitfalls faced by other traders. Above all else, learn the five market scenarios that place you at the most risk.
- Bad Markets – A good pattern won’t bail you out of a bad market, so move to the sidelines when conflict and indecision take hold of the tape. Your long-term survival depends on effective trade management. The bottom line: don’t trade when you can’t measure your risk, and stand aside when you can’t find your edge.
- Bad Timing – It’s easy to be right but still lose money. Financial instruments are forced to negotiate a minefield of conflicting trends, each dependent on different time frames. Your positions need to align with the majority of these cycles in order to capture the profits visualized in your trade analysis.
- Bad Trades – There are a lot of stinkers out there, vying for your attention, so look for perfect convergence before risking capital on a questionable play, and then get out at the first sign of danger. It’s easy to go brain dead and step into a weak-handed position that makes absolutely no sense, whether it moves in your favor or not. The bottom line: it’s never too late to get out of a stupid trade.
- Bad Stops – Poor stops will shake you out of good positions. Stops do their best work when placed outside the market noise, while keeping risk to a minimum. Many traders believe professionals hit their stops because they have inside knowledge, but the truth is less mysterious. Most of us stick them in the same old places.
- Bad Action – Modern markets try to burn everyone before they launch definable trends. These shakeouts occur because most traders play popular strategies that have been deconstructed by market professionals. In a sense, the buy and sell signals found in TA books are turned against the naïve folks using them.
Why Is Trading So Hard?
At one point or another, everyone who has interactions with the market asks oneself, “Why is trading so hard?” There are legitimate reasons why trading should be difficult: markets are highly random; whatever edge we can find is eroded by competition from smart, well-capitalized traders; some traders work within various constraints; and markets are subject to very large shocks that can have devastating effects on unprepared traders. Even so, it seems like something else is going on, almost like we are our own worst enemies at times. What is it about markets that encourages people to do exactly the wrong thing at the wrong time, and why do many of the behaviors that serve us so well in other situations actually work against us in the market?
Part of the answer lies in the nature of the market itself. What we call “the market” is actually the end result of the interactions of thousands of traders across the gamut of size, holding period, and intent. Each trader is constantly trying to gain an advantage over the others; market behavior is the sum of all of this activity, reflecting both the rational analysis and the psychological reactions of all participants. This creates an environment that has basically evolved to encourage individual traders to make mistakes. That is an important point—the market is essentially designed to cause traders to do the wrong thing at the wrong time. The market turns our cognitive tools and psychological quirks against us, making us our own enemy in the marketplace. It is not so much that the market is against us; it is that the market sets us against ourselves.
Technical Analysis Fact and Fiction
“Technical analysis, I think, has a great deal that is right and a great deal that is mumbo jumbo…
“There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.
“For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is — whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.
“Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behaviors. By definition, anything that creates a new chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.”
– Bruce Kovner, Market Wizards
Bruce Kovner pulled billions out of the markets, over multiple decades, before handing the reins of his fund, Caxton Associates, to the next generation of traders.
As an academic in a past life, Kovner was known for his deep dive fundamental analysis — but he also used charts extensively, as the Market Wizards excerpt shows. (more…)