Before entering every trade, you must know your pain threshold. You need to figure out what the worst-case scenario is and place your stop based on a monetary or technical level. Every trade, no matter how certain you are of its outcome, is an educated guess. Nothing is certain in trading. Reward, on the other hand, is unknown. When a stock moves, the move can be huge or small.
Archives of “worst case scenario” tag
rss18 -Wisdom One Liners for Traders
1. You will be tested mentally and emotionally this is not for the weak minded.
2. Master Traders are detached emotionally from profit or loss.
3. Boredom is the enemy of the master opportunist.
4. Haste is the enemy of great entry points.
5. Doubt is often followed by a lost opportunity.
6. The Trend will give you direction on your path.
7. Having an exit strategy prevents unnecessary pain.
8. The laws of probability give strength to your fingers.
9. Going against momentum brings forth the fools reward.
10. Better the bad trade that is unrewarding.
11. Habit is built on the principles of probability.
12. Know your exit point in the worst case scenario first.
13. The master trader is an escape artist.
14. When one knows the present they master the futures.
15. Set realistic goals and let the good times role.
16. A loss can be turned into a win when one is swift.
17. A master in day trading trades in an egoless state.
18. Times of great probability are like diamonds falling from the sky.
10 rules for Rookie Day Traders
1. The three E’s: enter, exit, escape
Rule No. 1 is having an enter price, an exit price, and an escape price in case of a worst-case scenario. This is rule number one for a reason. Before you press the “Enter” key, you must know when to get in, when to get out, and what to do if the trade doesn’t work out as expected.
Escaping a trade, also known as using a stop price, is essential if you want to minimize losses. Knowing when to get in or out will help you to lock in profits, as well as save you from potential disasters.
2. Avoid trading during the first 15 minutes of the market open
Those first 15 minutes of market action are often panic trades or market orders placed the night before. Novice day traders should avoid this time period while also looking for reversals. If you’re looking to make quick profits, it’s best to wait a while until you’re able to spot rewarding opportunities. Even many pros avoid the market open.
3. Use limit orders, not market orders
A market order simply tells your broker to buy or sell at the best available price. Unfortunately, best doesn’t necessarily mean profitable. The drawback to market orders was revealed during the May 2010 “flash crash.” When market orders were triggered on that day, many sell orders were filled at 10-, 15-, or 20 points lower than anticipated. A limit order, however, lets you control the maximum price you’ll pay or the minimum price you’ll sell. You set the parameters, which is why limit orders are recommended. (more…)
15 Rules for Stock Market Traders-Investors
1. Reward is ALWAYS relative to Risk: If any product or investment sounds like it has lots of upside, it also has lots of risk. (If you can disprove this, there is a Nobel waiting for you).
2. Overly Optimistic Assumptions: Imagine the worst case scenario. How bad is it? Now multiply it by 3X, 5X 10X, 100X. Due to your own flawed wetware, cognitive preferences, and inherent biases, you have a strong disinclination – even an inability — to consider the true, Armageddon-like worst case scenario.
3. Legal Docs protect the preparer (and its firm), not you: Ask yourself this question: How often in the history of modern finance has any huge legal document gone against its drafters? PPMs, Sales agreement, arbitration clauses — firms put these in to protect themselves, not your organization. An investment that requires a 50-100 page legal document means that legal rights accrue to the firms that underwrote the offering, and not you, the investor. Hard stop, next subject.
4. Asymmetrical Information: In all negotiated sales, one party has far more information, knowledge and data about the product being bought and sold. One party knows its undisclosed warts and risks better than the other. Which person are you?
5. Motivation: What is the motivation of the person selling you any product? Is it the long term stability and financial health of your organization — or their own fees and commissions?
6. Performance: Speaking of long term health: How significantly do the fees, taxes, commissions, etc., impact the performance of this investment vehicle over time?
7. Shareholder obligation: All publicly traded firms (including iBanks) have a fiduciary obligation to their shareholders to maximize profits. This is far greater than any duty owed to you, the client. Ask yourself: Does this product benefit the S/Hs, or my organization? (This is acutely important for untested products).
8. Other People’s Money (OPM): When handing money over to someone to manage, understand the difference between self-directed management and OPM. What hidden incentives are there to take more risk than would otherwise exist if you were managing your own assets? (more…)
10 Ways to Move From Peril to Profits
- The first question to ask in any option trade is how much of my capital could I lose in the worst case scenario not how much can I make.
- Long options are tools that can be used to create asymmetric trades with a built in downside and unlimited upside.
- Short options should only be sold when the probabilities are deeply in your favor that they will expire worthless, also a small hedge can pay for itself in the long run.
- Understand that in long options you have to overcome the time priced into the premium to be profitable even if you are right on the direction of the move.
- Long weekly deep-in-the-money options can be used like stock with much less out lay of capital.
- The reason that deeper in the money options have so little time and volatility priced in is becasue you are ensuring someones profits in that stock. That is where the risk is:intrinsic value, and that risk is on the buyer.
- When you buy out-of-the-money options understand that you must be right about direction, time period of move, and amount of move to make money. Also understand this is already priced in.
- When trading a high volatility event that price move will be priced into the option, after the event the option price will remove that volatility value and the option value will collapse. You can only make money through those events with options if the increase in intrinsic value increases enough to replace the vega value that comes out.
- Only trade in options with high volume so you do not lose a large amount of money on the bid/ask spread when entering and exiting trades.
- When used correctly options can be tools for managing risk, used incorrectly they can blow up your account. I suggest never risking more than 1% of your trading capital on any one option trade.
18 Trading Wisdom for Traders
1. You will be tested mentally and emotionally this is not for the weak minded.
2. Master Traders are detached emotionally from profit or loss.
3. Boredom is the enemy of the master opportunist.
4. Haste is the enemy of great entry points.
5. Doubt is often followed by a lost opportunity.
6. The Trend will give you direction on your path.
7. Having an exit strategy prevents unnecessary pain.
8. The laws of probability give strength to your fingers.
9. Going against momentum brings forth the fools reward.
10. Better the bad trade that is unrewarding.
11. Habit is built on the principles of probability.
12. Know your exit point in the worst case scenario first.
13. The master trader is an escape artist.
14. When one knows the present they master the futures.
15. Set realistic goals and let the good times role.
16. A loss can be turned into a win when one is swift.
17. A master in day trading trades in an egoless state.
18. Times of great probability are like diamonds falling from the sky.
Ask yourself are you really in control of your trading?
Have a Plan A, B, and C.
Finally if you don’t have backups or discipline then you’re trading without plan.
At all times, in all trades have a Plan A, B, and C.
- Plan A is your best case scenario.
- Plan B is your worst case scenario.
- And Plan C is something in between – the most likely scenario.
Top Ten Side Effects of Greedy Trading
- Greed causes the trader to only look at the best case scenario for profits and ignore the worst case scenario for losses in every trade.
- Greedy traders trade WAY to big a position size.
- A Greedy trader’s #1 priority is getting rich quick while ignoring the risk of ruin.
- Traders that are greedy tend to believe they can have returns bigger than the best traders in the world right at the beginning.
- Greed makes traders have absurd targets for their trades.
- Greedy traders tend to buy stocks that are down 50% believing they will double and go back to where they were.
- Greed distorts a trader to focus on the money not the homework involved to make the money.
- Traders take trades where the odds are way against them because of the greed of wanting to make huge returns on one trade. (Far out of the money options)
- Greedy traders trade with no plan and no method they are just pursuing profits randomly.
- Greedy traders are always looking for the easy path to money not to the real path of hard work and experience.
Ten Side Effects of Greedy Trading
- Greed causes the trader to only look at the best case scenario for profits and ignore the worst case scenario for losses in every trade.
- Greedy traders trade WAY to big a position size.
- A Greedy trader’s #1 priority is getting rich quick while ignoring the risk of ruin.
- Traders that are greedy tend to believe they can have returns bigger than the best traders in the world right at the beginning.
- Greed makes traders have absurd targets for their trades.
- Greedy traders tend to buy stocks that are down 50% believing they will double and go back to where they were.
- Greed distorts a trader to focus on the money not the homework involved to make the money.
- Traders take trades where the odds are way against them becasue of the greed of wanting to make huge returns on one trade. (Far out of the money options)
- Greedy traders trade with no plan and no method they are just pursuing profits randomly.
- Greedy traders are always looking for the easy path to money to the real path of hard work and experience.
18 Trading Wisdom Thoughts for Traders
1. You will be tested mentally and emotionally this is not for the weak minded. 2. Master Traders are detached emotionally from profit or loss. 4. Haste is the enemy of great entry points. 5. Doubt is often followed by a lost opportunity. 6. The Trend will give you direction on your path. 7. Having an exit strategy prevents unnecessary pain. 9. Going against momentum brings forth the fools reward. 10. Better the bad trade that is unrewarding. 11. Habit is built on the principles of probability. 12. Know your exit point in the worst case scenario first. 15. Set realistic goals and let the good times role. 18. Times of great probability are like diamonds falling from the sky. |