Archives of “position sizing” tag

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Its all about managing risk

  
  Education
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Trend Following is all about managing risk. As Trend Following is not about prediction, we do not know when we enter a trade whether it will be profitable or not, so we take calculated risk and put a position small enough not to hurt us bad in case the trade is a loss trade.
This small risk taken over a lot of trades ends up in the right side of the balance sheet, which makes Trend Following a good strategy.
Risk Management strategy is called Position Sizing or Money Management (MM).
 
We have made our business managing risk.
We are comfortable with risk and we get our reward from risk.”

Two Steps to Consistent Profits

  
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tworules1. Work on yourself and your personal issues so that they don’t get in the way of your trading. This step must be accomplished first; otherwise, it would interfere with each of the other steps.

2. Thoroughly understand your objectives and develop a position sizing strategy to meet those objectives. Probably less than 10% of all traders and investors understand how important position sizing is to trading performance and even fewer understand that it is through position sizing that you meet your objectives.

Six Positive Trading Behaviors

  
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1) Fresh Ideas – I’ve yet to see a very successful trader utilize the common chart patterns and indicator functions on software (oscillators, trendline tools, etc.) as primary sources for trade ideas. Rather, they look at markets in fresh ways, interpreting shifts in supply and demand from the order book or from transacted volume; finding unique relationships among sectors and markets; uncovering historical trading patterns; etc. Looking at markets in creative ways helps provide them with a competitive edge.
2) Solid Execution – If they’re buying, they’re generally waiting for a pullback and taking advantage of weakness; if they’re selling, they patiently wait for a bounce to get a good price. On average, they don’t chase markets up or down, and they pick their price levels for entries and exits. They won’t lift a market offer if they feel there’s a reasonable opportunity to get filled on a bid.
3) Thoughtful Position Sizing – The successful traders aren’t trying to hit home runs, and they don’t double up after a losing period to try to make their money back. They trade smaller when they’re not seeing things well, and they become more aggressive when they see odds in their favor. They take reasonable levels of risk in each position to guard against scenarios in which one large loss can wipe out days worth of profits.
4) Maximizing Profits – The good traders don’t just come up with promising trade ideas; they have the conviction and fortitude to stick with those ideas. Many times, it’s leaving good trades early–not accumulating bad trades–that leads to mediocre trading results. Because successful traders understand their market edge and have demonstrated it through real trading, they have the confidence to let trades ride to their objectives.
5) Controlling Risk – The really fine traders are quick to acknowledge when they’re wrong, so that they can rapidly exit marginal trades and keep their powder dry for future opportunities. They have set amounts of money that they’re willing to risk and lose per day, week, or month and they stick with those limits. This slows them down during periods of poor performance so that they don’t accumulate losses unnecessarily and have time to review markets and figure things out afresh.
6) Self-Improvement – I’m continually impressed at how good traders sustain efforts to work on themselves–even when they’re making money. They realize that they can always get better, and they readily set goals for themselves to guide their development. In a very real sense, each trading day becomes an opportunity for honing skills and developing oneself.

Five Qualities For Successful Trader

  
  Education
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  1. Capacity for Prudent Risk-taking.The young successful trader is not afraid to go after markets aggressively when the opportunity presents itself.
  2. Capacity for Rule Governance. The young successful trader has the self-control to follow rules in the heat of battle, such as rules of position sizing and risk management.
  3. Capacity for Sustained Effort.The trader uses productive time to do research, preparation, work on himself, outside of market hours.
  4. Capacity for Emotional Resilience. All young traders will lose money early in their development and experience multiple frustrations. The successful ones will not lose self-confidence and motivation in the face of loss and frustrations.
  5. Capacity for Sound reasoning. The successful young trader exhibits an ability to synthesize data and generate market and trading scenarios.

These 35 Mistakes can cost a trader a lot of money

  
  Education
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“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

Could you Trade Full Time?

  
  Education
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Take this quick quiz and honestly determine if you are built to trade full time:

  • Are you properly capitalized?
    I wouldn’t suggest anyone start to think about trading full time until they have at least six figures that can be used solely for trading. Living expenses must come from other income or saved funds. Without six figures (and the more then better), I suggest you continue to build your stake.
  • Are you a successful part time trader?
    Why do you think you can succeed being a full time trader if you haven’t made money as a part time trader? Have you built your own stake to six figures trading part time? If so, you pass this question with flying colors.
  • Have you developed a system that works?
    Does your system have a     positive expectancy? Have you back tested the system (I don’t hold too much weight to this question)? Do you understand position sizing and do you implement it properly so you don’t blow-up with one or two trades?
  • Does your system offer enough opportunity?
    Without opportunity (multiple trading signals per day/ week), you will not be able to achieve your system’s expectancy. A lack of opportunity may skew your results and turn your anticipated positive expectancy to a negative expectancy and cause you to go broke.
  • Can you handle your emotions?
    How do you handle your emotions now with longer term positions or part time trading? Do you follow your rules, all the time? Will you have pressure to make money every month, week or day? Can you handle being alone (most cases) and staring at a computer for large portions of the day?
  • Finally, do you have spouse or other influence that will interfere with your endeavor?
    A spouse, friend or family (member) can have a negative affect on your trading that may result in subconscious sabotage.     Outside negative forces or nagging pressure people may lead you down a path that is not controllable because you are trying to prove something rather than “just trade” based on your acquired skills. Make sure the closest people in your life support you while making the move to full time trading.

Look at trading like a pie chart

  
  Education
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  • Risk Management:  Stop loss, profit target, Risk / Reward, and position sizing.
  • Trading Game Plan:  expectations for the next session, Levels of Interest, and intraday tape reading.
  • Psychological Health:  Staying positive and keeping your head.
Notice the three green segments in the middle of the circle (that, as I was told today by a friend of mine, looks like the Google Chrome icon).  These three segments are isolated to remind you how crucial it is to have ALL of those pieces full of their green color while you’re trading – if one of them is missing, the other two will have to compensate for its absence.  If we took the above example, we would notice that the psychological health was damaged right away, as the trader immediately went into denial about the initial failure of his position.  The trader then got pissed off, and risked more money in order to compensate for his initial loss, damaging both his trading game plan and his risk management.  The center circle is now empty for this particular trader, and he has become a loose cannon.

Tharp, Trading Beyond the Matrix

  
  Education
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MATRIXVan K. Tharp came up with a terrific title for his latest book—Trading Beyond the Matrix: The Red Pill for Traders and Investors (Wiley, 2013). The reference, of course, is to the film The Matrix. “We live in a world of illusion shaped by our programming. And at some level, we seem to know that, and we seem to know that there is something better. At this point, you have a choice. You can take the blue pill and go back into a comfortable sleep where nothing changes. … Or you take the red pill and, as Morpheus says in the movie, ‘see how deep the rabbit hole goes.’” (pp. xxiv-xxv) (more…)

Ten Core Ideas of Trading Psychology

  
  Education
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1) We are most likely to behave in inhibited or impulsive ways, violating trading rules and plans, when we perceive events to be threatening;

2) What we perceive to be threatening is a joint function of events themselves and how we think about those events;

3) A key to gaining control over trading and maintaining consistency is to be able to reduce the threat associated with market events and process adverse outcomes in normal, routine ways;

4) We can reduce the threat associated with adverse market events through proper money management (position sizing) and through proper risk management (limits on losses per position);

5) We can reduce the threat associated with adverse market events by training ourselves to respond calmly to adverse outcomes (exposure methods) and by restructuring how we think about those outcomes (cognitive methods);

6) Optimal skill development in trading will occur in non-threatening environments in which learners can sustain concentration, optimism, and motivation;

7) A proper mindset is therefore necessary to the development of trading skills, but does not substitute for such development;

8) The cultivation of trading expertise is a function of the amount of time and effort devoted to learning and the proper structuring of that time and effort;

9) Proper structuring of learning involves the setting of specific, doable, cumulative goals and the provision of rapid feedback and correction regarding the achievement of those goals;

10) Practice does not make perfect in trading or anything else; perfect practice makes perfect. Training must gradually build competencies and correct deficiencies in a manner that sustains a positive mindset and optimal concentration and motivation.

10 More Trading Rules

  
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1) Trading rules don’t normally fall out of the sky.Number-10

2) The emotional work is normally not undertaken by developing traders. After all this game should be easy.

3) Not enough time has been spent finding a system that is a fit to the personality of the trader.

4) You don’t really feel congruence with the approach.

5) As soon as you have a few losers you tinker with the approach or move to a new approach.

6) You are under-capitalized or for some other reason you mess with the approach then don’t hold yourself accountable for the fiddling and blame the approach.

7) You have unrealistic expectations as to the performance of the system in terms of win rate.

8) You are ‘bricking it’ about entering drawdown territory.  

9) Your system actually isn’t complete.  You haven’t got all of the following bases covered: market selection, position sizing, entries, stops, exits, tactics.

10) You learned a system or got a system from a marketeer or pseudo trader and it’s actually just crap.

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