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EXIT in Trading

  
  Education
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exit_strategy1Exit– The exit is critical to being a successful trader. Let your winners run and your losers run out quickly. Two factors determine your exit, the Target and the Stop loss you have set on entering the trade.

1. The Target is determined by the type of market and the trading history of the stock.

2. If the trade proceeds in your direction move the Stop loss keeping it tight.

3. It the trade continues to move, you may want to take your money off the table!

4. Profits should be taken before reaching a S/R. SO WHAT if it continues to run after you left!

5. Take Profits quickly and often! And remember discretion is the better part of valor.

6. The two most important factors in determining the Stop loss are the last S/R and providing enough margin for the trade to be successful. You must balance these against each other.

7. The Stop loss can be predetermined by your maximum loss limit but understand a small loss limit can positively impact your probability of success.

8. I must balance courage and common sense when staying in the trade. The money may be better used in another trade.

9. Remember small losses are the key to success in an environment where you may be wrong greater than 50% of the time.

10. Don’t give back, remember you can always get back in!

11. Don’t change my rules and therefore my settings.

Mark Cuban’s post mortem on Facebook

  
  Education
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His latest take on the facebook IPO is here. His points are in bold.

1. Say goodbye to the individual investor on Wall Street. Mr. Cuban argues that because the media hyped the FB IPO that Wall Street is to blame. OK, I agree the IPO was hyped. But is that Wall Streets fault? Isn’t it the media’s fault? Isn’t it the buyers fault for not doing their due diligence? Didn’t Morgan Stanley spend millions propping up the stock the first day?

No one has long term success by reading any single piece of media, especially without knowing the writers intentions.

Here is a brief explanation on how the market works. If there are more buyers than sellers it goes up or vice versa. Or more important right now, if they have the means to buy.

2. The Valuation Bubble in Silicon Valley is bursting – but not for the reasons you think. The idea of private investment seems great but the execution is far off. The value of any market is liquidity. That has to be one of the important factors when making an investment. You know why futures are gaining popularity and what will eventually lead to their demise? A central market place and the lack thereof. Their spawns will kill the market and liquidity. The less central a market place the more likely the forces within that market are able to take control.

Mark agrees with me on liquidity but my interpretation is that he makes an argument against his point not for it. Didn’t the public market do a much better job at pricing? Didn’t the private market fail more dramatically than the public is this case? (Some one that knows the details better than I, when they went public did private shares get converted 1 to 1? If it did not get converted 1 to 1 let me know and I will gladly change it)

I believe Shark Tank is a great reason why Wall Street will always exist. I do not feel bad for the euntrepreuners and or the Sharks. Each assume the other person will add value. Wall Street assumes the same thing but to more people But as Mr. Cuban already knows, not everyone can win. But would they do better if there were 10 sharks or 100 sharks? Would more companies get funded?

If you allow people to be stupid, they will continue to be stupid. Howard Lindzon wrote a post as well that I disagreed with on the basis of access. They are both a lot more successful than I so I could be wrong. Also both of those guys should know that you are more likely to get screwed privately than publicly. I think this might be changing but it hasn’t yet. Open is not bad, closed is not bad, bad is bad. Liquidity and cash is always king, deeper markets should lead to better pricing. (more…)

Expectancy

  
  Education
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Expectancy
Expectancy along with position sizing are probably the two most important factors in trading/investing success. Sadly most people have never even heard of the concept.
Expectancy is the average amount you can expect to win (or lose) per rupee at risk.
Here’s the formula for expectancy:
Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)
As an example let’s say that a trader has a system that produces winning trades 30% of the time. That trader’s average winning trade nets 10% while losing trades lose 3%.

Expectancy, position-sizing and other aspects of money management are far more important than discovering the holy grail entry system or indicator(s). Unfortunately entry techniques are where the vast majority of books and talking heads focus their attention. You could have the greatest stock picking system in the world but unless you take these money management issue into consideration you may not have any money left to trade the system. Having a system that gives you a positive expectancy should be in the forefront of your mind when putting together a trading plan.

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