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Risk Size Is Key

YOUR WINNERS CAN RUN….IF YOU LET THEM
The proponents of risk/reward ratios say that in order to be successful the trade must out produce the amount of money you have at risk by at least double or triple your risk amount but what they fail to take into consideration is that the reward side of any trade is unknown. 
WHAT YOU CONTROL
You see the only part of the trading equation that you have any control over is the risk side of the trade. The reward side of any trade is a complete mystery. Oh sure, we all have our best guesses as to where the market might go next, but in the end it’s really just a crap shoot. Sometimes we’re right and sometimes we’re wrong and if we’re honest with ourselves we will admit that we really don’t know where the market is going next. 
If we don’t really know where the market is going, namely the reward side of the trade, why would we even include it in our trade scenario never mind making it the deciding factor of whether to take a trade or not? Obvious, right? Yet in spite of this I continue to encounter traders who insist on only taking high risk/reward trades thinking that they are being smart investors by doing so. (more…)

Anticipation & Action

The ANTICIPATION Phase:  this is where all the left hand chart reading takes place in preparation for the right hand chart battle. It’s the PROCESS that precedes the ACTION to put on a trade. A technical trader anticipates that a past price pattern will repeat again, so he identifies the pattern, locates a current one and determines a suitable match is present.  Technical analysis is nothing more than finding previous price patterns matched with current market conditions.  Traders anticipate such repetitive behavior based on human nature and seek to take advantage of it.

The ACTION phase involves hitting the BUY key based on the previous ANTICIPATION process.  Since no one can tell the future or what the right hand side of the chart will reveal, the ACTION is based on the confidence that the trader will do what is right once a trade is put on, which is to exit gracefully at a pre-determined loss line or exit humbly at a pre-determined profit target (P2), fully accepting either/or, or an OUTCOME between one or the other, depending on current market conditions.

Worries of Day Traders

Here is what traders choose to worry about (among others I am sure).  These so-called worries are usually in the form of a question and revolve around losing money:

1.  Will this trade make money?

2.  Will this trade hit a profit target?

3.  Will this trade reverse quickly against me?

4.  Will my gain turn into a loss?

5.  Will unknown news affect my trade?

6.  What if I have not done enough homework?

7.  What if my strategy is not sound?

8.  Will Cramer disagree (I had to throw this one in)?

9.  What if I get out too soon?

10.  Did I buy the right stock?

11.  What if I miss a potential move?

SIMPLIFY

simplifyWhen we follow a standardized process for trade execution, we help negate the impact that emotions can have on that process.  And when we create a set of rules within which is a subset of rules that allow for less mechanical, more intuitive management of our trades, we can potentially realize additional profits from those intangible insights into market direction without over-exposing our account to risk.  Here is how it works:

  S – Scan your charts .  Create a “Watch List” to help manage your inventory of trading opportunities.

I – Identify a high probability set up.    

 M – Map out the trade’s entry point, stop-loss exit point, and profit exit point. 

P – Pull the trigger.  By systematizing the process as we are talking about here, the anxiety associated with executing a trade is greatly reduced.  Instead of focusing on whatever issues keep you from pulling the trigger, your focus is on following a procedure, a set of instructions.  Mapping out and understanding exactly what our risk is also reduces the anxiety of entering a trade.    

 L – Let the market do its thing.  It’s not very often that you won’t have to take some heat on a trade.  It’s a great feeling when a trade goes in your favor immediately and stays that way.  But that’s the exception and not the rule.  As a good friend of mine would say, “Let it breathe!”  (more…)

20 Habits of Wealthy Traders

1)      Patient with winners and impatient with losers
2)      Making money is more important than being right
3)      View Tech Analysis as a picture of where traders are lining up to buy and sell
4)      Before they enter every trade they will know profit target or stop exit
5)      Approach trade no.5 with the same conviction as the previous 4 losing trades
6)      Use naked charts
a)      As we mature we begin peeling off indicators
b)      Prices action is key
7)      Comfortable making decisions with incomplete information
8)      Stopped trying to pick tops & bottoms long ago
a)      They make their money in the meat/middle of a trend (wait for confirmation)
b)      A trend is much more likely to continue than it is to reverse
9)      Do not think of the market as expensive or cheap
a)      Ignore whether you think something is overpriced or understand, think price action
10)  Aggressive with trade size when doing well or modest when not
a)      Do more of what is making, less of what is not
11)  Realised that the market will be open tomorrow (more…)

Solution focused approach

focusedWhat did we do differently on those successful occasions?

* I have planned the trade well in advance with research; it is not a spontaneous trade, so I’ve had time to think clearly about what I want to do.
* I have a clear profit target in mind based on research and refuse to waver from that target unless the market takes me out with a predefined stop. I consider myself a person of integrity, so I tell myself that I have to show integrity and loyalty to my trade idea and target;
* I don’t follow the position tick for tick. Either the trade will hit my target or it will hit my stop. I make a conscious effort to let go and not micromanage the trade;
* I keep myself calm and clearly focused by purposely getting up from my chair, doing some stretches, breathing deeply, and getting away from the screen. I keep myself in a state that is incompatible with anxiety;
* I rehearse constructive self-talk during the trade. I tell myself that I’ve done my preparation and established my edge. Any individual trade can go against me, but if I take all the good trades I can, eventually I’ll benefit from good odds and a good risk-reward ratio. If I lose money on the trade, I’ll figure out why and what that might be telling me about the current market. (more…)

THE THREE PHASES OF A TRADE

The ANTICIPATION Phase:  this is where all the left hand chart reading takes place in preparation for the right hand chart battle. It’s the PROCESS that precedes the ACTION to put on a trade. A technical trader anticipates that a past price pattern will repeat again, so he identifies the pattern, locates a current one and determines a suitable match is present.  Technical analysis is nothing more than finding previous price patterns matched with current market conditions.  Traders anticipate such repetitive behavior based on human nature and seek to take advantage of it.

The ACTION phase involves hitting the BUY key based on the previous ANTICIPATION process.  Since no one can tell the future or what the right hand side of the chart will reveal, the ACTION is based on the confidence that the trader will do what is right once a trade is put on, which is to exit gracefully at a pre-determined loss line or exit humbly at a pre-determined profit target (P2), fully accepting either/or, or an OUTCOME between one or the other, depending on current market conditions. (more…)

4 Wisdom Thoughts for Traders

Give up reliving your past trades.

Each trade is a new trade do not hold grudges against stocks and think they ‘owe’ you for past losses. Do not fall in love with a stock and hold it as it falls lower and lower.

Give up letting your trading define your self worth.

Do not let your trading define you. Diversify your life with friends, family, hobbies, and other interests. It is not healthy to become overly obsessed with the markets.

Give up on losing trades quickly when your stop is hit.

Your best trades will be the ones that are profitable from the start, if they immediately go against you be prepared to be stopped out. You can destroy your trading account when you start the “It will come back, I just have to wait” chant in the midst of a death spiral.

Give up on price targets let your winners run as far as they will go.

In the right market conditions trends can go on to unbelievable levels, the big wins during these trends can make your entire year profitable if losses are small on losing trades. If you set a predefined profit target you will miss the opportunity when the big move comes. Let a trailing stop take you out.

Hallmark of a Position Day Trader

hallmark-trader

  • Routine and Predictable daily methodology
  • Psychological Control: Discipline, Focus, Patience
  • Macro vs Micro Market Analysis … seeing the Big Picture
  • Comprehensive intraday Hit List analysis
  • Multiple intraday Set-up opportunities
  • Various chart pattern recognition … low risk opportunities
  • Capital preservation = risking less than 50% maximum stop loss.
  • Expectation & Time Exits: Scalp, Breakeven, Profit Target, Let Profits Run
  • Trading Execution Commitment: honoring Set-up signals, not P&L
  • Hallmark of a Position Day Trader

  • Routine and Predictable daily methodology
  • Psychological Control: Discipline, Focus, Patience
  • Macro vs Micro Market Analysis … seeing the Big Picture
  • Comprehensive intraday Hit List analysis
  • Multiple intraday Set-up opportunities
  • Various chart pattern recognition … low risk opportunities
  • Capital preservation = risking less than 50% maximum stop loss.
  • Expectation & Time Exits: Scalp, Breakeven, Profit Target, Let Profits Run
  • Trading Execution Commitment: honoring Set-up signals, not P&L