- Consider yourself a manager of bad trades. The profitable trades will look after themselves – sit back and let the profits run. However when a trade turns against you, cut your losses quickly and move onto the next trade.
- Find a trading strategy that works and validate it. You may design your own trading system, you may purchase a strategy or follow someone else’s advice but the key is to find a strategy that suits your personality. If you are comfortable and confident that your strategy works then you are more likely to stick with it when the losses come (and they will come!)
- Never second-guess your strategy. If your trading rules are telling you to exit a position…then get the hell out! Don’t presume you know more than the market. Don’t wait to see if a bad trade will turn around in your favor. It may, but it may continue to go against you and therefore create larger losses.
- Reality check: you WILL have losing trades. The goal is to make the losses insignificant so you are not taken out of the game and unable to keep trading. Large trading losses cause damage to your investment capital AND to you psychologically. It is very hard to step back up to the plate and take the next trade if you have a huge trading loss. Therefore, have a very clear risk management strategy and stick to it.
Archives of “trading strategy” tag
rssDay Trading Terms
Advisor – the one who charges money for a piece of stock advice to cover his/her losses on the market.
Advisory Service – an advisor who lost a considerable amount of money and started new business.
Afternoon – a daily chance to give back the money you made that morning (see Friday).
Apprentice – anyone who peers at your screen shortly after you closed a profitable deal.
Average Down – what you have to do if you opened a long position and had to go to the bathroom.
Average Up – what you have to do if you opened a short position and had to go to the bathroom.
Bad Trade/Stupid Trade – an unprofitable deal that someone else carries out which does not fit your trading strategy.
Bottom – (when you have an open long position) the spot where you give up averaging down and sell; (when you have an open short position) the spot where the book recommends you to open a short position.
Break – a pause you take when you have either 2 profitable or 5 unprofitable deals in a row. (more…)
Trading Wisdom from Richard D. Wyckoff
“You can learn from this how to develop independent judgment, so that you need never ask anyone’s opinion or listen to anyone’s tips, or take anyone’s advice. You can so train your judgment that you will know just what to do and when to do it. When you are in doubt you will do nothing.” –Richard D. Wyckoff
Wyckoff was talking here about trading. He was talking on the subject of studying the markets to determine how they operate. You will find developing your own trading strategy/method can be the most rewarding and challenging experience of your lifetime. You need to be comfortable with the risk, before you are comfortable with the reward. There is an age old saying, ‘If you can’t stand the heat, then stay out of the kitchen.’
As traders, we are exposed on a daily basis to the trading concepts of risk and reward. Personally, my own reward to risk tolerance took some time for me to feel comfortable with it. How much do you want to risk on each trade, and how much are you looking to make at a minimum?
Are you at its minimum profit objective going to make more money than you risk? So if you would take two trades, and one would win and the other would hit your stop loss, would you turn a small profit on your trading? Obviously, the goal of every trader should be the three general trading rules. (more…)
Managing your luck
You absolutely must have an edge. In the short run, you can get lucky and make money doing something that has no edge, but expected value will catch up with you. Don’t gloss over this point, because it might just be the single most important thing we can say about trading–you have to have an edge.
You must be consistent. You must trade with discipline. Nearly everyone who writes anything about trading says these things, but the why is important: you must be consistent because the market is so random. You cannot change your approach based on short-term results because those short term results are confounded by the level of noise in the market. In other words, you can lose doing the right thing and make money doing the wrong thing. Too many traders make adjustments based on evaluating a handful of trades, and this is likely a serious (fatal) error. See point 1: have an edge, and, now, apply that edge with consistent discipline. Markets are random; you don’t have to be.
Luck matters. There’s no denying that, but so does skill and so does edge. In fact, the more skillful you are as a trader, paradoxically, the more luck matters. (See Mauboussin book and video link near the end of this post.) You can be successful without luck, but the wildly successful traders (who are outliers) always have some significant component of luck. If the overall level of investment skill in the market is rising (far from a certain conclusion, in my opinion), then performance will converge and luck will play a bigger part for the top performers.
If you understand the part luck plays in your results, you will realize that emotional reactions to your results are largely inappropriate. Yes, that sentence sounds like something a Vulcan (from Star Trek) would say, but it’s true. Too many traders ride the emotional roller coaster from euphoria to depression based on their short term results, and this really doesn’t make sense because you’re letting luck (random fluctuation) jerk your emotions around. (It is worth considering, though, that this works for some traders and may actually help their performance.)
Intuition & Vision in Trading
Intuition – A qualitative virtue recognized by few and held by even less. Our intuition is the byproduct of the analysis performed by our subconscious. It acts much like a muscle and requires exercise to develop and grow. Like a muscle, neglect can cause atrophy. Traders with a strong intuition built on a strong trading strategy put themselves in an ideal position to achieve consistent success in the market. Over time, traders can feel the energy a market gives off and can execute trades from this. It is an invaluable tool in one’s trading arsenal.
Vision – While total clairvoyance as to future price movement is unrealistic. It is my goal as a trader to assimilate as much information as possible with the goal of playing out scenarios that tie in together. It’s not always easy to do, yet understanding trading does not occur in a vacuum and markets do exhibit funny things get you mentally prepared to deal with these outlier events. Those that can think for themselves and need not rely on templatized news releases for their ideas usually put themselves in a position to benefit from their forward thinking.
We have heard many times about leaders who saw an industry trend before it happened. This was no accident. It came as a result of their understanding of their field and what could change it for the better. Traders who gain an understanding of how things can potentially play out and factor that into their trading strategy go a long way to keeping their objectivity when things unfold in a fast and volatile market.
1 Thing Critical To A Trader's Success
I think more than anything it has to be discipline. Because as important as finding a suitable methodology, developing a strategy, sound risk management, and position sizing is, it will be for nothing if you don’t have the discipline to consistently execute it and follow your rules.
Discipline is an integral part of all trading, whether systematic or discretionary, day trading or buy-and-hold, across all asset classes. I don’t believe you can be consistently successful without it.
Risk control based on risk per trade, risk control based on sector, risk control based on total portfolio.
You must know how much you can lose on a given trade, and the maximum loss to your entire portfolio at any one time. Only then can you take the necessary measures to manage these risks.
Almost equally important is correct trading psychology. Being able to accept trades that do not work. Staying focused and strong in the complete uncertainty of trading.
Because even the best trading system will have losing periods and this is when you need to remain discipline and continue executing your trades.
A trader must have many different ingredients to be successful in trading, but what is absolutely critical is that you must love the type of trading you do.
Many people think they have a passion for trading but the reality of trading; watching charts, managing risk all day, is not as exciting as many believe. If you are a day trader then you must actively enjoy this process.
If not, you must find another form of trading (or profession) that suits your style. That might be swing trading, automated trading, systems trading, whatever. But what you must have is passion!
Position Size Can Be More Important Than the Entry Price
Too many traders focus only on the entry price and pay insufficient attention to the size of the position. Trading too large can result in good trades being liquidated at a loss because of fear.
On the other hand, trading larger than normal when the profit potential appears to be much greater than the risk is one of the key ways in which many of the Market Wizards achieve superior returns. Trading smaller, or not at all, for lower probability trades and larger for higher probability trades can even transform a losing strategy into a winning one.
For example, Edward Thorp, who started out devising strategies to win at casino games before achieving an extraordinary return/risk record as a hedge fund manager, discovered that by varying the bet size based on perceived probabilities, he could transform the negative edge in Blackjack into a positive edge. An analogous principal would apply to a trading strategy in which it was possible to identify higher and lower probability trades.
13+1 Habits For Traders
1. Have a plan before you initiate a trade. A detailed trading plan is your blueprint to success. It will help you define you as a trader, the way you trade, will help you find, execute and manage trades with ease and most importantly will help you put the education puzzle together.
2. Always analyze all closed trades, winners and losers. Having a trading journal will help you identify what works for you and what not; it will funnel you in the right direction. It is by far the most helpful method of personal trading introspection.
3. Maintaining a positive trading attitude will improve your money management and risk management skills. A negative trading mentality will alter your thinking and mindset. Your attitude will determine whether or not you are profitable with your trading. Your attitude is more important than your market knowledge and even your level of experience. It is important how you react to the market and not what the market will do to you.
4. Controlling Emotions. Emotional swings and emotional stresses impact your mental state of mind and will affect your trading decisions. When you trade with emotions you don’t trade clearly and rationally. Some books talk about separating your emotions from trading. But how is this possible? To even try to separate emotions is like fighting a losing battle, taking control over them that is a different story. Trading involves the most emotional COMMODITY in the world which is….money. Money outlasts hate, love, greed and anything else you can ever imagine. The only way to control your emotions as a trader is to have a solid trading plan.
5. Trade in the zone –Focus is key in trading. Make sure you are do not have any distractions around, no internet browsing, no phone answering, no kids playing, it should be just you and the charts. Let the charts speak to you and they will tell you what to do. (more…)
10 Pitfalls of Trading & Answers
What are the 10 major mistakes that these traders make that cost them dearly?
- Having no trading plan
When you don’t have a plan, you don’t have a template to follow. It becomes very costly when your emotions are high and you have to make decisions on the fly.
- Using strategies that do not match your personality
You hear of a trading strategy that has worked very well and you are anxious to follow it. One important factor to consider is: does it match who you are and your lifestyle?
- Having unrealistic expectations
Most traders assume that it is very easy to make money in trading. They have unrealistic expectations with regard to their initial capital, their risk profile and how much money they can expect to make.
- Taking too much risk
Usually when traders are down, they want to make their money back very quickly. Therefore, they increase their position size without thinking about the risk/rewards.
- Not having rules to follow
Most traders think if they have rules to follow, they are restricting themselves. It is on the contrary. Having rules allows you to be more flexible since you have thought about lots of issues beforehand.
- Not being flexible to market conditions (more…)
3 Types of Traders
Three popular trading personality types are intuitive, data oriented, and impulsive.
The data-oriented trader focuses on concrete evidence and is often very risk averse. They seek out as much supporting data for a trading decision as possible. The trader who prefers to do extensive back-testing of a trading idea exemplifies data-oriented type. Consider incorporating elements of data oriented trader personality into your trading style regardless of your natural inclinations. Make sure you have adequate information (a reason) before executing a trade. Particularly important is to have and trade a detailed trading plan in which risk is minimized and entry and exit strategies are clearly specified. Most often however, the data-oriented trader may take things a little too far. Searching for “the perfect” knowledge that just doesn’t exit in the trading world. At some point, one must accept the fact that he or she is taking a chance and no amount of data analysis can change this fact.
The intuitive trader is the opposite of the data-oriented trader. Trading decisions are based upon hunches and impressions rather than on clearly defined data. There’s a difference between being an intuitive trader who develops this style over time and one who is naturally intuitive. The experienced intuitive trader, bases decisions on data and specific market information. But, as a seasoned trader, analyzes the data quickly and efficiently. It happens so quickly that it seems like it occurs intuitively, but it is actually based on solid information. Ideally, all traders should gain extensive experience to the point where sound decisions are made with an intuitive feel.
A third trader personality type is the impulsive trader (gambler). This is the most dangerous style. The impulsive trader allows his or her decisions to adversely influence trading decisions. Rather than looking at information logically and analytically, information is discounted completely. The impulsive trader seeks out risk and enjoys taking risky, exciting trades. Impulsive traders can often make huge profits one day and see large draw downs the next. Your personality can have a huge influence on your trading performance. Identify your assets and liabilities, and work around your personality when it is necessary.