10 Things Traders Must Quantify

25 Nov
November 25, 2014

 

Subjective: Based on or influenced by personal feelings, tastes, or opinions. Proceeding from or taking place in a person’s mind rather than the external world.

Subjective traders are intertwined with their trades. They generally enter out of greed and exit based on fear. They believe in their opinions more than the actual price action. They base trades off how they feel about a particular market. A subjective trade idea comes out of the imagination of the trader, from their own beliefs, opinions, and what they think should happen. Many times, reality is not even cross-checked as a reference. It is the subjective traders who see what they want to see instead of what is really going on. Their compass is their emotions, and they often have conflicting goals.

Objective: (Of a person or their judgment) not influenced by personal feelings or opinions in considering and representing facts. Having actual existence or reality.

Objective traders have a quantified method, a system, rules, and principles they trade by. They know where they will get in a trade based on facts, and where they will get out based on price action. Objective traders have a written trading plan to guide them. The guides of the objective trader are historical price action, charts, probabilities, risk management, and their edge. They react to what is happening in quantifiable terms that can be measured. They go with the flow of price action, not the flow of internal emotions.

  1. What exactly is your entry signal going to be? What technical indicators will trigger you to enter a trade?
  2. What will the perceived edge for your entries be based on? Will you quantify your entries edge with back testing of through trading principles?
  3. Will you wait for an initial move in the direction of your trade entry or will you enter based on a technical indicator trigger?
  4. 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?
  5. 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?
  6. 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?
  7. 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?
  8. 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?
  9. Is your position size small enough to enable you to hold the trade without emotions effecting your ability to follow your trading plan?
  10. 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?

Don’t succumb to the emotions of a trade, and don’t attach your ego to it. Be the trader that witnesses the trade from an emotional distance with curiosity. If you can find that space between yourself and the trade, you will become more accurate and more profitable. When you can approach the results of your trades with equanimity, then you are at the next level.

Trading Expectations: Keep It Real

24 Nov
November 24, 2014

 

 

Unfortunately, the retail trading world is full of false promises.  No other industry has as many snake oil salesmen, promising to make traders rich for a fee. The more a newsletter writer or trading system seller tells you how easy trading is, the more cautious you should be.

Consistently profitable trading requires a winning system that fits a traders personality, and they must have the discipline to follow it Implicitly.

Here are a few things that a new trader needs to understand:

  1. No trader wins on every trade. The best traders in the world only have a 50%-80% success rate. 
  2. Trying to get rich quick requires so much risk, that the probabilities of ending up poor is far greater than your chances of becoming rich. 
  3. Consistent 15% – 20% annual returns are what world class traders and portfolio managers make.
  4. Some of the best traders’ best years were 50% – 100% annual returns, in specific market conditions, that were conducive to their strategy.
  5. Market conditions will have a huge impact on your returns each year, regardless of how you trade.
  6. The higher returns you aim for, the more risk will be required, and the larger draw down you will have getting those returns. 
  7. If you risk 5% t0 10% of your trading capital on every trade, your risk of ruin is 100% in the long term.
  8. If you think that the above percentages are just too small, then it is very likely that your trading account is too small to make those percentages meaningful.
  9. To trade for a living, you likely need a multiple six figure account, and a minimum of one years worth of living expenses to avoid the unrealistic expectations of small returns and the accompanying stress.
  10. Trading is a profession like any other, and requires the same level of discipline and dedication to be successful.
  11. All your profits comes from other trader’s losses. You must beat other traders to be profitable.
  12. Trading is the hardest easy money you will ever make.

 

$SPY Chart: 10 Fast Facts 11/23/14

23 Nov
November 23, 2014

 

  1.  The long and short term up trends in the market are both in place.
  2. This market has gone parabolic on a break above the 70 RSI. This is a rare outlier event to run so far with no pullback.
  3. This is currently a market for trend followers and momentum traders. Short signals have failed since the recent low was estabablished in October.
  4. The risk/reward is skewed strongly against longs at these lofty levels. This is a let profits run kind of market and not a great time to initiate new longs at these overbought price  levels. Much better odds on waiting for a pullback to get long if not already long here.
  5. The gap open and then close lower on Friday is the first sign of a possible reversal. The second would be a close under the low of day on the gap day.
  6. There are zero signs of a correction here, the bears have to battle for even a pullback with the buying pressure that is being exerted on every small dip.
  7. The low of the day on the gap up is the 1st level of short term support.
  8. The 5 day ema is the second level of support that lines up with the recent $206 break out resistance. 
  9. It is highly likely that selling deep out of the money puts is the highest probability trade here.
  10. I will be back on the dip buying side next week given the right opportunity at the 5 day ema or 10 day sma.

5 Great Trading Articles 11/22/14

22 Nov
November 22, 2014

 

Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics

The Theory Of Reflexivity: A Primer For Today’s Market

The Secret to Momentum is the 52-Week High??

Top Trading Tweets: Week of 11/21/14

21 Nov
November 21, 2014

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