We’ve all heard the “experts” preach to us that we should only take trades which offer at least a 2:1, or better yet a 3:1 reward to risk ratio and on the surface this seems like sound advice, but is it really?
RETHINK YOUR STRATEGY
I used to be one of those educators who would jump on the risk/reward bandwagon until one day when I stepped back and took an objective look at what trading is and how I can best optimize my chances of success. When I did this I realized that not only was the whole risk/reward premise false but that it had the potential to ruin chances for trading success by keeping me out of some of the best trades.
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. (more…)
Archives of “trades” tag
rss100% You will lose Money
| You are entering a position out of EMOTIONS or ANTICIPATION at wrong price level in a WRONG scrip with GREED or HOPE with no pre-entry exit in the place – even worst, once in a trade, riding the position with HOPE without STOP LOSS even if it goes against the entry – adding more to average down in the entirely wrong trade – at last running out PATIENCES and out of FRUSTRATION booking huge LOSS. Even the position is in PORFIT there is no STOP LOSS or pre-entry EXIT in place – exiting the position abruptly in FEAR booking just a small profit with FEAR that market may take this small profit too – these random small profits unable to compensate earlier big losses! To cover big losses you try more and more RANDOM trades and above process continues – end result it challenges your EGO and creates more FEAR, more AGONY – cycle continues with small profits and big losses – until account is wiped off. |
Trading Advice
1) Cut Risk – It’s that “above all else, do no harm” principle. If you don’t have a feel for the market, trade small while you regain your feel. Preserve as much of your capital as possible to lay the foundation for your recovery;
2) Focus on Your Strengths – It’s not unusual for frustrated traders to try to make all kinds of changes in their trading in a frantic effort to gain some traction. These efforts can compound difficulties by getting traders further and further from their strengths. During rebuilding periods, you want to focus on the markets and strategies that you know most about, that represent your strengths.
3) Reach Out – It’s especially helpful to reach out to traders who trade markets and strategies similar to yours. Are they also struggling? If so, this suggests that market changes, indeed, may be at the root of the problem. If the traders you contact are succeeding, try to find out what they’re doing differently from you. It may well be that a simple tweaking of execution, holding times, and risk management could turn your performance around. (more…)
Three Questions for the End of the Trading Day
| 1) Did I trade well today? – Did I make good use of my preparation? Did I follow rules about position sizing and execution? Did I adapt well to shifts during the trading day? Was I patient in finding trades with good risk/reward characteristics? 2) What did I learn about myself today? – What about today’s trading can I bring to the next day to make myself better? How can I learn from what I did right and wrong today? What goals can I set for tomorrow to make sure that I carry over that learning? 3) What did I learn about markets today? – Did markets do what I expected? Are my views on markets any different based on today’s trade? What levels did I observe in today’s trade that can inform decision making tomorrow? What themes from today will I be tracking tomorrow? |
Trading To Win
There is a meaningful difference between trading to win and trading to not lose. The average person feels more psychological pain over a loss than they feel pleasure over a gain–particularly once they have already “booked” that gain mentally. If I’m expecting a bonus from my employer, I’ll be happy when I receive the paycheck–but I’ll be much more upset if I find out the bonus has been rescinded. — We can never eliminate loss from life or trading; nor can we repeal the basic uncertainties of markets. What we *can* do is develop an edge in the marketplace and, over the course of many trades, let that edge accumulate in our favor. And, if you’re trading well, maybe that losing trade will offer you a fresh perspective about how the market is trading: an insight that can make you money the next time around. Then it’s not a loss. It’s information that you’ve paid for. |
THE IMPORTANCE OF SITTING
Patience is important not only in waiting for the right trades, but also in staying with trades that are working. The failure to adequately profit from correct trades is a key profit-limiting factor. Quoting again from Lefevre in Reminiscences, “It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!” Also, recall Eckhardt’s comment on the subject: “One common adage … that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits.”
Be Proactive and Not Reactive
If you want to stay positive even after some losing trades, then it’s also worth taking a proactive approach to losing -as oppose to being reactive to it.
For many, they use the visualising technique. This involves relaxing and trying to see yourself already having lost the trade before it happens. This is some what similar to having no expectations but you make an effort to mentally rehearse the lost. By rehearsing it, you will include your emotions in the rehearsal and start to anticipate how you will feel so that you will not react to it if it does happen.
Many Master Traders probably do not use this technique but they have gone through enough winners and losers to know how they feel. In my view, that is an reactive approach and that is in line with my next point below.
Don’t get me wrong, I’m not saying that visualisation is the best way. But I’m suggesting that you should find the method that best fits your personality. And, to me, that is being proactive.
20 Habits of Great 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 (more…)
GEMS from :The Daily Trading Coach
The Daily Trading Coach covers just about any psychology or behavioral issue the trader may face. I cannot help but recommend it. There are 101 lessons here divided into 10 chapters. Let’s dig into each chapter and uncover a gem within.
Today again completed reading this Book…Yes 5th time !!
1. The Process and the Practice: “Confidence doesna’t come from being right all the time: it comes from surviving the many occasions of being wrong” (27).
2. Stress and Distress: “Thinking positively or negatively about performance outcomes interfere with the process of performing. When you focus on the doing, the outcomes take care of themselves” (56).
3. Psychological Well-Being: “We can recognize the happy trader because he is immersed in the process of trading and finds fulfillment from the process even when markets are not open” (72).
4. Steps Toward Self-Improvement: “Your trading strengths can be found in the patterns that repeat across successful trades” (105).
5. Breaking Old Patterns: “Many trading problems are the result of acting out personal dramas in markets” (133)
6. Remapping the Mind: “When we change the lenses through which we view events, we change our responses to those events” (168)
7. Learn New Action Patterns: “Find experienced traders who will not be shy in telling you when you are making mistakes. In their lessons, you will learn to teach yourself” (203)
8. Coaching Your Trading Business: “Long before you seek to trade for a living, you should work at trading competence: just breaking even after costs” (230)
9. Lessons From Trading Professionals: “If you don’t trust yourself or your methods, you will not find the emotional resilience to weather periods of loss” (267)
10. Looking For the Edge: “The simplest [trading] patterns will tend to be the most robust” (311).
And a final admonition: “Know what you do best. Build on strengths. Never stop working on yourself. Never stop improving. Every so often, upset the apple cart and pursue wholly new challenges. The enemy of greatness is not evil; it’s mediocrity. Don’t settle for mediocre” (341).
10 Rules for Rookie Day Traders
Here is our philosophy around trading rules:
Rule should be designed to promote growth, not create limitations.
Rules should make YOU better.
Rules need to be second nature.
1. The three E’s: enter, exit, escape
Disagree, I can’t explain for proprietary reasons.
2. Avoid trading during the first 15 minutes of the market open
I agree that the first 15 minutes is risky but the most important thing to a new trader is lasting as long as possible. You are going to be better the more time that goes by, but you learn faster by doing. It is a tough balance.
3. Use limit orders, not market orders
Limits keep you out of the market, which is important. But they can also keep you in a market, which is of importance too.
4. Rookie traders should avoid using margin
Agree. Your winning positions should be larger than losing position, but a new trader doesn’t usually know which is which.
5. Have a selling plan
Agree. (more…)