- Follow the trends. This is probably some of the hardest advice for a trader to follow because the personality of the typical futures trader is not “one of the crowd.” Futures traders (and futures brokers) are highly individualistic; the markets seem to attract those who are. Very simply, it takes a special kind of person, not “one of the crowd,” to earn enough risk capital to get involved in the futures markets. So the typical trader and the typical broker must guard against their natural instincts to be highly individualistic, to buck the trend.
- Know why you are trading the commodity markets. To relieve boredom? To hit it big? When you can honestly answer this question, you may be on your way to successful futures trading.
- Use a trading system, any system, and stick to it.
- Apply money management techniques to your trading.
- Do not overtrade.
- Take a position only when you know where your profit goal is and where you are going to get out if the market goes against you.
- Trade with the trends, rather than trying to pick tops and bottoms.
- Don’t trade many markets with little capital.
- Don’t just trade the volatile contracts.
- Calculate the risk/reward ratio before putting a trade on, then guard against holding it too long.
- Establish your trading plans before the market opening to eliminate emotional reactions. Decide on entry points, exit points, and objectives. Subject your decisions to only minor changes during the session. Profits are for those who act, not react. Don’t change during the session unless you have a very good reason.
- Follow your plan. Once a position is established and stops are selected, do not get out unless the stop is reached or the fundamental reason for taking the position changes.
- Use technical signals (charts) to maintain discipline – the vast majority of traders are not emotionally equipped to stay disciplined without some technical tools.
Archives of “risk capital” tag
rssRules for Shorting
Basic Rules for Shorting Stocks
1. Shorting Momentum names is dangerous: Unless you are Superman, never step in front of a speeding locomotive
2. Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can get cheaper, dear stocks can get more expensive
3. ALWAYS work with a pre-determined loss – either a physical or mental stop loss — Never leave yourself open to infinite losses
4. Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation. (We use Money Flow, Short Term Trend lines, Institutional Ownership, Analyst Ratings).
5. It is tough to be a contrarian: During Bull and Bear cycles, the Crowd IS the market.
You have to figure out two things:
…a) When the crowd is wrong — Doug Kass calls it “Variant Perception”
…b) When the crowd starts to get an inkling they are wrong
At the turns — not the major trends — is where contrarians clean up.
6. Look for Over-owned, Over-loved stocks: 95% Institutional ownership, All buys or Strong Buys (no sells), and 700% gains over the past few years are reasons to put names on your short selling wish list. (That is how my partner Kevin Lane found and shorted Enron and Tyco back in the 1990s).
7. Beware the “Crowded Short“– they tend to become targets of the squeeze!
8. You can use Options to either juice your short returns, or pre-define your risk capital (options)
Ten questions to ask yourself before every trade
Does this trade fit my chosen trading style? Whether it is: swing trading, momentum, break out, trend following, reversion to the mean, or day trading? Does this trade fit into the parameters of who I am as a trader, or is it just based on my own fear or greed?
- How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital? Knowing where my stop will be how big should my position size be to limit my risk?
- What are the odds of my risk of ruin based on my capital at risk?
- Why am I entering the trade here? What is the entry trigger to take the trade? Is this a quantified entry on my trading plan?
- How will I exit with a profit? A price target or trailing stop? (more…)
Lessons from the Wizards
One of the first books I read in this business oh-so many years ago was Stock Market Wizards. It had a profound impact on my thinking about trading, psychology, risk, capital preservation, etc.
- All successful traders use methods that suit their personality; You are neither Waren Buffett nor George Soros nor Jesse Livermore; Don’t assume you can trade like them.
- What the market does is beyond your control; Your reaction to the market, however, is not beyond your control. Indeed, its the ONLY thing you can control.
To be a winner, you have to be willing to take a loss
HOPE is not a word in the winning Trader’s vocabulary;
When you are on a losing streak — and you will eventually find yourself on one — reduce your position size;
Don’t underestimate the time it takes to succeed as a trader — it takes 10 years to become very good at anything;
Trading is a vocation — not a hobby (more…)
Rules for Shorting
When it comes to shorting, many people are in the dark. It is more challenging to be short, subject to squeezes; the return max out at 100% — versus unlimited upside for longs.
Over the years, I have put together some rules for shorting. These are pretty broad and general, but they have kept me out of trouble when
Basic Rules for Shorting Stocks
1. Shorting Momentum names is dangerous: Unless you are Superman, never step in front of a speeding locomotive
2. Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can get cheaper, dear stocks can get more expensive
3. ALWAYS work with a pre-determined loss – either a physical or mental stop loss — Never leave yourself open to infinite losses
4. Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation. (We use Money Flow, Short Term Trend lines, Institutional Ownership, Analyst Ratings).
5. It is tough to be a contrarian: During Bull and Bear cycles, the Crowd IS the market.
You have to figure out two things:
…a) When the crowd is wrong — Doug Kass calls it “Variant Perception”
…b) When the crowd starts to get an inkling they are wrong
At the turns — not the major trends — is where contrarians clean up.
6. Look for Over-owned, Over-loved stocks: 95% Institutional ownership, All buys or Strong Buys (no sells), and 700% gains over the past few years are reasons to put names on your short selling wish list. (That is how my partner Kevin Lane found and shorted Enron and Tyco back in the 1990s).
7. Beware the “Crowded Short“– they tend to become targets of the squeeze!
8. You can use Options to either juice your short returns, or pre-define your risk capital (options)
That is my short shorting list . . .
The wrong ways to trade
Without a plan. Get one already. It does not have to be good right now. I have been accused more than once of always thinking I am always right. I am just confident. The only reason I can be confident is because I am willing to change if the information changes. I have to admit I am wrong a lot. You will have to admit your plan is flawed too.
Without good notes. The market changes very fast. The brain is over stimulated, especially in the beginning. Your recall of events will be better if you write them down. The goal is to learn the most, the cheapest. At the end of the day when you review the charts you will not believe you took that trade. There will be something that you missed that could have helped you to act differently. It is your job to make sure it does not happen again, good notes help.
Not maintain trading environment equilibrium (TEE). Have you ever said or done something that you were not proud of because of emotion? What if you could stop time, take a few breathes, evaluate the situation and then act? You have that opportunity in trading, use it. They say that you regret not saying or doing something when you have a chance. That does not apply to trading. Those situations are a few in a lifetime type situations. No trade is more important than another unless it is your last. Let me say that again, no trade is more important than another unless it is your last. Yes you are going to miss the “winner” but it was hypothetical.
Losing more than you budgeted. Every Rupee counts, for every Rupee you lose you have to make another to get to even. This is not a normal transaction, you are not guaranteed anything other than experience. You should be a better trader tomorrow. There is nothing worse than having to have your “best day ever” to get back to even. Sometimes you are wrong, sometimes your system is broke, be able to trade tomorrow. Tomorrow may be next week.
Not having risk capital. If the market has to go your way a certain amount for you to pay your mortgage you are in trouble. The mind goes from reacting to what is there to hoping and praying. It may work from time to time but it is not a dependable strategy.
To summarize. There are no right ways to do anything, there are more efficient ways but that is based on experience. There is a path to failure, fight those battles. Call your father or those that have/ had a positive effect on you and thank them.
Traders’ Discipline
Top daytraders have the discipline to follow their daytrading system rigorously, because they know that only the trades that are signaled by their system have a greater rate of success. Matching a method of trading with your personality is the only way you will ever feel comfortable in the markets. Some websites have sought to profit from day traders by offering them hot tips and stock picks for a fee.
Day trading is an investment tactic with a relatively short investment. You need to position yourself so that you can endure long strings of losses, and maintain your day trading system.
Trading successfully is by no means a simple matter. A day trader should treat their capital as 100% risk capital and should not have to unduly worry that the whole amount of this capital may be lost very quickly. Good day traders do not rush into trades.
Day trading is just a numbers game. Be aware that day trading does not offer the protection of an advisor who can tell you whether a particular investment is suitable to your financial goals. Day trading is like running any other kind of business. It requires planning and expertize.
Limiting your losses when day trading is by far more important than making big profits. Day trading is an inherently variable business. For the sophisticated investor day trading may be safe since such investors know what they are doing and are willing to absorb the risk of losing money. Online trading is quick and easy, but making money from day trading and online investing takes time.
5 “Common” Rules of Great Traders.
1. They react and make few decisions. They do plan every trade. They just plan a lot faster. The market moves fast, so do they. A plan is somehow neglected by many. Would you start a business without any plans? Do it already. You will improve.
2. They make most of their money on the highs or lows. There will be interest at the highs and lows, they use it to buy and sell into. They are already in a position when it gets there. It is a place that most people are looking at. The market actions will dictate further moves. I disagree that they stop picking tops and bottoms. They just are aware that is the type of trade they are taking. High risk, high reward.
3. They get out on the best tick. On a winner or a loser. See rule 1 and 2. I am not sure why no one ever talks about this, including here. Execution is as important as any other skill.
4. They accept responsibilities for their actions. They do not socialize losses and privatize wins. It is all privatized. They eliminate mistakes and learn more cheaply than others. I do not know if they only trade one market but they are experts on themselves.
5. Success is the end point. They can already pay their bills. They are actually trading with risk capital. They can focus on the market and keeping their TEE in balance. Percentage gains are very important but they are not indicative of future returns. Their measurement is based on how well they executed their plan.
Ten Questions to ask Yourself Before Every Trade
If you are just randomly trading what you like with no real underlying system, method or planning then unfortunately your odds of success in the long term are slim. Trading a winning methodology is what creates an edge in trading.
Consistently trading a robust system or methodology enables you to trade in a way that historically wins, controls risk, and does not bring your ego and your emotions into your trading in a destructive way.
Ten questions to ask yourself before every trade:
- Does this trade fit my chosen trading style? Whether it is: swing trading, momentum, break out, trend following, reversion to the mean, or day trading?
- How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital?
- What is my risk of ruin based on my capital at risk?
- Why am I entering the trade here? What is the trigger to trade?
- How will I exit with a profit? A price target or trailing stop? (more…)
Traders’ Discipline
Top daytraders have the discipline to follow their daytrading system rigorously, because they know that only the trades that are signaled by their system have a greater rate of success. Matching a method of trading with your personality is the only way you will ever feel comfortable in the markets. Some websites have sought to profit from day traders by offering them hot tips and stock picks for a fee.
Day trading is an investment tactic with a relatively short investment. You need to position yourself so that you can endure long strings of losses, and maintain your day trading system. (more…)