- What exactly is your entry signal going to be? What technical indicators will trigger you to enter a trade?
- What will the perceived edge for your entries be based on? Will you quantify your entries edge with back testing of through trading principles?
- Will you wait for an initial move in the direction of your trade entry or will you enter based on a technical indicator trigger?
- How will you trade in different market environments and trends? Will you have better odds of success buying dips in bull markets and shorting strength in down trends?
- What is the risk/reward ratio for the trade you want to take? How much are you willing to risk if the trade is a loser? How much could you make if you are right? Is it worth it?
- What are the probabilities that this entry will be a winning trade based on past historical price data and charts? With the winning percentage in mind how big do the winners have to be and how small do you have to keep the losers for the trading system to be profitable?
- Where should your stop loss be? At what price level will your entry be wrong and signal you to exit the trade with a loss?
- How big of a position size should you take based on your stop level and total capital you are willing to risk on this one trade?
- Is your position size small enough to enable you to hold the trade without emotions effecting your ability to follow your trading plan?
- When you open this trade in addition to your other positions, how much of your total trading capital is now exposed to loss if all trades went against you at the same time?
Archives of “risk” tag
rssTrader’s Emotions
The hardest thing about trading is not the math, the method, or the stock picking. It is dealing with the emotions that arise with trading itself. From the stress of actually entering a trade, to the fear of losing the paper profits that you are holding in a winning trade, how you deal with those emotions will determine your success more than any one thing.
To manage your emotions first of all you must trade a system and method you truly believe will be a winner in the long term.
You must understand that every trade is not a winner and not blame yourself for equity draw downs if you are trading with discipline.
Do not bet your entire account on any one trade, in fact risking only 1% of your total capital on any one trade is the best thing you can do for your stress levels and risk of ruin odds.
With that in place here are some examples of emotional equations to better understand why you feel certain emotions strongly in your trading:
Despair = Losing Money – Trading Better
Do not despair look at your losses as part of doing business and as paying tuition fees to the markets.
Disappointment = Expectations – Reality (more…)
The Greatest Trading Loss
The Greatest Trading Loss
What is the greatest risk you face in trading?
Is it loss of money?
Certainly, that’s what most traders believe. I tend to disagree though. In my opinion we have something much greater at risk, that very few of us consider during the ‘learning phase’.
The American political journalist and author, Norman Cousins, is quoted as saying, ‘Death is not the greatest loss in life. The greatest loss is what dies inside us while we live.’
Along similar lines, I would argue that loss of capital is not the greatest loss in trading. The greatest loss is what we lose from within. (more…)
There are 3 Types of Traders
What kind of person you are “outside the charts” will help determine what kind of trader you will be “inside the charts”.
If you are of the first kind, “the wills”, you will overcome all the obstacles on your way to consistent success. You will accept, even embrace, uncertainty as the driving force behind the next big opportunity for gain. You will lose gracefully and move on to the next trade, knowing that trading is a game of probabilities and possibilities; not certainties and absolutes. You will leave money on the table, thankful for what you were able to gain; not bitter by what was left. If you are of the first kind you will succeed. You will indeed.
If you are of the second kind, “the won’ts”, you will look for the always elusive easy road to riches. You won’t believe in the effort required to become a disciplined trader, driven by solid habits repeated daily. You won’t apply the skill necessary for managing risk as that would require planning and preparation, something you just do not have time for. You won’t develop your own well defined trading edge, depending instead upon others to do it for you. If you are of the second kind your opposition to anything other than what is easy will make it quite difficult to succeed when times get tough, and they will but you won’t.
If you are of the third kind, “the can’ts”, you will blame everyone and everything for your failures. You can’t succeed because you are too busy finding fault in any trading strategy that produces a loss. You can’t succeed because anyone who does so has some special knowledge or gift that you obviously cannot possess. You can’t succeed because the market is rigged. If you are of the third kind…quit. You are a quitter with a quitter’s attitude. Be in the majority. Be a can’t. It’s easy.
So, what kind of person (trader) are you?
Risk Management
- Risk of Ruin-Never risk more than 1% of your total account capital on any one trade.
- Position Sizing-Use your capital at risk to understand the right amount to trade based on the securities volatility.
- Capital at risk: Never put more than 6% of your total capital at risk at any given time on all positions.
- Trailing stops- Always have an exit strategy to lock in your winners.
Parabolic Moves Up:
These are stocks that jump 100%, 200% or more in a span of several days. The top of the pattern is marked by buying exhaustion and the best way to determine the exact top is to look out for the following candlestick patterns: doji, gravestone doji, long-legged doji, shooting stars, dark could covers, and bearish engulfings. All patterns are typically accompanied by the highest volume bar on the entire chart. Entering on the topping day may provide more profit, but it is riskier. The next day is considered the confirmation day in which the stock breaks down. The 2nd option for entry (less risk) is to enter at the very beginning of the breakdown.
Risk – Your only managable variable
The underlying concept is, that, if we cannot accurately predict our own performance, and as we cannot influence how the markets will behave, we should at least exercise control over those variables that we have actually control of. And that is the risk that we as traders take when entering a position.
Six Insights for Disciplined Trading
1) Trading is a probability game. You can’t be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you.
2) Jumping in too soon or getting in too late. These mistakes come from traders not having a well-defined plan of how they will enter the market. This positions the trader as a reactive trader instead of a proactive trader, which increase the level of emotion the trader will feel in reacting to market movements. A written plan helps make a trader more systematic and objective, and reduces the risk that emotions will cause the trader to deviate from his plan.
3) Not taking profits on winners and letting winners turn to losers. Again this is a function of not having a properly thought-out plan. Entries are easy but exits are hard. You must have a plan for how you will exit the market, both on your winners and your losers. Then your job as a trader becomes to execute your plan precisely.
4) Great traders don’t place their own expectations on to the market’s behavior. Poor traders expect the market to give them something. When conditions change, a smart trader will recognize that, and take what the market gives.
5) Emotional pain comes from expectations not being realized. When you expect something, and it doesn’t deliver as expected, what occurs? Disappointment. By not having expectations of the market, you are not setting yourself up for this inner turmoil. Douglas states that the market doesn’t generate pain or pleasure inherently; the market only generates upticks and downticks. It is how we perceive and respond to these upticks and downticks that determine how we feel. This perception and feeling is a function of our beliefs. If you’re still feeling pain when taking a loss according to your plan, you are still experiencing a belief that your loss is somehow a negative reflection on you personally.
6) The Four Major Fears – fear of losing money, being wrong, missing out, leaving money on the table. All of these fears result from thinking you know what will happen next. Your trading plan must approach trading as a probabilities game, where you know in advance you will win some and lose some, but that the odds will be in your favor over time. If you approach trading thinking that you can’t take a loss, then take three losses in a row (which is to be expected in most trading methods), you will be emotionally devastated and will give up on your plan.
10 Thoughts for Traders
- Managing your risk, you will not be around to win if you do not control your risk per trade. How many losses in a row can you survive? Surviving the market is magic at times.
- Trading a consistent methodology is magical because you will be consistent enough to make money when a market environment rolls around that it works in, single trades by themselves mean nothing outside the context of a method.
- Trading a methodology you believe in will enable you to trade it through draw downs instead of giving up.
- Understanding your edge will enable you to have the mental toughness to trade knowing eventually you will get the pay off.
- Trading price action versus your own opinion will help you magically be on the side of the majority most the time.
- Trading in the direction of the trend will enable you to be right more times than wrong most of the time.
- Cutting losses short and letting winners run will make you profitable. Now that is the magic of asymmetry.
- Only trading in markets and trading vehicles you understand will keep you safe from many big mistakes.
- Doing nothing when you do not know what to do is a plan that will save you much money.
- Spending thousands of hours studying charts, reading books from successful traders, and doing the right homework will make you successful eventually so all your friends can tell yo how lucky you are. Then you can tell them that is isn’t magic, trading is a lot of hard work.
Five Quotes From Market Wizard Steve Lescarbeau
“I think that a physical science degree is as good if not better than a financial degree because it trains you to be analytical. If there is anything I am really good at, it’s being a researcher. I’m not a particularly good trader.” – Steve Lescarbeau
I found it ironic that Lescarbeau doesn’t consider himself a good trader, despite the fact that Schwager later notes that Lescarbeau has the most impressive returns of anyone Schwager had interviewed.
I like Lescarbeau’s point that having a physical science degree taught him to be analytical. I have a similar background and can absolutely see the relation. Also, similar to Lescarbeau, I am finding that I prefer doing the research to actually trading. Trading makes me very nervous, but research is relaxing for me. This is a big part of the reason I have shifted my focus to system trading.
“The same qualities that make you a successful person in whatever you’re doing are going to make you successful in trading. You have to be very decisive, extremely disciplined, relatively smart, and above all, totally independent.” – Steve Lescarbeau
I like to think that I have all of those qualities, yet I never think of myself as very successful. I probably just haven’t gotten there yet.
“I may take partial profits on a position, or not go fully long on a buy signal, but I will never hold after a sell signal.” – Steve Lescarbeau (more…)