Archives of “position sizing” tag

rss

Swope and Howell, Trading by Numbers

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

The title of this book by Rick Swope and W. Shawn Howell is somewhat misleading. It’s not intuitively obvious, or at least it wasn’t to me, that Trading by Numbers: Scoring Strategies for Every Market (Wiley, 2012) is primarily about options.

But let’s start, as the authors do, with their trend and volatility scoring methods. The trend score has four components: market sentiment (the relationship between a long-term moving average and a short-term moving average and the position of price in relation to each moving average), stock sentiment (the same parameters as market sentiment), single candle structure (body length relative to closing price), and volume (OBV trend). The range is -10 to +10. Volatility scoring has three legs: historical market volatility, historical stock volatility, and expected market volatility. The range is 0 to +10.

Before moving on to the standard option strategies, the authors address risk management, which they wisely describe as nonnegotiable. Risk management again has three legs: risk/reward, concentration check, and position sizing. 

And, with chapter five (of sixteen), we’ve reached covered calls. The reader who has no experience with options will be lost. Even though the authors push all the right buttons (ITM, ATM, OTM strategies; the Greeks; position adjustments), they push the buttons almost as if they were playing a video game. Very fast.

Assuming that the reader is not new to the option market, what can he/she learn from this book? Let’s look very briefly at three strategies and see how they reflect three different market or individual stock conditions: a long call, a straddle/strangle, and an iron condor. Traditionally described, in the simplest of terms, the first is looking for a significant bullish directional move, the second anticipates a surge in volatility, and the third expects a rangebound market. (more…)

14 Questions for Traders

  
  Education
#  #  #  #  #  #  #  #  #  #

1)       Do I treat my trading/investing like a business?  Have I prepared for it the way I would for any other business?

2)      Do I have a business plan – a working document to guide my trading business?

3)      Do I have a set of written rules to follow?

4)      Am I following a regular procedure to prevent mistakes?  A mistake means not following your rules that you have laid out for yourself.

5)      Do I have a tested trading methodology?

6)      Do I know how my methodology will perform in different kinds of markets?

7)      Do I know what kind of market we are currently in now and what to expect from my methods in such a market?  Should I be trading these markets?

8)      Do I trade with exact exit points that are preplanned for every trade (position) I take?

9)      Have I developed specific objectives for my trading/investing?

10)    Do I understand that I achieve my objectives through a POSITION SIZING METHOD?   Have I developed a specific position sizing method to meet my objectives?

11)   Do I truly understand the importance of all the questions mentioned above?

12)   Do I understand that I create my own trading/investment results through my thoughts and beliefs?

13)   Do I accept full responsibility for that creation?

14)   Do I regularly work on myself to make sure that I follow the very important points (questions) above? (more…)

The 7 Best Ways to Exit a Trade

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #

In trading the money is not made in the entry, it is in the exit. The art of the exit is crucial to a traders success in the markets.  Profits can disappear if you do not take them at the right time, small losses can become huge losses if you do not cut them. Small profits can become huge profits if you let them run until they truly stop.  Keeping capital tied up in a trade going nowhere and just letting it sit there can cause you to miss out on other great opportunities.

So what is a trader to do?

  1. Use stop losses, only risk 1% of your total trading capital on any one trade, when you have lost that 1%, get out. Position sizing, stop losses,  and understanding volatility is key.
  2. Enter trades right at break out points to new highs or off key price support levels or key moving average support levels. If it loses that support later and fails to retake it quickly then sell it.
  3. Buy when a stock is one ‘R’ multiple above a key support level, sell if it falls back and loses that support level. (One ‘R’ multiple = 1% of total trading capital).
  4. Use a ‘stale’ or ‘time’ stop: Set a time limit on how long you will give a  trade  to move  a certain amount, if it fails to move enough fast enough, get out.
  5. Volatility stop. The market or your stock has a big expansion in its daily price range or starts moving against you the full daily range. You either cut your position down in size or get out due to increased risk.
  6. You trail a stop loss behind your winner, when it reverses and hits that stop you sell. A trailing stop can be a moving average or a percentage you your gain.
  7. You sell your position because you have found a much better trade with a better probability of success or a bigger upside.

The key above all else is always to have a plan to get out of every trade before you get in. Before each trading day begins think about what you will do based on the price levels your open trade is at.

Just follow these Trading Rules

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

  followtherules

 Stops – a stop price must be in place at all times for all positions.

 Balance – this one is the hardest of all to define, but because it is impossible to know with certainty the future direction of the market, a balance between bullish and bearish positions is the most prudent. In addition, if you are heavily weighted either bullish or bearish, and if the market moves strongly in your favor intraday, you should consider taking on a large opposite day-trade position for “insurance” profits in case that intraday move reverses. 

Freshness – positions should be regularly refreshed for the sake of updated stops. This is especially important when the market has moved in your direction a meaningful amount so that you can lock in some profits with tighter stops.

Emotional Awareness – use emotional awareness to your advantage, understanding fear often accompanies reversals in your favor and hubris often accompanies reversals against your positions.

Exits – the only acceptable exit is either being stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes. (more…)

Winning Traders -Never Quit

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #
1. They accept losing trades quickly but it does not define them, they learn and try again. This trade more wise than the last one.
2. They compartmentalize emotions by not blaming themselves but understanding the historical expectancy of their systems returns. 
3. They have a bias toward action by constantly doing things that move them closer to their goal of being a rich trader. (Homework, chart study, reading, being mentored, back testing)
4. They change their minds sometimes, they know when to stop doing something that does not work and move in the direction of trading success through new lessons. 
5. They prepare for things to go wrong through risk management an position sizing  instead of just going naively toward their goals they are ready to make adjustments as needed.
6. They’re comfortable with discomfort, they will accept losses and draw downs in their method, they are willing to pay tuition to the markets to get to where they want to be.
7. They’re willing to wait, they patiently improve each day setting themselves up for those winning trades that will be very profitable in the future.
8. They have trading heroes that inspire them to be better than they are now and give them the hope of achieving their dreams.
9. They have more than passion they are on a mission, their desire for success gives them the drive to not quit until they win.
10. They know only time separates them from their goals of wealth.

9 Trading Rules

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

1. Move: Always be flexible.  The beauty of the stock market is polygamy is perfectly acceptable.  Never get married to a particular position or a particular strategy.   The market is complex, dynamic and always changing.  Learn to change with it if necessary.

2.  Plan de Vida: Always invest with a plan.  Have strict rules and a machine-like approach.

3.  Downshift: Pulling yourself out of the game when you’re not certain will help you from making debilitating mistakes.  When in doubt get out.

4. 80% Rule: Never let more than 20% of your portfolio put 80% of your portfolio at risk.  Position sizing is key to risk management.

5. Hope is a 4 letter word: Holding and hoping is not a strategy.  Cut your losses, learn from it and never look back.   Never ever get into something you can’t get out of.

6. Understand your risks: You can’t avoid black swans, but they don’t have to rip your face off.  Understand your risks and your rewards.

7. Goals and accountability: Set goals and keep track of your performance.  You are responsible for your own decisions.  Own your mistakes.

8. Psychology: Learn to control your emotions and understand the emotions of those around you.  Always remember what General Patton said: “if everyone is thinking the same then someone isn’t thinking”.   Also the famous Buffett quote: “Be fearful when others are greedy and greedy when others are fearful.”

9. Your Tribe: Always remember that there is more to life than investing.  Don’t live to invest.  Invest to live.  Being the richest man/woman in the graveyard is worthless if there isn’t anyone to bury you there.

Three Reasons Why Most Trading Strategies Fail

  
  Education
#  #  #  #  #  #  #  #  #  #  #

MAIL BOXI wonder how would you rank order market selection, setup/entry timing, protective stop, trailing stops/exit and position sizing in terms of overall importance to the success of a trading system?

A:  Each are important, but in analyzing numerous strategies I have not seen a tried-and-true ranking system that fits everything.

The reason I think (and my research proves out) that why strategies fail are directly related to three main things: 1) user error (i.e. failure to act on the signals provided by your system in a consistent manner without trying to outsmart the system, 2) over optimization and use of extensive leverage, and 3) the most important of all – little to no risk management through proper position sizing and stops. All in all, if you really are focused on improving yourself in 2010, the first place to look is risk management as it has more of an impact over your eventual success or failure than anything else.

35 Things Will Destroy Your Trading Capital

  
  Education
#  #  #

“What was the cause of the biggest draw downs in your trading accounts?”

  1. Having no exit strategy
  2. Being certain of your opinion on the direction of an asset
  3. Arrogance that you know how the trade will turn out
  4. Thinking that you are invincible
  5. Over-trading
  6. Believing that the market must go down based on a guru’s prediction
  7. Letting a guru convince you that you shouldn’t place a hard stop, but to wait for a reversal
  8. Incorrect position sizing
  9. Greed that causes you to trade too big and risk too much
  10. Margin
  11. No Hedges
  12. Not understanding that a Bull Market has ended
  13. Poor risk management
  14. Not knowing that earnings were about to come out on your stock
  15. Your ego takes over your trade
  16. You decide not to take your initial stop loss
  17. Believing a losing trade just has to reverse
  18. Buying a stock because it is a ‘value’ that drops another 50% from your entry
  19. Trading without a positive expectancy model
  20. Trading options without understanding how to place stops or use proper position sizing
  21. Thinking it “Has To Come Back”
  22. Buying and hoping
  23. Trading with no plan
  24. Not having trading rules for your system
  25. Not following your trading rules
  26. Averaging down
  27. Trading without an edge
  28. Keying error on the trade
  29. Not placing a stop
  30. Trying to out-guess the market
  31. Trading illiquid options
  32. Fighting the trend in your time frame
  33. Not fighting the natural impulses of greed and fear
  34. Using emotions for trading signals
  35. Using greed for position sizing

11 Steps for Successful Trading

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

 

  1. You must have a Mission Statement.  What’s your real motivation behind your trading?
  2. You must spell out your trading/investing Goals and Objectives.  You cannot get from A to Bvery easily unless you truly know where B is.
  3.  You must spell out your Trading/Investing Beliefs and Market Beliefs.  Please remember this very important statement, “You cannot trade the market.  You can only trade your beliefs about the market.”  Therefore, it’s a very good idea to identify your beliefs about the market first. 
  4.  Spell out your exact Trading Strategies.  How do you go about analyzing the market and what are the key things you look at in your market analysis?  What trade set-ups do you use before entry? What are your timing signals for market entry?  What is your catastrophe stop loss?  Where and when will you take profits?  Will you use a trailing stop?  Will you scale into the market?  What exactly is your trade management system once you’re into the trade?    
  5.  What are your Position Sizing Strategies?  This is part of money management and is very important in reaching your trading goals and objectives in terms of profitability. 
  6. What are your typical Psychological Problems in following your trading plan?  What is your plan for psychological management for dealing with these problems?
  7. What are your Daily Trading Procedures?  What should you be doing on a daily basis, not only to become organized, but to become methodical in everything you do as a trader, on a day-to-day basis.
  8. Do you have an Education Plan to Help Improve Yourself on a continuing basis?  If not, you should have one.  Like anything else in life, you need to be continually working on yourself to become better and better.
  9. What is your Disaster Plan?  What can go wrong, and how will you deal with each item?
  10. What is your Planned Income and Budget for Trading Expenses?  This is pretty simple and straightforward; write down everything you can think of and try to be as realistic as possible.
  11.  How do you Prevent Trading Mistakes and Avoid Repeating Them… if they occur?  Really sit back and think about this and write down any and all mistakes that you might make during your trading.  Once you do that, come up with a solution to each potential mistake that you might make so you don’t allow that to happen.

Simple Formula For Performance.

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

Potential is what everyone has inside them, it is the education, learning, development, support and time put in that enables one to continually develop their capabilities. This can increase, at least until either physical or mental limitations constrain further growth. 
Interference is what detracts from potential to reduce performance. This can be down to any number of reasons, perhaps environmental or external factors, physical or mental hurdles or limitations, poor execution of process, inadequate self-management. Many of these can be deatlt with in some way; however, the greatest threat in most cases is from attitude and mindset. Perhaps it could be something as simple as seeing yourself failing and recalling the look of an angry parent, a doubting physical education teacher or a school bully from your younger years who always told you that you did not have what it takes. – This creates that painful memory which instils that moment of hesitation or self-doubt just when you least need it. – Who hasn’t at some time during their trading had that pang of self-doubt, or lacked the self-belief or confidence just at a crucial moment, and then looked back with regret and heartache, in some cases leading to a whole cycle of self-doubt and poor decisions, execution and position sizing.

Go to top