Respect the price action but never defer to it.
The action (or “eyes”) is a valuable tool when trading but if you defer to the flickering ticks, stocks would be “better” up and “worse” down—and that’s a losing proposition. This is a particularly pertinent point as headlines of new highs serve as sexy sirens for those on the sidelines.
Discipline trumps conviction.
No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you’re smarter than the market.
Opportunities are made up easier than losses.
It’s not necessary to play every move, it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.
Emotion is the enemy when trading.
Emotional decisions always have a way of coming back to haunt you. If you’re personally attached to a position, your decision making process will be flawed. It’s that simple. (more…)
Archives of “risk reward” tag
rssThe Tortoise and The Hare
The job of a trader is to make good risk / reward decisions over and over.
To get better and better at doing this over time.
The cash will follow.
If you are only about the money your longevity, in my humble opinion is limited.
One danger about only focussing on the $$ is that you push it too hard in the quest. The risk is burning out or blowing up your account. We’ve all seen or heard of traders who break down under the pressure that they’ve put themselves under to hit their monetary target or who have swung for the fences so hard that they have destroyed their account. Occasionally these traders fly through the finish line in magnificent style.
On the other hand:
If you love the process that you take to define the good risk / reward trades and the execution of them then you are likely to be a success. (more…)
Technical Analysis Obsession
‘You know that you’re obsessed with Technical Analysis when…’ *Trapped in traffic at a roundabout, you find yourself waiting for a “breakout”. *The best that lingerie advertisements can do is start you thinking about double tops. *You start thinking about your marriage in terms of risk-reward. |
Trading Wisdom by Larry Hite & Marty Schwartz
Larry Hite
While the speculator doesn’t have the product knowledge or speed, he does have the advantage of not having to play. The speculator can choose to only bet when the odds are in his favor. That is an important positional advantage.
In the above quote, Larry is referring to the fact that smaller retail traders have the advantage of being able to sit out an wait patiently for the best opportunities. Bigger institutional traders have to trade more and whilst they might have a speed advantage, the retail trader has to use his advantage of being able to trade like a sniper to its fullest.
Frankly, I don’t see markets; I see risks, rewards, and money.
The above quote stresses the importance of seeing each trade as a risk reward ratio, rather than just a potential profit opportunity. Pro traders calculate their risk first and then their reward, if the risk reward ratio of a trade doesn’t make sense then they don’t trade.
Marty Schwartz
I always laugh at people who say, “I’ve never met a rich technician.” I love that! It’s such an arrogant, nonsensical response. I used fundamentals for nine years and got rich as a technician. (more…)
Solution focused approach
What 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…)
Accepting Losses?
The markets do not know you!
You do not exist to them in any other form than as the other side of a transaction.
They do not care if it is your last cent, and your kids will not have milk, and on, and on.
Markets need losers so they can make money in this zero-minus-sum game.
But please … do remember that taking an acceptable risk reward ratio position and being wrong is not losing!
Whether you win or lose, you should always strive to remain at a comfortable emotional state. Building a
proper plan is enormously helpful in getting you to do just that.
Many people know what to do; yet very few are able to do what they know! It is the rules that force one
to take the proper actions.
Losers often think that the rules are made for others. Think that they are not for you?
Think again!
Fight the rules and you will have a very short career!
The stock markets can be a great place to turn your savings into wealth.
On the other hand, if you do not keep the fundamental investment rules and do not follow certain
simple stock investing basics, you can lose your shirt.
Anirudh sethi says that IF: (more…)
IMPROVE YOUR RISK/REWARD STRATEGIES
| Enter every trade with a plan and stick to it. Understand first who you are as a trader. Do you like to daytrade? Do you prefer swing trading? What is your risk tolerance level? Everyone has a unique style and situation. As a result, what might be a great entry point for a swing trader may turn out to be a not-so-good entry for a daytrader. A trader with a low tolerance of risk might find that trade far too risky. The key here is to know why you’re entering a trade, what it would take for you to exit (stop loss) and an appropriate target. These should all be determined BEFORE you enter the position. Many unsuccessful traders have one or two of these criteria figured out before they enter the trade. It’s the third one that derails them. |
The Ten Trading Commandments
Respect the price action but never defer to it.
The action (or “eyes”) is a valuable tool when trading but if you defer to the flickering ticks, stocks would be “better” up and “worse” down—and that’s a losing proposition. This is a particularly pertinent point as headlines of new highs serve as sexy sirens for those on the sidelines.
Discipline trumps conviction.
No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you’re smarter than the market.
Opportunities are made up easier than losses.
It’s not necessary to play every move, it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.
Emotion is the enemy when trading.
Emotional decisions always have a way of coming back to haunt you. If you’re personally attached to a position, your decision making process will be flawed. It’s that simple.
Zig when others Zag.
Sell hope, buy despair and take the other side of emotional disconnects in the context of controlled risk. If you can’t find the sheep in the herd, chances are that you’re it.
Adapt your style to the market. (more…)
Look at trading like a pie chart
- 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.
Time Tested Rules (Part 1)
Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.
Take a trading break. A break will give you a detached view of the market and a fresh look at yourself and the way you want to trade for the next several weeks.
It is a safe bet that the money lost by (short term) speculation is small compared with the gigantic sums lost by those who let their investments “ride”. Long term investors are the biggest gamblers as after they make a trade they often times stay with it and end up losing it all. The intelligent trader will . By acting promptly—hold losses to a minimum.
People who buy headlines eventually end up selling newspapers. (more…)