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Position Size Can Be More Important Than the Entry Price

  
  Education
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Too many traders focus only on the entry price and pay insufficient attention to the size of the position. Trading too large can result in good trades being liquidated at a loss because of fear.

On the other hand, trading larger than normal when the profit potential appears to be much greater than the risk is one of the key ways in which many of the Market Wizards achieve superior returns. Trading smaller, or not at all, for lower probability trades and larger for higher probability trades can even transform a losing strategy into a winning one.

For example, Edward Thorp, who started out devising strategies to win at casino games before achieving an extraordinary return/risk record as a hedge fund manager, discovered that by varying the bet size based on perceived probabilities, he could transform the negative edge in Blackjack into a positive edge. An analogous principal would apply to a trading strategy in which it was possible to identify higher and lower probability trades.

Day Traders

  
  Education
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If a trader is willing to give a large share of his time and energy to study of the markets and of technical considerations, and if he has the proper ability and proper personal makeup, then it seems quite certain that he will make greater profits on the shorter time frame as opposed to position trading. Certainly the possibility for such profit is much greater in short-term trading.

On the other hand, the individual who is unable or unwilling to give up a good portion of his time and energy to the study of technical considerations, who knows or finds himself erratic in his trading success or unfitted psychologically for short-term trading, will, of course, find greater profit, slower but more certain, by confining his operations to those for the long-swing.

The third and most likely possibility is that most individuals will lose either way. This is the real key:

… a study done by one of the major clearing firms analyzed what percentage of their retail accounts were profitable in the mid-’80s to mid-’90s, and that number came in around eight percent. The most profitable accounts were those with the highest activity levels [ed. pre-tax profits, of course]. But, overall, the floor traders and specialists have always been the most profitable group of traders in history.

It seems the secret to profitable short-term trading is to hold the order book, “proper personal makeup” and “the study of technical considerations” be damned

Trading firms put their money on poker experts

  
  Education
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Reporting from New York — Chris Fargis thought his big job interview was over. But when the partners at Wall Street upstart Toro Trading finished with their questions, they broke out a deck of cards and a green-felt card table. Mind playing a few hands of poker?

It was a final test, and Fargis was relieved. The 30-year-old never went to business school or even took a finance class. But he knew poker. He had made a living playing the game online for six years from his Manhattan apartment, betting on up to eight hands at a time.

Within a few days, Fargis — with no Wall Street experience — was offered a position trading stock options, a job that entails making multimillion-dollar gambles. His poker skills sealed the deal. (more…)

Short Selling

  
Analysis, Education
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Recommended books on short-selling:

1) How to Make Money Selling Stocks Short by William O’Neil (Wiley, 2005) – [Technical, Swing & Position Trading]
2) Sell & Sell Short by Dr. Alexander Elder (Wiley, 2008) – [Technical, Day Trading]
3) The Art of Short Selling by Kathryn Staley (Wiley, 1997) – [Fundamental]
4) Sold Short by Manuel Asensio (Wiley, 2001) – [Fundamental]
5) Sell Short: A Simpler, Safer Way to Profit When Stocks Go Down by Michael Shulman (Wiley 2009) – [Macro]

The best way to become an effective short seller is by making it a habit of studying hundreds and even thousands of charts every week. Train your eye to see the setups, the accompanying volume, how the MA’s line up, etc. The only way to do this is with practice. Short-selling can become very profitable due to the simple fact that stocks drop faster than they rise (in most cases) and for me, it typically only takes about 1-3 days to make a decent profit of 10% or more.

Trade only the best setups to increase your odds. I do recommend the use of stop losses above key resistance areas due to the fact that losing short positions can cause serious damage if left unattended.

Long or Short Position

  
  Education
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Do you need to long or short the market today? If you’re a day trader, forget this question and ignore this post. But if you’re a positional player, perhaps having a holding period of at least 5 sessions, the above question is necessary.

Let us ponder.

1. What are your chances of success (initiating a trade that will eventually turn into a satisfactory profit)? Since you’re going to hold for several sessions, possibly facing several opening gaps along the way, might as well establish a position that you’re going to sleep with. So, unless you get the price you’re comfortable with, stay aside. Particularly practical with long holidays.
2. Is this your original plan? Are you trading according to your overall strategy or purely intraday impulse? I don’t think its very difficult to tell the difference. If you trade base on intraday impulse, you get a little more excited than usual.
3. ‘I have been dormant for some time, and I seriously need to do something’. The degree of this itchiness varies according to individuals. If you come from a day trading background, you’ll have a tougher time adjusting. After all, the mindset of ‘If I don’t do anything, I am not going to make anything either’ is in every human’s mind. Think about it. Position trading involves much passiveness, so technically, after establishing a position, you are dormant in some way.
4. ‘I am sure this is a solid short term opportunity’. I think this is the mother of all trading sin. Of course, this does not apply to day traders. But if you’re now a positional trader, stay a positional trader. Learn to let go the small fish.

FEAR

  
  Education
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No, not the fear you’re thinking of, the other kind of fear, the fear of missing out.

Many people believe there are two emotions that traders feel, fear and greed, I disagree, it’s only fear.  The fear of loss and the fear of not having enough.  There’s a difference between being greedy and being fearful of not having enough, and it’s important.  Greed is defined by the excessive desire to possess wealth or goods.  Synonyms include lust and gluttony.  The fear of not having enough is very different, and I believe that is what drives market participants.

Trading is inherently a competitive exercise.  We look across the desk at the guy next to us and see that he made X amount of dollars today and we made less.  We look at the major averages as benchmarks, we listen to people taking profits on our StockTwits stream and feel both happy for them and wanting to punch them in the face for making a better trade on the same stock.  It’s only natural.  And when the market is moving well, not being involved while everyone else is, while your benchmark is climbing, traders can feel a considerable amount of fear.

I’ve felt this many times, the fear of not having enough.  And I’ve become pretty good at gauging both my own emotions regarding this and the pulse of the market as a whole.  Many times this emotion can be seen exhibited in the price action through a blow off top where price accelerates at the end of a big move and then reverses sharply.  Intermediate term swing and position trading is about staying with the trend and not getting shaken out, while managing your risk well. (more…)

Six steps for Traders

  
  Education
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  • Define the question
  • gather information and resources
  • form hypothesis
  • perform experiment and collect data
  • analyze data
  • interpret data and draw conclusions that serve as a starting point for a new hypothesis.

1. Define the question: What is it exactly that you are trying to achieve? Are you shooting for high returns with high risk, long term gains with minimal risk, day trading, swing trading, position trading? Are you trying to make enough money to buy a new car or enough to buy a yacht? First define what it is that you want out of your trading!

2. Gather information and resources: What will be the best route to achieve your trading goals? Are you going to be a stock trader, a futures trader, a forex trader? Maybe everything? Doing the necessary research and taking the time to really get to know your market/markets is absolutely key to successful trading. Some people make great futures traders but horrible stock traders and vice-versa, while others are able to dabble in a little bit of everything and be successful. One way to see what fits you best is to try trading a little bit of everything and see where you feel the most comfortable. Start with small accounts and see what fit is a good one for you.

3. Form hypothesis: This is the fun part and where you get to design your “system” or “rules” by which to trade. Does your trading hypothesis revolve around chart patterns, trendlines, support and resistance, or are you more of a numbers kind of person that trades strictly off price? Do you use indicators? Maybe you are a programmer that has developed an algorithm. Whatever it is I believe it is important to form a hypothesis and then… (more…)

Day Trading Terms

  
  Education
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Advisor – the one who charges money for a piece of stock advice to cover his/her losses on the market.

Advisory Service – an advisor who lost a considerable amount of money and started new business.

Afternoon – a daily chance to give back the money you made that morning (see Friday).

Apprentice – anyone who peers at your screen shortly after you closed a profitable deal.

Average Down – what you have to do if you opened a long position and had to go to the bathroom.

Average Up – what you have to do if you opened a short position and had to go to the bathroom.

Bad Trade/Stupid Trade – an unprofitable deal that someone else carries out which does not fit your trading strategy.

Bottom – (when you have an open long position) the spot where you give up averaging down and sell; (when you have an open short position) the spot where the book recommends you to open a short position.

Break – a pause you take when you have either 2 profitable or 5 unprofitable deals in a row. (more…)

Position Size Can Be More Important Than the Entry Price

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

Too many traders focus only on the entry price and pay insufficient attention to the size of the position. Trading too large can result in good trades being liquidated at a loss because of fear.

On the other hand, trading larger than normal when the profit potential appears to be much greater than the risk is one of the key ways in which many of the Market Wizards achieve superior returns. Trading smaller, or not at all, for lower probability trades and larger for higher probability trades can even transform a losing strategy into a winning one.

For example, Edward Thorp, who started out devising strategies to win at casino games before achieving an extraordinary return/risk record as a hedge fund manager, discovered that by varying the bet size based on perceived probabilities, he could transform the negative edge in Blackjack into a positive edge. An analogous principal would apply to a trading strategy in which it was possible to identify higher and lower probability trades.

Books on short-selling

  
  Education
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1) How to Make Money Selling Stocks Short by William O’Neil (Wiley, 2005) – [Technical, Swing & Position Trading]
2) Sell & Sell Short by Dr. Alexander Elder (Wiley, 2008) – [Technical, Day Trading]
3) The Art of Short Selling by Kathryn Staley (Wiley, 1997) – [Fundamental]
4) Sold Short by Manuel Asensio (Wiley, 2001) – [Fundamental]
5) Sell Short: A Simpler, Safer Way to Profit When Stocks Go Down by Michael Shulman (Wiley 2009) – [Macro]

The best way to become an effective short seller is by making it a habit of studying hundreds and even thousands of charts every week. Train your eye to see the setups, the accompanying volume, how the MA’s line up, etc. The only way to do this is with practice. Short-selling can become very profitable due to the simple fact that stocks drop faster than they rise (in most cases) and for me, it typically only takes about 1-3 days to make a decent profit of 10% or more.

Trade only the best setups to increase your odds. I do recommend the use of stop losses above key resistance areas due to the fact that losing short positions can cause serious damage if left unattended.

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