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Archive for the ‘Money management’ Category

PostHeaderIcon Successful Trading: How to Put it All Together


What trips up the vast majority of traders so they never quite make the transition from new trader to good trader?

Not being able to deal with the stress of trading: this is caused primarily from a lack of faith in themselves and or their method.

They lack the ability to pull the trigger when it is time to enter a trade or cut a loss.

Some people just can’t overcome the fear of losing money both in the entry and exit.

Many traders just do not have the discipline or work ethic to create a trading plan through proper homework.

Most traders have no trouble over analyzing the markets to death with enough indicators to make someone go cross-eyed. Many traders read enough books to know how to trade, many follow enough different people online that they get so confused they do not know what to do. Most traders spend far to much time in front of the computer all day watching the prices tick. The majority of traders would really quit trading if they added up the amount of time they spent for the privilege of losing money.

What is the key to over coming the barriers to success in trading. A GOOD TRADING PLAN, not a few rules I mean a complete plan. A plan that you 100% believe in based on your own studies and back testing. Your own personal plan that YOU created, not someone’s opinions.

What needs to be in there?

The Trading Plan comes first and should account for the following parameters:

1.  Entering a trade. Quantified approved entries.

2.  Exiting a trade. Predetermined Exit point BEFORE you enter a trade.

3.  Stop Placement. How will you know you were wrong about a trade? A stop loss, trailing stop, chart signal, volatility stop, time stop, or target price.

4.  Money Management. How much capital will you risk on any one trade? This is the key to position sizing.

5. Position Sizing. How much capital will you put on any one trade? Do you have rules that tell you to trade bigger or smaller based on the odds?

6.  What to Trade. What qualifies stocks to be on your watch list?

7.  Trading Time Frames. Are you going to day trade or position trade and hold for a week or more? or will you be a short term or long term trend follower?

8.  Back Testing. You need back testing either with a computer, by reviewing charts, or others research to show that your system is a winner.

9.  Performance Review. You must keep a detailed log of your trades and watch your performance to understand the wins and losses and their causes.

10.  Risk vs. Reward. Each trade must begin with the potential of winning more money than you are risking.

This is a very basic outline, I suggest expanding this to include 30 rules minimum; 10 each covering the areas of risk management, psychology, and method. If you can write this, believe it, and follow it, you will win in trading the only question that remains is when?


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PostHeaderIcon Why Apple Bulls Got Hurt

 

 

 

 

 

Ever have that day when you were 100% sure about a trade. You just could not lose, the stock was a real buy, it had already fallen a great deal and it could not possibly fall any farther. So you waited and then plunged in, you couldn’t lose so why not just go big? You bought in and sat back with dreams of what you would do when the stock rose back up to its past glorious price high. You had almost spent the money in your mind when the weirdest thing happened, the stock went down even farther after you bought it. But you were not concerned the stock was an excellent company so it would get back to its highs, you just had to be patient, you would just buy more at these prices, how could you lose? The next day it dropped even more, okay you bought more and felt good about it. You imagined it was another opportunity, you were the next Warren Buffett buying value. You patted yourself on the back and waited. But it kept falling, you started to feel the heat, your account was much lower than when you started on this can’t lose adventure into the abyss. You reasoned “It is only a paper loss, I still own the stock as long as I do not sell I  can just wait for it to go back up.”

This story never ends well. What we don’t realize is that either the P/E was contracting because the future growth in the company no longer met analysts expectations so it was being distributed by institutions not bought. Or the market was entering into a bear stage and growth stocks were being sold off to raise capital for cash withdrawals from mutual funds by smart investors selling their mutual fund shares. Or the stock simply peaked out and had gone as far as it could with everyone owning it that wanted to and no buyers really left to come in and push it higher.

What ever the reason this is why you always must have an exit plan and the price that it needs to go to that will mean you were wrong and it is time to sell. Many times the more obvious a trade looks the worse the odds of it being a winner. Most the time the hardest trades to take are the ones that are the winners. The sad thing is while the new trader is losing his account and sitting in a puddle of sweat having a stress attack there is some mellow rich trader who shorted the same stock and is out by the pool with a drink and a cigar counting his winnings. .

Always remember: the most dangerous trade is the one that you think you can’t lose. It makes you trade too big, be over confident, sloppy, greedy, and not use stops.

 

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PostHeaderIcon The Top Ten Scariest Things A Trader Can Do…..


 

On this scary holiday of ghouls and goblins, trick or treating, and haunted houses it made me think of what is really scary for traders to do. Emotions sometimes are sending traders messages, fear can mean that you have not done enough homework or that you are trading too big. Fear can be screaming at you to cut your losses as they become bigger and bigger.

The majority of the time you should be greedy when you are winning and let your winner run to a logical resistance point but be fearful and ready to exit when you are losing afraid that you loser will grow bigger.

The Top Ten Scariest Things A Trader Can Do…..

  1. When risking 5% of you account on any one trade, 10 losers in a row and BAM! 50% draw down and you need a 100% return to get back to even. If you don’t think that you will have ten losses in a row this year then that is SPOOKY!

  2. Buying far out of the money options with a .10 delta. Generally this trade will lose 9 out of 10  times, only being profitable from the strongest trend within your time frame. Spooky that traders want to buy lottery tickets with those odds.

  3. Taking a trade with NO EXIT STRATEGY that is a horror movie. It is dangerous to not have a stop loss when you enter a trade becasue if a trader thinks they bought in at a great price the price starts looking better the lower it goes, and terror of all terrors the trader adds more to the trade! It only takes one mistake letting one trade run into a huge loss and add to it to blow up an account.

  4. Shorting the strongest stocks in the market during a bull market is scary as they continue to go up.

  5. Going long a stock in a death spiral due to a business misstep or earnings decline is like riding a roller coast that generally ends up much lower when the trade is finally closed.

  6. “Going all in” on one trade, with this plan all it takes is one bad trade to blow up your account, those are scary odds.

  7. When you are losing you go from your trading plan to “plan B” “hoping” maybe even praying for a reversal. When a trade turns you religious and leads you to pray it is definitely time to get out!

  8. Asking for others opinions instead of following your trading plan or methodology is very scary, time for homework not tips.

  9. It is terrifying to watch someone fight a trend instead of follow it. The bigger they go against the trend the scarier it gets. They are trying to stand in front of an elephant walking and tell it where it should be going.

  10. When you find out you are in a trade that is 100% the opposite position of the best traders you know, it should be a wake up call to reassess your thinking process, I know that is always an uh oh moment for me, I usually lose in those situations.

Happy Halloween Everyone! Be Safe My Friends!


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PostHeaderIcon The 7 Skills A Trader Must Have To Win

 

 

 

 

 

There are seven skills you will need to survive in trading without discipline no system will work because it will not be followed. With out risk management it is a 100% probability that the trader will blow up their account. Without passion trader’s will not have enough energy and drive to  get from new trader to rich trader. Without perseverance new traders  become quitters after meeting with resistance, failure, and monetary losses. No work ethic = no edge over other traders. Without flexibility a rigid trader will be broken by the markets. Without a focus a new trader becomes the jack of all trades and the master of none.

  1. DISCIPLINE: The trader must have the ability to control themselves and follow a plan. Discipline is a required skill in trading without it there is no edge, you are either a gambler or simply trading off fear and greed. You will not be successful, instead you will be gamed by those in control of their emotions.

  2. RISK MANAGEMENT: Risk management must be a top skill for a trader to even survive in the markets. You must structure your risk per trade to be no more than risking 1% or 2% of your trading capital. You have to be able to survive 10 losses in a row. These strings of losses come around more often than a new trader would suspect. If you lose just 5% of your trading capital in each of ten trades you will be down almost 50% and need a 100% return just to get back to even. At this point you are ruined.

  3. PASSION: A trader must love to trade, without a passion for the markets and trading the new trader will not survive the learning process because anyone with common sense would believe that it was not worth the struggle. Passion will be needed to bring a trader through the learning curve and later the losing streak.

  4. PERSEVERANCE: A top skill of a trader is not quitting. A trader will have many bad days, bad weeks, bad months, and in the beginning, even bad years. The ability to keep going anyway because you have a goal in mind can not be underestimated.

  5. WORK ETHIC: There is no easy money in trading it is work. Even the ‘easy’ money in bull markets is usually taken back from newbies in the next bear market cycle as they continue to fish for support and just know their stock will ‘come back to even and let them out’. Being a trader is probably equivalent to getting a bachelor degree in a college and in some ways it is like getting a law or medical degree. New traders should expect to pay tuition costs as they start out not just in books, tapes, videos, seminars, and newsletters but also trading losses. There is no professional field where you can just start it and make money from day one. Expecting to start making money trading from day one is like some one going up to a doctor and saying “Hey, how can I make some quick bucks in the medical field, just tell me how you do it.”

  6. FLEXIBILITY:A trader must have the skill to both quickly realize they are wrong and act on that by taking a small loss before it becomes big. There are no crystal balls good traders play probabilities and try to go with the flow. Most new traders will never accept that trading is not about being right every time it is losing small when wrong and winning big when right. Expect a 50%-60% win rate and understand that your wins have to pay for your losses so make them as small as possible.

  7. FOCUS:In trading being an expert on your specific markets: currencies, commodities, futures, options, or stocks will lead to more success than dividing your attention into too many parts. A small watch list allows you to not miss anything and understand your own trading vehicles better than the majority of others you are trading against. Also being an expert on your own systems, methods, or styles will give you an edge over others that drift between methodology.

Surprisingly I have found that these seven skills are primary and the winning trading system itself is secondary. There are many, many, robust systems, methods, and styles but none of those work if you are missing one of these.


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PostHeaderIcon Trading:The Secret Sauce

 

 

 

 

 

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” -George Soros

One element of trading that is over looked as traders chase hot stocks, trends, and chart patterns is the importance of taking trades that have the potential to be big wins OR small losses. Big losses will kill your account quickly and small wins will do little to pay for those losses. Our trades have to be asymmetric where our downside is carefully planned and managed but our upside is open ended. This is a crucial element for trading success and has to be understood and planned for.

The risk/reward ratio is used by more experienced traders to compare the expected profits of a trade to the amount of money risked to capture the profits. This ratio is calculated mathematically by dividing the amount of profit the trader expects to have made when the position is closed (the reward) by the amount the trader could lose if price moves in the unprofitable direction and the trader is stopped out.  

A big secret that many rich traders know that new traders do not is that the winning percentage for even the best traders is only about 50%-60% one type of trading edge comes in having bigger winners than losers. A great formula to use is a 3:1 risk/reward ratio, with this ratio a trader is risking $100 to make $300. If 100 shares of stock are bought for $100 a share and the stop is at $99 then the stock should only be purchased if it is probable that the stock could run to $103. At a $103 share price profits could be taken or ideally if it runs to $104 a trailing stop could be set at $103 to give the stock an opportunity to be an even bigger winner. After ten trades your account could look like this:

Lose $100
Make $300
Lose $100
Make $300
Lose $100
Make $300
Lose $100
Make $300
Lose $100
Make $300
Profit $1,000 with only a 50% win rate!

However if you allow losers to run hoping they will come back and take profits quickly while they are there you can get into trouble fast.

Lose $1000
Make $100
Lose $500
Make $200
Make $100
Make $100
Make $200
Make $100
Make $100
Make $100
Lost $500 even with an 80% win rate!

Other ways to measure the ratio:
In trades you can also plan to cut your losses if the stock drops 5% while taking entries on stocks that can run 15% of more.
Another way to measure a 3:1 ratio is that you can risk 1% of your trading capital for the possibility of making 3% of your trading capital in profits.

Remember that you can cut losses even shorter if you are proven wrong before your stop is hit, but at the same time you have to allow enough room for normal fluctuations and volatility in your stop and use position sizing that you are comfortable with for your trading account size. I also recommend you to allow winners to run as far as possible, you never know when you could have a huge win with the right entry and trend.

First know how much you will risk on any one trade then do not enter a trade where the upside is not at least two or three times your risk of loss.


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PostHeaderIcon Trading: Mistakes versus Losses. 10 BIG MISTAKES

 

 

 

 

 

Lose your money,but keep your discipline.

Trading is about following a method, system, or rules that give you an advantage over other market participants in the long run. There are good bets and bad bets. There are traders who follow a trading plan with discipline and others that start trading out of fear and greed after strings of losses or wins. Just because you lost money does not mean you made a mistake. Just because you made money does not mean you did not make a mistake. The goal of trading is to make money over the long term not be right every time. Losses are a part of trading. There is a big difference between a loss after following your plan versus a loss after a loss of discipline.

Losses are simply getting out of a trade with less capital than you entered it. The question is was the loss due to your method or your lack of discipline?

A mistake however can be many things, and mistakes can be profitable which is dangerous to the long term health of your trading account.

  1. Trading a position size so big that your risk of ruin is inevitable is a big mistake whether your individual trades are a win or a loss.

  2. Abandoning your method to start trading a different time frame or style than you have researched is a mistake because your edge is gone.

  3. Adding to a losing position is a big mistake because eventually you will be in the trade that does not revert to the mean and you lose your whole account.

  4. Believing that you are above your own trading plan and can start just trading as you wish is a death wish for your account.

  5. Trading based on beliefs instead of reality is a dangerous place to trade and is a mistake.

  6. Taking your entries a little sooner than they are triggered or an exit a little later than your stop loss is a mistake.

  7. Diversifying traded markets or stocks before doing the proper research is a mistake.

  8. Trading so big that your emotions interfere with your trading plan is a mistake.

  9. Trading when you are very sick or going through emotional personal problems is a mistake.

  10. Making trading decisions based solely on ego, fear, or greed is always a mistake whether you win or lose.


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PostHeaderIcon Surviving a Drawdown: 7 Steps

 

 

 

 

 

 

A draw down is a normal occurrence for a trader. Swing traders experience them in trending markets, trend traders experience them in choppy markets, day traders experience them in markets that whip saw violently, and growth investors experience them in bear markets and corrections. the key to surviving them is staying disciplined in your entries and exits. Only take valid  entries and always cut your losses at predetermined spots where you are proven wrong. If you are gunning for high returns then you can expect draw downs that are about half your return rate. A draw down is a function of the market not being conducive to the traders method and system, it is not an indictment of the traders ability if they are disciplined in taking their entries and exits. The question is: “Where will your account be with a string of 7 losses?”

Here are 7 steps to limit the pain of draw downs:

  1. When losing in trade after trade, lower your trading size by 50%. Trade smaller until a winning streak begins.

  2. Only risk 1% of your capital per trade. While this is standard, you must avoid the temptation to trade big to make up your losses. This usually compounds the problem becasue the market is not co-operative with your style during a down trend.

  3. Stay diciplined with your entries and exits. Do not get sloppy.

  4. Do not abandon your method, you have to stay the course so when your method comes back in favor you will start winning again.

  5. Do not take losses personally. It is not your fault that the market is not conducive to profits if you are trading your proven system.

  6. Do not fall into the temptation to let losers run. Cut your losses at predetermined stops regardless of the pain.

  7. Do not stop watching the market, be ready to take the right entry when it presents itself. Many traders get so beat up on a string of losses that they stop focusing on their watch list and stop taking high probability entries. Don’t ever stop.


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PostHeaderIcon $AAPL My Indicators & My Trading Plan

 

 

 

 

 

 

Charts are my best mentors and moving averages are my best teachers.

Entering into Monday Morning I am long Apple with an in the money $610 strike weekly call option but I am hedged with an out of the money $620 weekly put. Like me many traders see indecision with that doji candlestick laying right on the 100 day ema support line. This is the first time all year I have implemented a hedge and not been in a purely directional trade. But, with this option play structure I will capture the full upside of a possible bounce and run with Apple into earnings but my losses are capped to only a few hundred dollars if Apple does rollover under the 100 day ema and 100 day sma and falls towards the 200 day sma at $575 next week. From looking at the chart my belief is that the lowest we will go is the 100 day sma at about $622 that is the probable support area. The resistance level on the upside is at the 5 day ema of $636.55, if we have trouble getting over that line intra-day then it is a good place to take profits on bounces. If we break and close above the 5 day ema then that is my sign to get long with a possible change in trend into earnings. From chart history it looks like this is now a dangerous place to be short and a short covering rally could happen at any moment along with positions being taken by funds for longer term investments at this attractive price point for a value play with a 15 P/E ratio. In the long term time frame this stock is still in an uptrend and at its support level. This is the crossroads, the bottom of the uptrend or the top of a new downtrend. My bet is slanted to the upside.

I will be long with no hedge with a close above the 5 day ema $636ish currently but this target moves fast.I will ride the long until earnings if it stays above the 5 day ema.

I will hold my put option and go solely short by selling my call option with a close below the 100 day ema targeting the 200 day as the next chance to get long.

 


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PostHeaderIcon 7 Ways to Trade With An Edge

 

 

 

 

 

“If you diversify, control your risk, and go with the trend, it just has to work.” -Larry Hite.

We often hear of trading  with an edge, but how do we know for sure we have an edge in our trading? How do we know that the odds are in our favor and that the more we trade the more our accounts should grow as we play our edge over and over? Are we really the casino and not the gambler or are our short term winning the result of luck?

  1. One edge is in trading entry points in chart patterns that historically play out as a winning trade more times than a losing trade. Even taking entries that play out as winners only 60% to 70% of the time is much better odds than a random 50/50 entry point. The key is to do your homework and know the odds of each entry from specific chart patterns. Cups with Handles, candles sticks, and triangles are just some of these patterns. Thomas Bulkowski has done some amazing work around quantifying these patterns.

  2. Another edge is in the use of historical price action back testing using software and historical price data along with technical indicators to see how a system would have done over an extended period of time across multiple markets. Moving averages and breakouts in different time frames are used many times to see what the equity curve looks like if the system was followed. This is the realm of the mechanical system trader. Price history gives the edge. Programming knowledge required.

  3. Another edge is to trade a method that has been proven historically as a winning one. The method should have rules on what to buy based on fundamental or technical criteria , when to buy, how much to risk per trade, when to exit at a loss or when to exit to lock in profits. One example of such a method is the CAN SLIM system by William O’Neil while the system is very robust it is more of an investing system than a trading system due to the time frames of the recommended buying and holding of stocks.

  4. Technical Analysis applied correctly can give a trader an edge. By trading what the chart is saying with support, resistance, trend lines and volume it will give a trader an edge over someone who enters randomly or based on opinions.

  5. Experienced discretionary traders can be their own edge through intuition which is developed through market experience and exposure to market behavior and what makes and loses money over many years of trading. Successful discretionary traders are like seasoned athletes who began to just know what to do in different circumstances based on past experience and learning through repetitive action. They are also like professional poker players that can instantly size up the odds of their hand and the possible actions of their competitors.

  6. An Emotional Edge can be gained by traders who make buy and sell signals based on systems and methods instead of fear and greed, they can step in and buy in a bear market when a reversal begins with a new trend upwards with out being clouded by fear and they can allow winners to run in a bull market not selling to soon out of fear of giving back profits. Traders not affected by their ego can sell quickly when they are wrong to avoid taking a bigger loss than is necessary. Much of trading is a mind game and do not underestimate the edge of having the discipline to follow your trading plan instead of your own fear and greed over taking you during market hours.

  7. Asymmetric Risk Edge is really THE edge that produces profits in the long term. The only way to make money in the long term is to have all your winners be bigger than all your losers. This can only happen by cutting losers short and letting winners run or having a very big win percentage. A good ground rule is to only take trades that can profit $3 for every $1 at risk. Only risk $1,000 if you believe you can make $3,000 on a specific trade. Of course a day trader with a 60% win rate may be able to get by with a $2 profit for a $1 risk if they stay disciplined in cutting losses and a trend following may have amazing returns with only a 30% win rate if there wins are 5 to 10 times their risk.

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PostHeaderIcon 7 Warning Signs That A Trader Is In The Danger Zone

 
 
 
 
 
 
 
 

There are warning signs that a trader is going down the road road in a trade or in their trading in general. Traders have to go with the flow of the market, manage risk, and keep their mind open to actual price action. Departing from these principles are dangerous and could result in huge draw downs in capital and even blowing up their accounts. Trading through the filters of fear, greed, or ego are very dangerous.

  1. You stop trading your plan and start “shooting from the hip” you are losing or winning so you believe that you are above your own rules, you start trading your opinions instead of your plan.

  2. You are about to take a trade you are 100% sure of, you have no doubt that it will work out. Trades that feel good to do and feel like can’t lose trades rarely win because everyone is already positioned in those trades.

  3. When you ignore your first stop and start deciding that you should give your trade “more room”, when you allow a loss to grow and rationalize why you should hold it instead of following your plan and stopping out you are in trouble.

  4. Averaging down in a position that is going against you is never a good idea, fighting trends are very dangerous amplifying your losses by increasing your position size can be fatal to your account.

  5. Fighting against the prevailing market trend over an over again can chop your account to pieces.

  6. When losing, you start trading bigger and bigger to get back to even. When you are losing you should start trading smaller and smaller to decrease losses.

  7. When you actually disagree with the market and believe it is wrong and you are right. Price is reality wherever it is, your job is to trade trend and price action not your own opinion.


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