| 1) Did I trade well today? – Did I make good use of my preparation? Did I follow rules about position sizing and execution? Did I adapt well to shifts during the trading day? Was I patient in finding trades with good risk/reward characteristics? 2) What did I learn about myself today? – What about today’s trading can I bring to the next day to make myself better? How can I learn from what I did right and wrong today? What goals can I set for tomorrow to make sure that I carry over that learning? 3) What did I learn about markets today? – Did markets do what I expected? Are my views on markets any different based on today’s trade? What levels did I observe in today’s trade that can inform decision making tomorrow? What themes from today will I be tracking tomorrow? |
Archives of “position sizing” tag
rssFive Steps To Consistent Profits
- 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.
- Develop a business plan as a working document to guide your trading. This business plan is not to raise money, which is the purpose of many business plans. Instead, it’s designed to be a continual work-in-progress to guide you throughout your trading career. The business plan actually helps you with all five of the steps. The plan also includes an overview of the big picture influencing the markets you will be trading and a method for keeping on top of those factors so that you will know when you are wrong.
- Develop several strategies that fit your view of the big picture and understand how each of these strategies will perform under various market types. The ultimate goal of this step is to develop something that will work well under every possible market condition. It’s actually not that hard to develop a good strategy for any particular market condition (including quiet, sideways). What’s difficult is to develop one strategy that works well under all market conditions—which is what most people attempt to do. (more…)
Five Stages of Trader Evolution
Gambler. This is the oldest trader’s ancestor. He was fairly naive, highly emotional and addicted gambler. The gambler perceived the market as his casino-like entertaining arena. He bet large and he bet often. His goal was to get rich quick. Most, if not all, of his capital was quickly distributed to more evolved traders.
Which stage are you at?
Three Keys to Trading Success
The successful trader is creative. I think it’s fair to say that his approach is a short-term trend-following method. His way of evaluating the market trend, however, is unique. He is definitely not just looking at the same old 14-period oscillator that comes pre-programmed in most charting applications. Similarly, he has clear stop points and price targets, but these are defined in a unique way, based upon the market conditions he’s observing. This “out-of-the-box” thinking style is common to successful traders, I’ve found. They look at markets in unique ways that help them capture shifts in supply and demand. to find a way of trading that you can make your own. You’re more likely to stick with a method that fits with how you think (and that fits with your skills) than if it’s something you’ve blindly copied from others. Our trader believes in his method, and that gives him the brass ones to hang in there during relatively lean periods.
2) The successful trader is always seeking improvement. If our trader is already successful, why does he need to talk with Henry? He knew that, by sharing his ideas, he would learn a great deal about the strengths and weaknesses of his trading. Sure enough, Henry found that the average size of the trader’s losers was larger than it needed to be. A simple modification of stop-loss rules improved the system’s performance meaningfully. Similarly, by putting a filter on the system–only taking trades if certain conditions were met–the average profit per trade went up significantly. That could aid position sizing. The trader knew he had something good, but good wasn’t good enough. He wanted better.
3) The successful trader is persistent. One thing I want to stress: the trader’s methods were very sound–and Henry found ways to make them better–but they were not perfect. Out of about sixty months analyzed, fourteen were losers. The drawdowns were not hellacious, but there were periods of flat performance and drawdown. What that means is that a successful trader needs to have the confidence to ride out these periods of poorer performance to get to the periods of success. That is one reason why it’s so important
3 Biases That Affect Your Trading
1) Gambler’s fallacy bias
People tend to believe that after a string of losses, a win is going to come next. Take for example that you are playing a game of coin tossing with a capital of $1000. You lost 3 bets in a row on heads and cost you $100 each bet. What will you bet next and how much would you stake?
It is likely you will continue to bet on heads and with a higher stake, say $300. You do not ‘believe’ that it can be tails consistently. People fail to realize coin tossing is random and past results do not affect future outcomes.
Traders must treat each trade independently and not be affected by past results. It is important that your trading system tells you how much to stake your capital which is also known as position sizing, so that the risk-reward ratio will be optimal.
2) Limit profits and enlarge losses bias
People tend to limit their profits and give more room to losses. Nobody likes the feeling of losing. Most investors tend to hold on to losses and hope their investments will turn around soon, and they will be happy if their holdings break even. However, chances are that they will amount to greater losses. On the other hand, if they are winning, most investors tend to take profits early as they fear their profits will be wiped out soon. Thereafter, they regretted that they didn’t hold a little longer (sounds familiar?).
One of the most important principle in trading is contrary to what most investors do – Traders have to LIMIT LOSSES and let PROFITS RUN. Losses are part and parcel of trading and hence, it is crucial to protect the capital from depleting too much – live to fight another day is the mantra for all traders. Large profits are thus required to cover the small losses – so do not limit profit runs.
3) I am right bias
Humans are egoistic in nature and we want to prove that we are right. High accuracy is not important in trading but making more money when you are right is. Remember what George Soros said, “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.”
Five qualities for Successful Traders
- 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.
3 Biases That Affect Your Trading
Van K. Tharp mentioned there are 3 biases that will affect one’s trading:
1) Gambler’s fallacy bias
People tend to believe that after a string of losses, a win is going to come next. Take for example that you are playing a game of coin tossing with a capital of $1000. You lost 3 bets in a row on heads and cost you $100 each bet. What will you bet next and how much would you stake?
It is likely you will continue to bet on heads and with a higher stake, say $300. You do not ‘believe’ that it can be tails consistently. People fail to realize coin tossing is random and past results do not affect future outcomes.
Traders must treat each trade independently and not be affected by past results. It is important that your trading system tells you how much to stake your capital which is also known as position sizing, so that the risk-reward ratio will be optimal.
2) Limit profits and enlarge losses bias
People tend to limit their profits and give more room to losses. Nobody likes the feeling of losing. Most investors tend to hold on to losses and hope their investments will turn around soon, and they will be happy if their holdings break even. However, chances are that they will amount to greater losses. On the other hand, if they are winning, most investors tend to take profits early as they fear their profits will be wiped out soon. Thereafter, they regretted that they didn’t hold a little longer (sounds familiar?). (more…)
Risk Management for Traders
- Your first loss is the best loss.
- Let winning positions run and cut losing positions short. The market is always right.
- I finally understand why Kirk always says risk management is the most important thing.
- Always know your exit. Before any trade is made, you must always identify your stop beforehand and then follow it without hesitation if it triggers.
- Patterns and trends matter more than I thought…paying attention to them can provide better entry/exit points.
- Patterns and measured moves are key but you have to wait until a pattern is triggered and the trigger holds.
- Being patient and waiting for confirmation instead of trying to anticipate market movements.
- Risk is greatest when everyone who wants to buy has already done so – Apple is the latest example!
- Position sizing is my first and last line of defense.
- Leverage is for losers.
9 Trading Rules
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