The Great Mystery of Stops
One of the great mysteries of trading is the subject of the dreadful stop. It is the number one question that I get from clients, “what kind of stops should I use?”
My philosophy regarding stops is very different than most people .when PEOPLE learn how to use them wisely, they discover that stops don’t have to hurt.
Stops are the medicine of trading.
When your trade is sick, stops are there to heal it.
There a few ways of using stops:
1. The “No Stop” –
What do you call a trader that doesn’t use stops? An investor. When a trader lets a trade go against him, he gets married to the stock, starts looking at fundamentals and becomes an investor. I have seen many people, especially in the early 2000’s, buy a stock at 120 and still hold it today, even though it’s a penny stock today.
2. The “random stop” or the “gambling stop” –
These happen when a trader knows how much money he wants to risk on a stock, his “bet” on the stock, and that is his stop. Buy XYZ stock with a $500 dollar stop, because that is all they can allocate for this trade. These traders think of their trading as gambling, they put in their money on the table and forget about it.
The problem with this method is that it is not a method, there is no reasoning behind the placement of the stop.
3. The “Adding in stop” –
Some traders keep adding in money into their position as it goes against them. This is also called “Dollar Cost Averaging”.
When I was a stock broker, guilty as charged, we were taught that adding money to a position lowers your cost on it and, therefore, allows you to buy more shares at a lower price. Mr. Investor, if you liked XYZ at 50, I am sure you will like it so much more at 40, right?
The reasoning behind this method is very dangerous.
You buy 1000 shares at 40, buy another 1000 at 39, buy another 1000 at 38. Now, your average cost is 39, not 40 as you originally wanted. The stock only has to jump up a dollar for you to break even, not two dollars.
The problem comes when the stock keeps diving and you are now stuck with 3000 shares on the wrong side of a breakout.
I have seen many ex-traders use this method to wipe out their accounts. This trader will become an investor. If not on the first 20 trades, then on the 21st that would wipe them out.
It only takes one large loss to devastate an account and devastate the trader.
Stops are like medicine for your trading.
The longer you take before you swallow the bitter pill, the worse your condition is going to be.
Preventive medicine works so much better, it prevents small weaknesses from becoming serious diseases.
Our method of stops is very simple, always exit a trade when the reason for your entry no longer exists.
Notice I said exit, not stop.
We do not take stops, we exit.
Sometimes it’s a negative exit, but it is still an exit, not a stop.
A “stop loss” stops your loss, we are not interested in the trade becoming a loss.
Explain…as follows
ENTRY
If you have done your analysis right, you should be able to pinpoint an entry.
An entry is a trigger that starts a trend,
starts a wave in a trend,
starts a bounce,
starts a fade or a break out.
If you are accurate with your entry, then your exit should be very simple.
If you entered a trend, you exit when you know that the reason for your entry no longer exists, when the stock refuses to start your trend.
If you entered a breakout, you know the reason for your entry no longer exists when the stock returns back into your consolidation.
So how much is that?
Your stop, or negative exit, (if you did your home work and pinpointed your entry,) is Noise + Spread.
Noise is the normal fluctuation of the stock and spread is the difference between bid and ask.
Basically, if you add them together, it is the amount that the stock can pull back before you know that your entry is wrong.
For example, in day trading, most of our negative exits are less than 5 cents. Most of the stocks that we trade have less than 5 cents spread and noise. In Swing trading, most of our negative exits are less than 50 cents for the same reason.
Some people day trade with a dollar stop or even two dollars. If you do your home work and can pinpoint your entry, how many 5 cents negative exits can you take before you equal one point or two points?
Imagine having 20-40 attempts for the price of one.
---------------------------------------
There are three keys to success here:
1. Pinpoint your entry – You need to know exactly where to enter.
2. Know exactly where the reason for your entry no longer exists –Where on the chart does price have to go to invalidate your entry?
3. Re-entry – If the stock comes back and your setup is still valid, make sure that you re-enter.
Most of us pay less than $10 in commissions, which is a lot less than a devastating stop loss of multiple points.
If you have to pay $10 plus pennies for a trade that didn’t work, it is a business expense, not a stop loss. It protects you financially and psychologically. It allows you to re-enter the trade without any damages.
If you exit with an expense of $100, it will do a lot less damage than several thousands or your whole account. How would you feel if you spent a hundred bucks on a trade vs. lost several thousands on a gamble?
Traders need to get educated how to pinpoint their entries and know exactly when the trade is working or not, in order to keep stops down to business expenses, instead of serious losses.
The secret to longevity and prosperity in trading is knowing why you are entering, pinpointing your entries and preservation of your capital.
Preservation of capital is always more important than capital appreciation.
Hope this helps your trading in some way.
Dedicated to maximizing your profits,
Saturday
Tested Classic Trading Rules -
1. Plan your trades and trade your plans.
2. Hope and fear are the two greatest enemies of speculators.
3. Keep records of your trading results.
4. Maintain a positive attitude no matter how much you lose.
5. Avoid overconfidence——it could be your greatest enemy.
6. Continually set higher trading goals.
7. Stops are the key to success for many traders——limit your losses!
8. The most successful traders are those that trade long term.
9. Successful traders buy into bad news ＆ sell into good news.
10. The successful trader is not afraid to buy high ＆ sell low.
11. Successful traders have a well scheduled planned time for studying the markets.
12. Successful traders set profit objectives for each trade they enter.
13. Do not collect the opinions of others before entering trades——facts are priceless——opinions are worthless. In short successful traders isolate themselves from the opinions of others.
14. Continually strive for patience, perseverance, determination, and rational action.
15. Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.
16. Avoid getting in or out of the market too often.
17. The most profitable trading tool is simply following the trend.
18. Never change your position in the market without a good reason. When you make a trade, let it be for some good reason or according to a definite plan; then do not get out without a definite indication of a change in trend.
19. Losses make the speculator studious——not profits. Take advantage of every loss to improve your knowledge of market action.
20. The most difficult task in speculation is not prediction but self－control. Successful trading is difficult and frustrating. You are the most important element in the success equation.
21. The basic substance of price change is human emotion. Panic, fear, greed, insecurity, anxiety, stress, and uncertainty are the primary sources of short－term price change.
22. Bullish consensus is typically at its high when the market is at a top. Also there are few bulls at major bottoms.
23. Watch the spreads i.e., don't be bullish if inverses are narrowing.
24. Remember that a bear market will give up in one month what a bull market has taken 3 months to build.
25. Identify “the dominant factor” in each commodity. Be prepared to redefine this factor as conditions change.
26. Expand your sources for market info but limit your sources for market opinion.
27. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if market moves against you 20％ from your peak profit point.
28. It is never possible to know everything about anything. A commodity trader is in constant danger.
29. Successful trading requires four things. Knowledge, disciplined courage, money, and the energy to merge the first 3 properly.
30. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
31. The one essential ingredient to making money with money and keeping it is having an organized effort.
32. Unless you progress, you go backwards. Once you complete a trading goal it is crucial that you immediately set a new goal.
33. The art of concentration can help you become a great trader. In other words, set aside time to think, plan, meditate, investigate, research, analyze, evaluate and select your trades carefully.
34. Split your profits right down the middle and never risk more than 50％ of them again in the market.
35. The key to successful trading is in knowing yourself and in knowing your stress point.
36. The real difference between winners and losers is not so much native ability as it is discipline exercised in avoiding mistakes.
37. The greatest risk for a commodity trader is to rely on hope alone. Never substitute hope for facts. The greatest loss is loss of self－confidence.
38. You cannot perform very well for very long with your shoes nailed to the floor. In trading as in fencing there are the quick and the dead.
39. Remember Mark Twain: “only 10％ of the people think. 10％ think they think. The other 80％ would rather die than think.”
40. The man who goes to the top as a commodity trader does not do as he pleases. He has trained himself to choose correctly between the two freedoms: the freedom to do as he pleases, and the freedom to do what he must do.
41. Since there is always the possibility of surprise in thin, dead markets, less capital should be risked there than in markets which are broad and moving.
42. Limit the risk in any one trade to a maximum of 10％ and the risk in all open trades to a maximum of 25％ of trading capital. (risk = pct of available capital). Determine this each day, adding profits and subtracting losses in open trades, and combine this net figure with your trading capital.
43. It does not take much capital to trade a market if one has knowledge and understanding. St. Paul said, “when I am weak I am strong.”
44. Speech may be silver but “Silence is Golden”. Traders with the golden touch do not talk.
45. Common trading errors include: A) trading without good reasons. B) trading on hope rather than facts. C) overloading without regard for capital.
46. “I like the short side of the market because there is usually less company”. The mob is usually wrong. It is usually long.
47. A fatal mistake made by the fundamental trader is to take small profits. This is the result of limited vision ??? extremes always seem silly to men of so called good judgment.
48. Trade only when you have a good reason on an appraisal of fundamentals and using chart action for confirmation and timing of entry and exit.
49. Believe that “the big one is possible” ——be there when it starts. Have the gross power to act, be rested mentally and physically, and finally let your profits run and cut your losses quickly.
50. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
51.Commodity trading is the art of regarding fear as the greatest sin and giving up as the greatest mistake. It is the art of accepting failure as a step toward victory.
52.Have you taken a loss? Forget it quick. If you have taken a profit, forget it quicker. Don’t let ego and greed inhibit clear thinking and hard work.
53.The characteristics of realizing bull market are:
a.a fundamental bullish situation
b.a reluctance by specs to buy
c.an inversion or small carrying charge between cash and futures
d.business interests are either cautious or bullish
54.Always remember that weather markets are mercurial, extreme in price fluctuations, and very difficult to master. Forecasts of weather beyond a few days are not reliable.
55.One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity nearly always lies through the open door.
56.The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this, he is safe. When he ignores it, he is lost.
57.Somewhere a change is occurring that can make you rich.
58.Beware of “fools disease” (i.e. Waiting for trades that you’re sure are 100 pct profitable.) It is better never to let yourself believe that you are 100 pct sure of anything.
59.A known fundamental is a useless fundamental.
60.Major trends are seldom broken unless market goes against trend for more than 3 consecutive days.
61.If a market doesn’t do what you think it should and you’re tired of waiting ， you’d better be out of it.
62.Stay calm and maintain clear thinking when trading big positions.
63.Reevaluate your position in the market if charts have deteriorated and fundamentals have not developed as you expected.
64.Above all be mentally prepared for the rigors of each trading day from the time you get up each morning until you go to bed at night.
65.Do whatever is necessary to stay on top of the markets you are trading.
66.Believe that the market is stronger than you are. Do not try to fight the market.
67.Beware of large positions that can control your emotions and feelings. In other words don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
68.Capital preservation is just as important as capital appreciation.
69.When a market’s gotten away and you’ve missed the first leg you should still consider jumping in even if it is dangerous and difficult.
70.Work hard at understanding the key factor(s) motivating the market(s) you are trading. In other words, the harder you work the luckier you’ll be.
71.Remember that it’s better to trade a few big moves a year (and close them out profitably) than to trade constantly.
72.Set an objective for each trade you enter and get out when you meet it. Don’t be greedy!
73.Remember that for many commodities ，politics are more important than economics.
74.Never add to a losing position.
75.Beware of trying to pick tops or bottoms.
76. Worry about how much you can lose. Figure risk reward ratio ahead of trade. Strive for at least 3x potential profit vs. loss.
77. If it appears that lots of bulls are long ， be nervous!
78. If you have a good lead in the market and all the news seems too good to be true you’d better take profits.
79. The news always follows the market.
80. There is only one side to the market; and it is not the bull side or the bear side, but the right side.
91. In a bear market, it is always wise to cover if complete demoralization suddenly develops.
92. The principles of successful commodity speculation is based on the supposition that people will continue in the future to make the mistakes that they have made in the past.
93. In a bull market and particularly in booms, the public at first makes money, which it later looses simply by overstaying the bull market.
94. A bull market needs to be fed every day ， a bear market only once a week.
95. Never underestimatehow much time is necessary to wash out a market that is long.
96. Never buy the first rally and never sell the first break.
97. Be advised that it is better to be more interested in the market’s reaction to new information than in the piece of news itself.
98. Don’t diversify ， concentrate on a few commodities. More diversity reduces amount you can speculate with. Also too much to watch.
99. Don’t pioneer highs or lows. Let the market tell you a high or low has been made.
100. Keep some perspective. Trees don’t grow to the sky. Values don’t go to zero. What are histories and recent highs and lows， Loan levels， Loans are not necessarily price floors. CCC selling prices aren’t necessarily price ceilings.
101. “If you get in on Jones’ tip; get out on Jones’ tip”. If you are riding another person’s idea, ride it all the way.
102. Run early or not at all. Don’t be an eleven o’clock bull or a five o’clock bear.
103. Woodrow Wilson said, “a governments first priority is to organize the common interest against special interests”. Successful traders seek out market opportunities capitalizing on the reality that government’s first priority is rarely achieved.
104. People who buy headlines eventually end up selling newspapers.
105. If you do not know who you are, the market is an expensive place to find out.
106. Never give advice—the smart don’t need it and the stupid don’t heed it.
107. Disregard all prognostications. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word—nobody! Thus the successful trader bases no moves on what supposedly will happen but reacts instead to what does happen.
108. Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
109. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does console yourself by thinking of all the times when liquidating early preserved gains you would otherwise have lost.
110. When the ship starts to sink, don’t pray—jump!
111. Life never happens in a straight line. Any adult knows this. But we can too easily be hypnotized into forgetting it when contemplating a chart. Beware of the chartist’s illusion.
112. Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.
113. Whatever you do, whether you bet with the herd or against, think it through independently first.
114. Repeatedly reevaluate your open positions. Keep asking yourself: would I put my money into this if it were presented to me for the first time today? Is this trade progressing toward the ending position I envisioned?
115. It is a safe bet that the money lost by (short term) speculation is small compared with the gigantic sums lost by those who let their investments “ride”. Long term investors are the biggest gamblers as after they make a trade they often times stay with it and end up losing it all. The intelligent trader will . By acting promptly—hold losses to a minimum.
116. As a rule of thumb good trend lines should touch at least three previous highs or lows. The more points the line catches, the better the line.
117. Volume and open interest are as important to the technician as price.
118. The clearest and easiest way to determine a trend is from previous highs and lows. Higher highs and higher lows mark an uptrend, lower highs and lower lows mark a downtrend.
119. Don’t sell a quiet market after a fall because a low volume sell－off is actually a very bullish situation.
120. Prices are made in the minds of men, not in the soybean field: fear and greed can temporarily drive prices far beyond their so called real value.
121. When the market breaks through a weekly or monthly high, it is a buy signal. When it breaks through the previous weekly or monthly low, it is a sell signal.
122. Every sunken ship has a chart.
123. Take a trading break. A break will give you a detached view of the market and a fresh look at yourself and the way you want to trade for the next several weeks.
124. Assimilate into your very bones a set of trading rules that works for you.
125. The final phase in a bull move is an accelerated runaway near the top. In this phase, the market always makes you believe that you have underestimated the potential bull market. The temptation to continue pyramiding your position is strong as profits have now swelled to the point that you believe your account can stand any setback. It is imperative at this juncture to take profits on your pyramids and reduce the position back to base levels. The base position is then liquidated when it becomes apparent that the move has ended
1. Plan your trades and trade your plans.
2. Hope and fear are the two greatest enemies of speculators.
3. Keep records of your trading results.
4. Maintain a positive attitude no matter how much you lose.
5. Avoid overconfidence——it could be your greatest enemy.
6. Continually set higher trading goals.
7. Stops are the key to success for many traders——limit your losses!
8. The most successful traders are those that trade long term.
9. Successful traders buy into bad news ＆ sell into good news.
10. The successful trader is not afraid to buy high ＆ sell low.
11. Successful traders have a well scheduled planned time for studying the markets.
12. Successful traders set profit objectives for each trade they enter.
13. Do not collect the opinions of others before entering trades——facts are priceless——opinions are worthless. In short successful traders isolate themselves from the opinions of others.
14. Continually strive for patience, perseverance, determination, and rational action.
15. Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.
16. Avoid getting in or out of the market too often.
17. The most profitable trading tool is simply following the trend.
18. Never change your position in the market without a good reason. When you make a trade, let it be for some good reason or according to a definite plan; then do not get out without a definite indication of a change in trend.
19. Losses make the speculator studious——not profits. Take advantage of every loss to improve your knowledge of market action.
20. The most difficult task in speculation is not prediction but self－control. Successful trading is difficult and frustrating. You are the most important element in the success equation.
21. The basic substance of price change is human emotion. Panic, fear, greed, insecurity, anxiety, stress, and uncertainty are the primary sources of short－term price change.
22. Bullish consensus is typically at its high when the market is at a top. Also there are few bulls at major bottoms.
23. Watch the spreads i.e., don't be bullish if inverses are narrowing.
24. Remember that a bear market will give up in one month what a bull market has taken 3 months to build.
25. Identify “the dominant factor” in each commodity. Be prepared to redefine this factor as conditions change.
26. Expand your sources for market info but limit your sources for market opinion.
27. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if market moves against you 20％ from your peak profit point.
28. It is never possible to know everything about anything. A commodity trader is in constant danger.
29. Successful trading requires four things. Knowledge, disciplined courage, money, and the energy to merge the first 3 properly.
30. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
31. The one essential ingredient to making money with money and keeping it is having an organized effort.
32. Unless you progress, you go backwards. Once you complete a trading goal it is crucial that you immediately set a new goal.
33. The art of concentration can help you become a great trader. In other words, set aside time to think, plan, meditate, investigate, research, analyze, evaluate and select your trades carefully.
34. Split your profits right down the middle and never risk more than 50％ of them again in the market.
35. The key to successful trading is in knowing yourself and in knowing your stress point.
36. The real difference between winners and losers is not so much native ability as it is discipline exercised in avoiding mistakes.
37. The greatest risk for a commodity trader is to rely on hope alone. Never substitute hope for facts. The greatest loss is loss of self－confidence.
38. You cannot perform very well for very long with your shoes nailed to the floor. In trading as in fencing there are the quick and the dead.
39. Remember Mark Twain: “only 10％ of the people think. 10％ think they think. The other 80％ would rather die than think.”
40. The man who goes to the top as a commodity trader does not do as he pleases. He has trained himself to choose correctly between the two freedoms: the freedom to do as he pleases, and the freedom to do what he must do.
41. Since there is always the possibility of surprise in thin, dead markets, less capital should be risked there than in markets which are broad and moving.
42. Limit the risk in any one trade to a maximum of 10％ and the risk in all open trades to a maximum of 25％ of trading capital. (risk = pct of available capital). Determine this each day, adding profits and subtracting losses in open trades, and combine this net figure with your trading capital.
43. It does not take much capital to trade a market if one has knowledge and understanding. St. Paul said, “when I am weak I am strong.”
44. Speech may be silver but “Silence is Golden”. Traders with the golden touch do not talk.
45. Common trading errors include: A) trading without good reasons. B) trading on hope rather than facts. C) overloading without regard for capital.
46. “I like the short side of the market because there is usually less company”. The mob is usually wrong. It is usually long.
47. A fatal mistake made by the fundamental trader is to take small profits. This is the result of limited vision ??? extremes always seem silly to men of so called good judgment.
48. Trade only when you have a good reason on an appraisal of fundamentals and using chart action for confirmation and timing of entry and exit.
49. Believe that “the big one is possible” ——be there when it starts. Have the gross power to act, be rested mentally and physically, and finally let your profits run and cut your losses quickly.
50. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
51.Commodity trading is the art of regarding fear as the greatest sin and giving up as the greatest mistake. It is the art of accepting failure as a step toward victory.
52.Have you taken a loss? Forget it quick. If you have taken a profit, forget it quicker. Don’t let ego and greed inhibit clear thinking and hard work.
53.The characteristics of realizing bull market are:
a.a fundamental bullish situation
b.a reluctance by specs to buy
c.an inversion or small carrying charge between cash and futures
d.business interests are either cautious or bullish
54.Always remember that weather markets are mercurial, extreme in price fluctuations, and very difficult to master. Forecasts of weather beyond a few days are not reliable.
55.One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity nearly always lies through the open door.
56.The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this, he is safe. When he ignores it, he is lost.
57.Somewhere a change is occurring that can make you rich.
58.Beware of “fools disease” (i.e. Waiting for trades that you’re sure are 100 pct profitable.) It is better never to let yourself believe that you are 100 pct sure of anything.
59.A known fundamental is a useless fundamental.
60.Major trends are seldom broken unless market goes against trend for more than 3 consecutive days.
61.If a market doesn’t do what you think it should and you’re tired of waiting ， you’d better be out of it.
62.Stay calm and maintain clear thinking when trading big positions.
63.Reevaluate your position in the market if charts have deteriorated and fundamentals have not developed as you expected.
64.Above all be mentally prepared for the rigors of each trading day from the time you get up each morning until you go to bed at night.
65.Do whatever is necessary to stay on top of the markets you are trading.
66.Believe that the market is stronger than you are. Do not try to fight the market.
67.Beware of large positions that can control your emotions and feelings. In other words don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
68.Capital preservation is just as important as capital appreciation.
69.When a market’s gotten away and you’ve missed the first leg you should still consider jumping in even if it is dangerous and difficult.
70.Work hard at understanding the key factor(s) motivating the market(s) you are trading. In other words, the harder you work the luckier you’ll be.
71.Remember that it’s better to trade a few big moves a year (and close them out profitably) than to trade constantly.
72.Set an objective for each trade you enter and get out when you meet it. Don’t be greedy!
73.Remember that for many commodities ，politics are more important than economics.
74.Never add to a losing position.
75.Beware of trying to pick tops or bottoms.
76. Worry about how much you can lose. Figure risk reward ratio ahead of trade. Strive for at least 3x potential profit vs. loss.
77. If it appears that lots of bulls are long ， be nervous!
78. If you have a good lead in the market and all the news seems too good to be true you’d better take profits.
79. The news always follows the market.
80. There is only one side to the market; and it is not the bull side or the bear side, but the right side.
91. In a bear market, it is always wise to cover if complete demoralization suddenly develops.
92. The principles of successful commodity speculation is based on the supposition that people will continue in the future to make the mistakes that they have made in the past.
93. In a bull market and particularly in booms, the public at first makes money, which it later looses simply by overstaying the bull market.
94. A bull market needs to be fed every day ， a bear market only once a week.
95. Never underestimatehow much time is necessary to wash out a market that is long.
96. Never buy the first rally and never sell the first break.
97. Be advised that it is better to be more interested in the market’s reaction to new information than in the piece of news itself.
98. Don’t diversify ， concentrate on a few commodities. More diversity reduces amount you can speculate with. Also too much to watch.
99. Don’t pioneer highs or lows. Let the market tell you a high or low has been made.
100. Keep some perspective. Trees don’t grow to the sky. Values don’t go to zero. What are histories and recent highs and lows， Loan levels， Loans are not necessarily price floors. CCC selling prices aren’t necessarily price ceilings.
101. “If you get in on Jones’ tip; get out on Jones’ tip”. If you are riding another person’s idea, ride it all the way.
102. Run early or not at all. Don’t be an eleven o’clock bull or a five o’clock bear.
103. Woodrow Wilson said, “a governments first priority is to organize the common interest against special interests”. Successful traders seek out market opportunities capitalizing on the reality that government’s first priority is rarely achieved.
104. People who buy headlines eventually end up selling newspapers.
105. If you do not know who you are, the market is an expensive place to find out.
106. Never give advice—the smart don’t need it and the stupid don’t heed it.
107. Disregard all prognostications. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word—nobody! Thus the successful trader bases no moves on what supposedly will happen but reacts instead to what does happen.
108. Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
109. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does console yourself by thinking of all the times when liquidating early preserved gains you would otherwise have lost.
110. When the ship starts to sink, don’t pray—jump!
111. Life never happens in a straight line. Any adult knows this. But we can too easily be hypnotized into forgetting it when contemplating a chart. Beware of the chartist’s illusion.
112. Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.
113. Whatever you do, whether you bet with the herd or against, think it through independently first.
114. Repeatedly reevaluate your open positions. Keep asking yourself: would I put my money into this if it were presented to me for the first time today? Is this trade progressing toward the ending position I envisioned?
115. It is a safe bet that the money lost by (short term) speculation is small compared with the gigantic sums lost by those who let their investments “ride”. Long term investors are the biggest gamblers as after they make a trade they often times stay with it and end up losing it all. The intelligent trader will . By acting promptly—hold losses to a minimum.
116. As a rule of thumb good trend lines should touch at least three previous highs or lows. The more points the line catches, the better the line.
117. Volume and open interest are as important to the technician as price.
118. The clearest and easiest way to determine a trend is from previous highs and lows. Higher highs and higher lows mark an uptrend, lower highs and lower lows mark a downtrend.
119. Don’t sell a quiet market after a fall because a low volume sell－off is actually a very bullish situation.
120. Prices are made in the minds of men, not in the soybean field: fear and greed can temporarily drive prices far beyond their so called real value.
121. When the market breaks through a weekly or monthly high, it is a buy signal. When it breaks through the previous weekly or monthly low, it is a sell signal.
122. Every sunken ship has a chart.
123. Take a trading break. A break will give you a detached view of the market and a fresh look at yourself and the way you want to trade for the next several weeks.
124. Assimilate into your very bones a set of trading rules that works for you.
125. The final phase in a bull move is an accelerated runaway near the top. In this phase, the market always makes you believe that you have underestimated the potential bull market. The temptation to continue pyramiding your position is strong as profits have now swelled to the point that you believe your account can stand any setback. It is imperative at this juncture to take profits on your pyramids and reduce the position back to base levels. The base position is then liquidated when it becomes apparent that the move has ended
Ten Trading Mistakes
1. Refusing to define a loss.
2. Not liquidating a losing trade, even after you have acknowledged the trade's potential is greatly diminished.
3. Getting locked into a specific opinion or belief about market direction. From a psychological perspective this is equivalent to trying to control the market with your expectation of what it will do: "I'm right, the market is wrong."
4. Focusing on price and the monetary value of a trade, instead of the potential for the market to move based on its behavior and structure.
5. Revenge-trading as if you were trying get back at the market for what it took away from you.
6. Not reversing your position even when you clearly sense a change in market direction.
7. Not following the rules of the trading system.
8. Planning for a move or feeling one building, but then finding yourself immobilized to hit the bid or offer, and therefore denying yourself the opportunity to profit.
9. Not acting on your instincts or intuition.
10. Establishing a consistent pattern of trading success over a period of time, and then giving your winnings back to the market in one or two trades and starting the cycle over again.
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The Ten Trading Commandments
1) Trade for success not for money.
2) Strive for discipline.
3) Know yourself and how well you handle risk.
4) Lose your ego.
5) Know your risk level and when you hit your stop point exit the trade.
6) Know when to trade and when to wait.
7) Love your losers like you love your winners.
8) Losing trades will be your best teachers.
9) After three losing trades in a row, take a break.
10) Don't break any of the above nin rules.
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The Ten Cardinal Rules
1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don't rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events.
7. Be willing to face problems, understand them, and recognize that they are in some way related to your behavior.
8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
9. Understand the larger framework in which trading occurs— how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.
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1. Refusing to define a loss.
2. Not liquidating a losing trade, even after you have acknowledged the trade's potential is greatly diminished.
3. Getting locked into a specific opinion or belief about market direction. From a psychological perspective this is equivalent to trying to control the market with your expectation of what it will do: "I'm right, the market is wrong."
4. Focusing on price and the monetary value of a trade, instead of the potential for the market to move based on its behavior and structure.
5. Revenge-trading as if you were trying get back at the market for what it took away from you.
6. Not reversing your position even when you clearly sense a change in market direction.
7. Not following the rules of the trading system.
8. Planning for a move or feeling one building, but then finding yourself immobilized to hit the bid or offer, and therefore denying yourself the opportunity to profit.
9. Not acting on your instincts or intuition.
10. Establishing a consistent pattern of trading success over a period of time, and then giving your winnings back to the market in one or two trades and starting the cycle over again.
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The Ten Trading Commandments
1) Trade for success not for money.
2) Strive for discipline.
3) Know yourself and how well you handle risk.
4) Lose your ego.
5) Know your risk level and when you hit your stop point exit the trade.
6) Know when to trade and when to wait.
7) Love your losers like you love your winners.
8) Losing trades will be your best teachers.
9) After three losing trades in a row, take a break.
10) Don't break any of the above nin rules.
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The Ten Cardinal Rules
1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don't rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events.
7. Be willing to face problems, understand them, and recognize that they are in some way related to your behavior.
8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
9. Understand the larger framework in which trading occurs— how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.
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ACTION acronym (1)
Currency Trading Success Tips (1)
METHOD (10)
MIND (3)
MONEY (1)
RISK (2)
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ACTION acronym
Accept all possible losses before entering the balttle.
Centre yourself in body,mind and spirit.
Trust your skills ,and intuition.
Imagine success clearly eithin the mind's eye.
Only exist in the present moment to control fear.
Never stop or look back once actions has begin.
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Currency Trading Success - 6 Tips to Increase Your Profits
If you want to increase your profit potential and achieve currency trading success then the simple tips will help you.
Some are at normal investment wisdom, but as the bulk of traders don't ever achieve long term currency success, so that's Good!
Here are your 7 tips for greater currency trading success and bigger profits.
1. Focus on the long term trends
Currency trends mirror the health of the economy generally and economic trends last years and these are reflected in currency trends.
Forget day trading, it's the equivalent to flipping a coin. You can't predict such short term movements so don't try.
When flipping a coin the odds are even, but keep in mind in currency trading the fact that you have to place a stop and you have to overcome both slippage and commission, means you will take a thumping loss.
Day trading won't lead to currency trading success for you, but will simply make your broker rich.
2. Trade in frequently
Many traders want to be in the market all the time and act like gamblers trading for the sake of trading if you DON'T want currency trading success do this!
Only trade this moves with the best profit potential.
Keep in mind you may need to be patient - You can't hurry the market, so don't try.
3. Don't diversify too much
If you don't risk anything you won't make anything.
Diversification is the enemy of making really big gains.
To make really big profits you have to have the courage to take calculated risks on the really good trades and go for maximum profits.
This is the only way you will make really big gains - Period.
4. Use a simple system
There is no correlation between how complicated a system is and how much profit it will make.
On the contrary, simple systems are more robust than complicated ones and will cope better in the face of brutal market conditions.
A good example of a simple system is a breakout system, which anyone can understand.
You must always make sure you understand the system's logic.
If you do, you will have the discipline to follow it through inevitable losing periods, so never trade a system where the logic is not revealed.
A great method to learn is the Gann method of trading, its different, it's revealed and it made him $55 million.
In conclusion, get a system you understand, that's simple and that has been proven to be successful.
5. Never Seek or Give Opinions
If you win at currency trading you will often be trading in the opposite direction to the majority so don't discuss your trades with other people, they will put you off and don't give opinions either.
Trade in isolation.
Independent thought, is one of the keys to currency trading success so don't get distracted.
6. Stay with the majors
Stay with the major currencies: US $, British Pound, Euro Swiss Franc and Japanese yen.
These all have good liquidity and good trends.
Don't trade minor currencies that can feature erratic moves or currencies that don't have a long history.
The majors will give you plenty of opportunities so use them.
Above are six general rules for currency trading success and bigger profits.
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What do I need to know about Spreads?
A spread refers to the price difference between a nearby (spot) contract month vs. the next closest (or more distant delivery months) in the same commodity. The nearby month of a contract is usually cheaper than the distant month (this is due to the "Cost of Carry" - insurance, storage and interest for distant months and is known as a "discounted" market). Occasionally a market may "invert" and the nearby month will sell for more money than the distant months. This is known as a "premium" market. Commercial buying causes this phenomenon because of an urgent need for the commodity. The "cross" from a normal or "discounted" market (for the nearby or spot month) to an inverted or "premium" market is bullish. Below are some things to keep in mind when evaluating spreads:
1. It is bullish when a premium occurs, but it is very important to look at the relationship of the premium to the market itself. In other words, how is the spread performing with respect to price? You can time your entry into the market by looking for divergence between the spread and market price.
2. A declining market may also have an increasing premium in the spread, which can indicate that a bullish condition may be developing, even though price is declining.
3. If spread premium falters while a market rallies, it can be an indication that the market is nearing a top and is bearish.
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Positive Expectancy Systems
If you have a positive expectancy trading system, the only factors that determine how much money you will make per year are the number of trades the system generates, how much capital you allocate to the system, and how accurately you implement the trading signals. If you do not know whether your trading system is positive expectancy then why are you trading it? Expectancy is calculated using the profit or loss on each trade (net of trading implementation
costs) divided by the initial risk (using your stop loss) and then taking the average of this number of a series of trades. Systems that have positive expectancy will make money on average and those with negative expectancy will lose money.
Successful traders only trade systems where the odds of success are in their favor (i.e. the system is positive expectancy) so they know that making money is the result of accurately implementing the system and not just pure luck.
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Perfectionism in Trading
There are only a few ways to work to change the habit to a favorable habit to trade successful...
Almost everyone carry over from their life’s knowledge and experience to trading and quickly find out that these don’t work so well in trading. Traits that made these traders in their daily lives successful and respected are little useful. The need to win every trade is a weakness must be addressed.
There are 2 types of perfectionism: one that would work in trading and one that doesn’t. The difference is simple: perfectionism in flawless executing of the rules and trading plans and perfectionism in having all winning trades or perfect record. These two perceptions make important differences in trading. If a perfectionist cannot change, at least he can change in more constructive way to help him succeed.
What is the difference and how does it affect trading? When a trader decides and expects a perfect record in winning trades, this is a setup for failure. Why? Because no trade is perfect and no trade will result in a winner. This is uncertainty and no can predict the next trade will be a winner.
Perfectionist must have complete control and this plays a major conflict with an uncertain outcome of the market. It’s a fact of life. No winningest team ever had a perfect record. Understanding this and accept failure as a process will lead to the second and better part of perfectionism: that is perfecting the execution of entries and exits and in following the rules. Once he has a winning method, it’s only a matter of executing the entry correctly, that is, getting in at the right price and not chasing or not hesitate and let the entry go when the signal is given. Perfect execution also means exiting at the right time and price; not waiting to get one more point due to wanting more or take exit early just to record that profit or not wanting to lose more when the stop has not been touched yet. By deviating from the rules and plans, sloppy execution is sure to follow. Perfectionism requires discipline and for perfectionists, discipline is the major positive attribute to success in trading. So perfectionists in many ways have the right mindset to succeed but he must channel that mindset in a correct way.
There are few ways to work toward channeling the actions properly. Here are a few suggestions:
1) Forget about performance and results numbers (i.e. P/L, Wins vs. Losses). These numbers only blur the plan and increase the anxiety on not losing on next trade. This aggravates the proper mindset to prepare to trade properly. Perfectionists will not execute well and will try to focus on buying low (bargain hunting to win) when the entry is not right.
2) Create the trading plan and write it into details to avoid ambiguity. This helps prevent loosely interpreted actions and end with too much leeway and perfect execution won’t be successful.
3) Focus on the charts and work toward identifying and preparing the entry and exits. Having these numbers in mind will keep the focus on the executing at the right prices.
4) Focus on the Risk:Reward ratio in mind. Having this ratio will keep the execution precise because any miscue will change the ratio in negative way. If the ratio is set, chances of the making the perfect entry and exits are higher.
5) Be picky with trades. Perfectionists love the trade to go right. Waiting for the right setup to come will reinforce good habits: perfect plan and execution.
These are only a few ways to work to change the habit to a favorable habit to trade successful. Exercise it with vigor and the payoff will be seen almost immediately.
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Process and Outcome
Individual decision can be badly thought through, and yet be successful, or exceedingly well throught through, but be unsuccessful, because the recognized possibility of failure in fact occur. But over time, more thoughtful decision-making will lead to better results, and more thoughtful decision making can be enouraged decisions on how well they were made rather than on outcome
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Entries, Exits, Emotions and Trading Profitably
Entries & exits, emotions and making money.
Do you have difficulty or challenges with any of these?
It's understandable if you do. These are the most common challenges for traders, and the most burning questions that are brought up on a very regular basis. I know exactly how you feel. The frustration of knowing that you're smart enough to make it work, yet losing money or just breaking even really is nerve-racking.
Seeing your money disappear with trades where the market moves against you and you hang on to it, hoping that it will turn around, then having it turn into a sizable loss is just gut-wrenching.
Even worse is when you miss out on one that you pick right or either act too late or hang on to it too long and watch your profits vaporize.
Then the confusion sets in. You get gun-shy about even entering trades and your confidence is circling the drain. It's a downward spiral that is totally opposite of what you expected when you got into trading.
There is hope, though.
You are definitely smart enough, and have what it takes. I know that because you would never have been in a position to even consider trading if you hadn't already proved it.
You're experiencing challenges with the entries and exits, emotions and making money because those challenges are the result of what happened when you first started trading. Nobody told you about it because they didn't know.
What happened is a series of events that seem perfectly normal and logical, on the surface. But when you look deeper, you see that these events actually set people up to do things that they wouldn't do otherwise.
Like jump into a treacherous endeavor unaware of what they're in for and unprepared to deal with the traps and pitfalls that await them.
Like putting substantial sums of money at high risk, without properly planning the trades out and having an exit strategy fully in place.
Like I said, I know how you feel. I've been there and felt the anguish of watching my money disappear in trading. Like you, I got lured into trading naive of what really happens and what it takes to truly trade profitably.
Fortunately, after considerable research and reflection, I was able to see the forest for the trees and discover the truth of what happens and why so many smart people don't make money trading.
When I first made the discovery and thought on the matter, it almost sounded like a mental and emotional trap that would be part of a conspiracy, although it could never be proved.
It sure does seem like a lot of good people get sucked into trading and their money taken by a very small few.
If you're considering trading or if you've already begun and you're finding difficulty, then you'd better get your guard up and think twice before continuing.
You have real money at stake, and the odds are more against you than you realize. You can turns those odds around, if you can get out of the "get rich quick" frame of mind and take a more realistic look at trading, with some good guidance from someone who's already been down that road.
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Fibonacci - Who Was He And How Could He Improve My Stock Trading Profits?
The word Fibonacci means a lot of things to a lot of different people. For mathematicians, Fibonacci is an important number sequence. For some painters, sculptors, and other visual artists, Fibonacci is a principle theory of the arts. For traders, businessmen, economists and the like, Fibonacci is a system that can efficiently predict market trends. Yet, for most of us, Fibonacci sounds incredibly complex and something that we'd rather not discover. But what exactly is Fibonacci? What does it mean and for what is it used?
Fibonacci, which means son of Bonacci, is actually a nickname used by the famous Italian mathematician and businessman Leonardo Pisano. Bonacci, on the other hand, is the nickname of his father and it means 'good natured' or 'simple'. While Fibonacci was born in Italy, he spent most of his childhood years in Bugia (now Bejaia), a Mediterranean port in Algeria where his father, Guilielmo, worked as a consul for the merchants of Pisa. It is in Bugia where he learned the Arabic numeral system, and later as he traversed the rest of the Mediterranean world, he learned more of the Arabic mathematical system and its practical uses.
In 1200, Fibonacci ended his travels and returned to Europe. There he wrote a number of books that disclosed the mathematical skills he had learned in his Mediterranean travels. Among his works that were published are the Practica Geometriae, Flos, Liber quadratorum, Di minor guisa, and his commentary on Book X of Euclid's Elements; the last two mentioned, unfortunately, are already lost. His Liber quadratorum, or Book of Squares, is probably his most magnificent book, but it was not his most popular work. His most popular work was rather the Liber Abaci, his first book that was written in 1202 where he introduced to the Europeans the Arabic numerical and mathematical system. In this book, he also taught the Europeans how to use such mathematical system in accounting and in trading. Most importantly, it is in the Liber Abaci where he introduced the Fibonacci numbers and sequence for which he is best remembered today.
The Fibonacci numbers, or sequence, was first used in Liber Abaci as a solution to a problem regarding the ideal population of rabbits. It is a recursive number sequence that starts with 0 and 1, and the succeeding numbers being the sum of the two numbers preceding it. This number sequence efficiently predicted the ideal growth of the population of rabbits. Later, mathematicians and scientist discovered that the Fibonacci number sequence has a lot of other uses aside from just predicting the population growth of rabbits. They have discovered that the Fibonacci sequence, in fact, occurs in many various patterns of nature.
What started out as a way of counting rabbits has now found a large number of other uses and applications. And as our present day scholars continue to study about the Fibonacci sequence, more and more uses for it continue to be discovered. Today, there are a variety of applications where the Fibonacci sequence, and its derivatives, are being used. It has found use in many computer programs. A ratio derived from the Fibonacci sequence, called the Golden Mean, has been considered by ancient Greeks to be the ideal aesthetic ratio and is now being widely used by many visual artists in their works. The Fibonacci trading system, which is an efficient way of predicting future trends in the world financial markets, has also become popular to expert traders and aspiring traders as well.
Who in the past might have known that such a simple number sequence like the Fibonacci numbers would have a great impact on a lot of things today? Maybe, not even Fibonacci himself.
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More Trading Hints and Tips
1. OPPORTUNITY. There are dozens of these every day, unfortunately you can’t buy them all, so only pick the top 10 and then narrow them down to 2 to 3.
This is done by using your buying criteria which is part of your trading plan which you already have written down. (Hopefully you have one?)
2. BUYING and SELLING. I have a pre planned strategy which I have developed by trial and error; this was achieved by learning by my trading mistakes and the mistakes of others.
3. PATIENCE.This is definitely a virtue worth developing. Sometimes the market is going up in the right direction, but is not going as fast upwards as you would like.
Be patient and use a “stop loss” to lock in those profits. However small they may be.
Also don’t always be in a hurry to “buy that next share” just because you have that money burning a hole in your pocket.
Do your homework and then you have chosen the right share for the right reasons and not just because it looked good
4. STRESS.If it is hurting! Don’t do it, cut your losses or be content with a small profit and get out.
5. THINK and PLAN AHEAD. After I have bought a stock and once it has been cleared. I immediately put a sell order in at the price/ percentage that I had previously worked out using my trading plan.
This trading plan is not set in concrete as it is revised usually on a monthly basis. And always be prepared to improve on it where necessary.
Depending on the volume and the stock’s volatility I occasionally vary my profit margin upwards. If I do this, I always keep a watchful eye on its movement and put in a stop loss to lock in those precious profits.
6.HOPE.This has no place in a trader’s plan, as Hope leads to procrastination (putting thing off).And this will lead to losses which you can ill afford.
7. WORRYING. The same thing applies as above; if you are worrying about a stock then it is time to sell it.
8. FUN. You should enjoy trading for if isn’t fun then it’s time to put your money into managed funds and quit trading.
9. RESPONSIBILITY. Take responsibility for your trading mistakes and learn from them. No one else made you buy that stock.
10. CONFIDENCE.Have faith in your abilities. At all times be a “Student” for you never know it all. And the minute you become complacent, something nasty comes along to bring you back to earth with a thump. I hope these tips will give you some assistance in finding you profitable shares and improves your trading skills.
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Day Trading Systems - Why You Will NEVER Win Day Trading
Not a day goes by without me seeing yet another day trading system with claims that it can make me huge gains. I normally for fun ask for the real track record and of course don’t receive one. Fact is day trading systems will lose you money as by their very nature they can’t work here’s why.
Firstly
If you are ever considering buying a day trading system ask for the real time track record over the long term ( this means 2 years + ) don’t accept a hypothetical track record! Let’s see we know the prices in hindsight can we make a profit?
Of course we can! Anyone can win with a hypothetical track record, they're worthless, so ask for the real time record and you won’t get one here’s why.
1. Short term moves are random
The currency markets trade trillions of dollars per day and short term moves within any daily period are random. You could flip a coin or use a day trading system your odds of winning are the same.
2. Volatility
Is random in short time frames and prices can simply go anywhere. As most day trading systems bang on about keeping losses small, stops are normally taken out creating a loss. Furthermore, your chances of losing are greater as the odds of being taken out are high.
3. Day trading systems never run profits
A day trading system keep your losses small (albeit you have massive odds of being stopped out) but they never seem to do the other essential of making money in FOREX and that’s run profits. Day trading systems normally have short term profit targets and are grateful for any profit they can get.
So what do you have? Lots of small losses and no real profits to make up for them. This means you get wiped out and normally wiped out quickly.
The Myth and The Reality
The myth is that day trading systems make money, the reality is day trading is one of the best ways to not only lose your equity, but lose it quickly. People day trade because they are greedy or simply fools. When I read a lot of the sales blurb of day trading systems its obvious these vendors have never traded, they make their money selling courses.
They make money from book sales not from trading, so they win you lose. Saw one promising me 90% successful trades for a few hundred dollars. Well if I had one of those, would be making millions and certainly wouldn’t sell it I would be to busy enjoying my riches.
Finally
If you want to trade currency markets you can make money, but be realistic and sensible and make sure that you don’t fall for the hype of day trading systems.
If you do get ready to lose your equity and lose it quickly.
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Trading With Discipline Key To Market Timing Success
It is not enough to have a successful market timing strategy if that strategy is not traded with discipline. It is also not enough to trade with discipline if you are overly aggressive with those funds allocated to market timing, and cannot handle the resulting volatility.
Many market timers think that the more they trade, the better they will do. But in reality, market timers do not need to trade aggressively to do well. There are four critical issues market timers must deal with; strategy, discipline, money management and diversification.
Market Timers Must Have An Edge
At FibTimer, our "edge" is trend trading. We know that the financial markets are usually in a trend, either up or down. In fact, our research, going back many years, tells us they are in trends over 80% of the time.
This knowledge is our edge. We know there are times that the markets are not trending, but that these times do not last long. We keep our losses small during non-trending markets using disciplined risk management. And, by trading every trend that occurs, we know absolutely that we will "never" miss a trend.
With the markets trending 80% of the time, we are profitable 80% of the time. This does not mean we are profitable on 80% of our trades. It means that because 80% of the time the markets are trending, and because we trade all trends, we will be making money in those trends.
By limiting losses, and allowing profits to ride, we use our edge to time the markets with great success.
Disciplined Execution
Once you have an edge, you have to be able to execute. Some common trading errors; not taking trades until you see if they are profitable, or jumping the gun and taking trades ahead of time because you "think" a signal will be issued soon, can be a disaster to your profitability.
By not sticking to a plan, you allow emotions to rule your finances, and that places you right in with the majority of investors. Those who are the cause of the market's volatility.
The "herd" followers.
At FibTimer, all of our strategies are non-discretionary. Emotions are not allowed. Our strategies offer disciplined execution of non-emotional buy and sell signals.
The reason for following any timing strategy is to remove yourself from making emotional trades. To remove yourself from the herd, which is often headed in the wrong direction. Towards the nearest cliff.
If you are concerned that following a disciplined non-discretionary timing strategy can result in small losses at times, just try trading the markets using your instincts. The deadly results of emotional trading are usually evident quickly.
A second reason for following a non-discretionary timing strategy is, it gets you out of losing buy and sell signals fast while limiting draw downs. You are not subject to the emotional pitfalls of trading, such as holding onto a trade in hopes it will come back to profitability, then finally making a panic exit after taking a large loss.
The disciplined execution of a timing strategy avoids all of these pitfalls. You just follow the buy and sell signals with the absolute assurance that your losses will be limited and you will never miss a trend. Over any fair time frame, you will beat the markets.
Diversification... Not Just A Word
Many times impulses are difficult to control because of emotional states.
Overly aggressive investment allocations can ruin even a good timing strategy with excessive drawdowns, while overly conservative allocations of capital will not optimize your total returns.
If you are a conservative investor who wishes to use market timing to protect against losses in a bear markets, do NOT invest 100% of your funds in an aggressive bull and bear strategy that you are not prepared for. Yes, they make a great deal of money over time, but aggressive timing strategies do have more frequent buy and sell signals, and more frequent small losses.
If, as a conservative investor you are unable to handle those losses, you are likely to exit the trade, thus locking the losses in at just the wrong time!
Stick to strategies that fit your emotions. Market timers should know themselves and use timing strategies that they will be able to stick with over long time frames. Patience is the market timing key to success!
Even aggressive market timers should not time 100% of their funds in a single aggressive strategy. Diversification is not just a word, it is a prerequisite to having a successful timing strategy.
At Fibtimer, we rarely invest more than 20-30% of our own funds in bull and bear strategies. The rest is diversified in sector funds (Sector Timer), a small percentage in the Gold Timer, Bond Timer and Smallcap Timer.
Using at least some diversification takes the stress out of investing, and makes it much easier to follow buy and sell signals with discipline.
Conclusion
At FibTimer, we never question buy and sell signals and follow them faithfully. Over the years, our disciplined approach has resulted in excellent gains, year after year. We hope that we can instill this disciplined trading into all of our subscribers.
It does not take blind faith. What it takes is a realization that our own emotions and instincts are usually wrong, and that a non-discretionary timing strategy that trades all trends and limits losses in non-trending periods, is the most successful approach to profiting in the stock market.
Once you realize this, you will relax and allow the strategies to successfully grow your investments as they are designed to do.
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Cut Losses Short
Cut losses short is the sister rule to the let profit run, and is usually just as difficult to implement. In the same way that profitability comes from a few large winning trades, capital preservation comes from avoiding the few large losers that the market will toss your way each year. Setting a maximum loss point before you enter the trade so you know before-hand approximately how much you are risking on this particular position is relatively straightforward. You simply need to have a exit price that says to you this trade is a loser and I will exit before it gets any bigger. Due to gaps at the open, or limit moves in futures we can never be 100%
certain that we can get out with our maximum loss, but simply having the rules, and always sticking to it will save us from the nasty trades that just keep on going and going against our position until we have lost more than many winning trades can make back.
If you have a losing position that is at you maximum loss point, just get out. Do not hope that it will turn around. Given that trades are either winners or losers, and this one is shouting Loser at you, the chances that it will turn around and become a large winner is tiny. Why risk any more money on this losing trade, when you could simply close it out (accept the loss) and move on. This will leave you in a much better place financially and mentally, than holding the position and hoping it will go back your way. Even if it did do this, the mental energy and negative feelings from holding the losing position are not worth it. Always stick to your rules and exit a position if it hits your stop point.
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Consistent And Discipline
In order to realize the full potential of your trading systems it is critical that you take every trading entry, adjust every stop, and close out every trade as and when your system says you should do. This takes extreme confidence in your trading systems, good robust reliable technology, and the mental discipline to stick to your trading plan whatever happens.
An underlying assumption about being consistent and disciplined is that you have a pre-defined plan for every situation you may face in your trading, so that you know how you are defining what being consistent is. Your plan needs to include at least the following items:
All your trading rules for entering, adding to, and exiting positions
What you will do if your trading computer, internet connection, broker, power, telephone
etc. fails
What you will do if you are unable to trade
What you will do if you lose X% of your account
What you will do if all the markets are closed and you cant exit your positions
Unless you write the answers down to all these issues, you cannot be consistent and disciplined in your approach to trading and if you lose money you will not know whether it is because you didnt follow your plan, because your plan is incomplete, because your systems do not work, or simply because you are going through a losing period.
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Psychological
The goal of any trader is to turn profits on a regular basis, yet so few people ever really make consistent money as traders. What accounts for the small percentage of traders who are consistently successful is psychological—the consistent winners think differently from everyone else.
The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mind-set—aunique set of attitudes—that allows them to remain disciplined, focused,and, above all, confident in spite of the adverse conditions.
Those traders who have confidence in their own trades, who trust themselves to do what needs to be done without hesitation, are the ones who become successful.They
no longer fear the erratic behavior of the market. They learn to focus on the information that helps them spot opportunities to make a profit, rather than focusing on the information that reinforces their fears.
You don't need to know what's going to happen next to make money; anything can happen, and every moment is unique, meaning every edge and outcome is truly a unique experience.
The trader that it's his attitude and "state of mind" that determine his results.
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The Psychology of Investing
Investors need to pay a great deal of attention to what influences their behavior. Three tendencies are particularly relevant for investor: consistency and commitment, social validation, and scarcity.
Psychologist discovered that after bettors at a racetrack put down their money, they are more confident in the prospects of their horses winning than immediately before they placed their bets. After making a decision, we feel both internal and external pressure to remain consistent to that view, even if subsequent evidence questions the validity of the initial decision.
So an investor who has taken a position in a particular stock, recommended it publicly, or encouraged colleagues to participate, we feel the need to stick with the call. Related to this tendency is the confirmation trap: post decision openness to confirming data coupled with disavowal of denial of dis confirming data.One useful technique to mitigate consistency is to think about the world in ranges of values with associated probabilities instead of a series of single points. Acknowledging multiple scenarios provides psychological shelter to change views when appropriate.
There is a large body of work about the role of social validation in investing. Investing is an inherently social activity, and investors periodically act in concert. Awareness of breakdowns in the diversity of opinion and respect for extreme valuations can help offset the deleterious impact of social validation.
Finally, scarcity has an important role in investing (and certainly plays a large role in the minds of corporate executives). Investors in particular seek informational scarcity. The challenge is to distinguish between what is truly scarce information and what is not. One means to do this is to reverse engineer market expectations- in other words, figure out what the market already thinks.
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Money Management
The overwhelming reason that traders win or lose is not because of their entry method, but because of their money management skills.
By "money management" it simply mean keeping losses and drawdowns to an absolute minimum while making the most of opportunities for profit.Good Trader must keep his losses to a minimum to ensure his survival. If you keep your losses to a minimum on every trade, you will have 80 percent of the battle won.
Important‑if the market starts to move parabolically or has a rangeexpansion move, take profits on the entire position. This is very likely climax!
'When the ducks quack, feed them." In other words, when everybody wants something, that's probably the perfect spot to sell it to them. The price has already been bid way up. Emotions drive the markets to extremes, and these extremes are the ideal spot to exit our trades.
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Dont Take Too Much Risk
One of the most devastating mistakes any trader can make is risking too much of their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game. Why risk so much you could be prevented from continuing? There is a saying in
poker than going all-in (risking all your chips) works every time but once. This is true of trading.
If you risk all your account on every trade it only takes one loser to wipe you out (and no trading method is 100% accurate), so you will be out of the game at some point it is only a question of time.
In general, we only risk 1-3% of the available capital allocated to a system on any individual trade. This is calculated using the size and, the difference between our entry price and our maximum stop price, and the amount of capital allocated to the system. With the win probability
and ratio of size of winning trades to losing trades we are almost certain never to lose all of our trading capital. In fact, the chance of us hitting our maximum drawdown for the year is tiny.
All trades should be of a size that almost seems insignificant. If you are worried about the size of a trade then it is too big and you should reduce the size immediately. Remember that longevity is the key to making money by trading slowly over a long time with minimal risk, is always preferable to rapidly with too much risk.
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Risk and Stock Trading Fees: The Two Barriers To Overcome If You Want A Successful Trading Career.
You know the old joke:
"How do you make a million in the stock market? Start with two million?"
There is no way around it, risk and stock market fees are a part of trading that you can`t avoid. But, you can manage your risk. You can also manage the brokerage stock trading fees that eat away at your trading float. All it takes is some planning and making good choices.
If you think you`re ready to start trading, look carefully at where you`re getting your money from. Maybe you`ve been considering trading for a while and built up some savings. That`s good planning. Or maybe you`re considering borrowing money. This is generally a bad idea. Maxing out your credit cards is a quick and easy way to get cash, but the effects can be devastating.
It`s hard enough to worry about making trading profits along with the stock market fees you have to pay. But, worrying about the debt servicing on your credit cards builds too much stress. You will be too concerned with making payments to be concerned about good trading. Don Miller talks about this in Trading Markets World Meet the Traders when he tells new traders to worry about trading well, not making money. One of the best ways to learn trading is to begin on a part-time basis. This allows you to hone your skills while you still have an income stream. As a trader, you need to realize the risk you`re taking by simply putting your money into the market.
With good money management, you`ll be able to limit your risk. But, there is a kind of risk that can`t be minimized, and that`s "market riskâ€. This is the risk that the market might not be there tomorrow. Just by putting money in the market you are putting it at risk, so make sure you only trade with money you are willing to lose. This isn`t to say that you are going to lose all your capital - it`s just to say that you need to be able to focus on trading well, not trading to make money. See, you can only do this if you work with money you can afford to lose.
Once you`ve got your capital together, you can consider the next barrier to trading, stock trading fees. Although there is no perfect amount of capital to start trading with it`s no secret that the bigger the trading float you begin with, the easier it is to trade and the less percentage of stock trading fees you will have to pay. This is because of the single biggest expense in trading - brokerage stock trading fees.
Every broker has many different stock trading fees, but many charge flat stock trading fees per trade. These flat stock trading fees are easier on traders with larger fund sizes. For example, to obtain a better understanding on how stock trading fees work, let`s consider two traders. One is starting with an opening position of $1,000 and the second is starting with an opening position of $10,000. All traders are charged flat stock market fees of $100. So, our first trader, with a position of $1,000 has to make back ten percent of his float on each trade before he breaks even. But, our second trader only has to realize a one percent gain to reach his break-even point. This doesn`t mean that you can`t start trading with a smaller float, but if you do you are at a bit of a disadvantage.
However, you can use your trading float size to help determine your trading system. If you have a very small trading float, it`s recommended that you look at a long-term system. With a long-term system, you will be incurring far fewer stock trading fees. A short-term system, where you are receiving lots of buy and sell signals will chew up your trading float very quickly with the cost of the different stock trading fees.
This is why short-term systems, such as day-trading, are best suited to larger trading sizes - it is easier on the stock trading fees. I actually recommend that when you begin trading that you look at a longer-term system. You can manage a long-term system while still working full-time. Once you are successful with the long-term time frame, you might look at moving to a shorter-term system and focussing more time on your trading.
You can mange both risk and stock trading fees with planning, and by making good choices. Your level of capital will be set by what you can afford, and what you are comfortable risking. How that capital grows will be set by the time-frame of the systems your planning to trade, and the instruments you trade with. from winter's barrenness, they desert us too quickly!
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Currency Trading Success Tips (1)
METHOD (10)
MIND (3)
MONEY (1)
RISK (2)
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ACTION acronym
Accept all possible losses before entering the balttle.
Centre yourself in body,mind and spirit.
Trust your skills ,and intuition.
Imagine success clearly eithin the mind's eye.
Only exist in the present moment to control fear.
Never stop or look back once actions has begin.
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Currency Trading Success - 6 Tips to Increase Your Profits
If you want to increase your profit potential and achieve currency trading success then the simple tips will help you.
Some are at normal investment wisdom, but as the bulk of traders don't ever achieve long term currency success, so that's Good!
Here are your 7 tips for greater currency trading success and bigger profits.
1. Focus on the long term trends
Currency trends mirror the health of the economy generally and economic trends last years and these are reflected in currency trends.
Forget day trading, it's the equivalent to flipping a coin. You can't predict such short term movements so don't try.
When flipping a coin the odds are even, but keep in mind in currency trading the fact that you have to place a stop and you have to overcome both slippage and commission, means you will take a thumping loss.
Day trading won't lead to currency trading success for you, but will simply make your broker rich.
2. Trade in frequently
Many traders want to be in the market all the time and act like gamblers trading for the sake of trading if you DON'T want currency trading success do this!
Only trade this moves with the best profit potential.
Keep in mind you may need to be patient - You can't hurry the market, so don't try.
3. Don't diversify too much
If you don't risk anything you won't make anything.
Diversification is the enemy of making really big gains.
To make really big profits you have to have the courage to take calculated risks on the really good trades and go for maximum profits.
This is the only way you will make really big gains - Period.
4. Use a simple system
There is no correlation between how complicated a system is and how much profit it will make.
On the contrary, simple systems are more robust than complicated ones and will cope better in the face of brutal market conditions.
A good example of a simple system is a breakout system, which anyone can understand.
You must always make sure you understand the system's logic.
If you do, you will have the discipline to follow it through inevitable losing periods, so never trade a system where the logic is not revealed.
A great method to learn is the Gann method of trading, its different, it's revealed and it made him $55 million.
In conclusion, get a system you understand, that's simple and that has been proven to be successful.
5. Never Seek or Give Opinions
If you win at currency trading you will often be trading in the opposite direction to the majority so don't discuss your trades with other people, they will put you off and don't give opinions either.
Trade in isolation.
Independent thought, is one of the keys to currency trading success so don't get distracted.
6. Stay with the majors
Stay with the major currencies: US $, British Pound, Euro Swiss Franc and Japanese yen.
These all have good liquidity and good trends.
Don't trade minor currencies that can feature erratic moves or currencies that don't have a long history.
The majors will give you plenty of opportunities so use them.
Above are six general rules for currency trading success and bigger profits.
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What do I need to know about Spreads?
A spread refers to the price difference between a nearby (spot) contract month vs. the next closest (or more distant delivery months) in the same commodity. The nearby month of a contract is usually cheaper than the distant month (this is due to the "Cost of Carry" - insurance, storage and interest for distant months and is known as a "discounted" market). Occasionally a market may "invert" and the nearby month will sell for more money than the distant months. This is known as a "premium" market. Commercial buying causes this phenomenon because of an urgent need for the commodity. The "cross" from a normal or "discounted" market (for the nearby or spot month) to an inverted or "premium" market is bullish. Below are some things to keep in mind when evaluating spreads:
1. It is bullish when a premium occurs, but it is very important to look at the relationship of the premium to the market itself. In other words, how is the spread performing with respect to price? You can time your entry into the market by looking for divergence between the spread and market price.
2. A declining market may also have an increasing premium in the spread, which can indicate that a bullish condition may be developing, even though price is declining.
3. If spread premium falters while a market rallies, it can be an indication that the market is nearing a top and is bearish.
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Positive Expectancy Systems
If you have a positive expectancy trading system, the only factors that determine how much money you will make per year are the number of trades the system generates, how much capital you allocate to the system, and how accurately you implement the trading signals. If you do not know whether your trading system is positive expectancy then why are you trading it? Expectancy is calculated using the profit or loss on each trade (net of trading implementation
costs) divided by the initial risk (using your stop loss) and then taking the average of this number of a series of trades. Systems that have positive expectancy will make money on average and those with negative expectancy will lose money.
Successful traders only trade systems where the odds of success are in their favor (i.e. the system is positive expectancy) so they know that making money is the result of accurately implementing the system and not just pure luck.
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Perfectionism in Trading
There are only a few ways to work to change the habit to a favorable habit to trade successful...
Almost everyone carry over from their life’s knowledge and experience to trading and quickly find out that these don’t work so well in trading. Traits that made these traders in their daily lives successful and respected are little useful. The need to win every trade is a weakness must be addressed.
There are 2 types of perfectionism: one that would work in trading and one that doesn’t. The difference is simple: perfectionism in flawless executing of the rules and trading plans and perfectionism in having all winning trades or perfect record. These two perceptions make important differences in trading. If a perfectionist cannot change, at least he can change in more constructive way to help him succeed.
What is the difference and how does it affect trading? When a trader decides and expects a perfect record in winning trades, this is a setup for failure. Why? Because no trade is perfect and no trade will result in a winner. This is uncertainty and no can predict the next trade will be a winner.
Perfectionist must have complete control and this plays a major conflict with an uncertain outcome of the market. It’s a fact of life. No winningest team ever had a perfect record. Understanding this and accept failure as a process will lead to the second and better part of perfectionism: that is perfecting the execution of entries and exits and in following the rules. Once he has a winning method, it’s only a matter of executing the entry correctly, that is, getting in at the right price and not chasing or not hesitate and let the entry go when the signal is given. Perfect execution also means exiting at the right time and price; not waiting to get one more point due to wanting more or take exit early just to record that profit or not wanting to lose more when the stop has not been touched yet. By deviating from the rules and plans, sloppy execution is sure to follow. Perfectionism requires discipline and for perfectionists, discipline is the major positive attribute to success in trading. So perfectionists in many ways have the right mindset to succeed but he must channel that mindset in a correct way.
There are few ways to work toward channeling the actions properly. Here are a few suggestions:
1) Forget about performance and results numbers (i.e. P/L, Wins vs. Losses). These numbers only blur the plan and increase the anxiety on not losing on next trade. This aggravates the proper mindset to prepare to trade properly. Perfectionists will not execute well and will try to focus on buying low (bargain hunting to win) when the entry is not right.
2) Create the trading plan and write it into details to avoid ambiguity. This helps prevent loosely interpreted actions and end with too much leeway and perfect execution won’t be successful.
3) Focus on the charts and work toward identifying and preparing the entry and exits. Having these numbers in mind will keep the focus on the executing at the right prices.
4) Focus on the Risk:Reward ratio in mind. Having this ratio will keep the execution precise because any miscue will change the ratio in negative way. If the ratio is set, chances of the making the perfect entry and exits are higher.
5) Be picky with trades. Perfectionists love the trade to go right. Waiting for the right setup to come will reinforce good habits: perfect plan and execution.
These are only a few ways to work to change the habit to a favorable habit to trade successful. Exercise it with vigor and the payoff will be seen almost immediately.
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Process and Outcome
Individual decision can be badly thought through, and yet be successful, or exceedingly well throught through, but be unsuccessful, because the recognized possibility of failure in fact occur. But over time, more thoughtful decision-making will lead to better results, and more thoughtful decision making can be enouraged decisions on how well they were made rather than on outcome
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Entries, Exits, Emotions and Trading Profitably
Entries & exits, emotions and making money.
Do you have difficulty or challenges with any of these?
It's understandable if you do. These are the most common challenges for traders, and the most burning questions that are brought up on a very regular basis. I know exactly how you feel. The frustration of knowing that you're smart enough to make it work, yet losing money or just breaking even really is nerve-racking.
Seeing your money disappear with trades where the market moves against you and you hang on to it, hoping that it will turn around, then having it turn into a sizable loss is just gut-wrenching.
Even worse is when you miss out on one that you pick right or either act too late or hang on to it too long and watch your profits vaporize.
Then the confusion sets in. You get gun-shy about even entering trades and your confidence is circling the drain. It's a downward spiral that is totally opposite of what you expected when you got into trading.
There is hope, though.
You are definitely smart enough, and have what it takes. I know that because you would never have been in a position to even consider trading if you hadn't already proved it.
You're experiencing challenges with the entries and exits, emotions and making money because those challenges are the result of what happened when you first started trading. Nobody told you about it because they didn't know.
What happened is a series of events that seem perfectly normal and logical, on the surface. But when you look deeper, you see that these events actually set people up to do things that they wouldn't do otherwise.
Like jump into a treacherous endeavor unaware of what they're in for and unprepared to deal with the traps and pitfalls that await them.
Like putting substantial sums of money at high risk, without properly planning the trades out and having an exit strategy fully in place.
Like I said, I know how you feel. I've been there and felt the anguish of watching my money disappear in trading. Like you, I got lured into trading naive of what really happens and what it takes to truly trade profitably.
Fortunately, after considerable research and reflection, I was able to see the forest for the trees and discover the truth of what happens and why so many smart people don't make money trading.
When I first made the discovery and thought on the matter, it almost sounded like a mental and emotional trap that would be part of a conspiracy, although it could never be proved.
It sure does seem like a lot of good people get sucked into trading and their money taken by a very small few.
If you're considering trading or if you've already begun and you're finding difficulty, then you'd better get your guard up and think twice before continuing.
You have real money at stake, and the odds are more against you than you realize. You can turns those odds around, if you can get out of the "get rich quick" frame of mind and take a more realistic look at trading, with some good guidance from someone who's already been down that road.
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Fibonacci - Who Was He And How Could He Improve My Stock Trading Profits?
The word Fibonacci means a lot of things to a lot of different people. For mathematicians, Fibonacci is an important number sequence. For some painters, sculptors, and other visual artists, Fibonacci is a principle theory of the arts. For traders, businessmen, economists and the like, Fibonacci is a system that can efficiently predict market trends. Yet, for most of us, Fibonacci sounds incredibly complex and something that we'd rather not discover. But what exactly is Fibonacci? What does it mean and for what is it used?
Fibonacci, which means son of Bonacci, is actually a nickname used by the famous Italian mathematician and businessman Leonardo Pisano. Bonacci, on the other hand, is the nickname of his father and it means 'good natured' or 'simple'. While Fibonacci was born in Italy, he spent most of his childhood years in Bugia (now Bejaia), a Mediterranean port in Algeria where his father, Guilielmo, worked as a consul for the merchants of Pisa. It is in Bugia where he learned the Arabic numeral system, and later as he traversed the rest of the Mediterranean world, he learned more of the Arabic mathematical system and its practical uses.
In 1200, Fibonacci ended his travels and returned to Europe. There he wrote a number of books that disclosed the mathematical skills he had learned in his Mediterranean travels. Among his works that were published are the Practica Geometriae, Flos, Liber quadratorum, Di minor guisa, and his commentary on Book X of Euclid's Elements; the last two mentioned, unfortunately, are already lost. His Liber quadratorum, or Book of Squares, is probably his most magnificent book, but it was not his most popular work. His most popular work was rather the Liber Abaci, his first book that was written in 1202 where he introduced to the Europeans the Arabic numerical and mathematical system. In this book, he also taught the Europeans how to use such mathematical system in accounting and in trading. Most importantly, it is in the Liber Abaci where he introduced the Fibonacci numbers and sequence for which he is best remembered today.
The Fibonacci numbers, or sequence, was first used in Liber Abaci as a solution to a problem regarding the ideal population of rabbits. It is a recursive number sequence that starts with 0 and 1, and the succeeding numbers being the sum of the two numbers preceding it. This number sequence efficiently predicted the ideal growth of the population of rabbits. Later, mathematicians and scientist discovered that the Fibonacci number sequence has a lot of other uses aside from just predicting the population growth of rabbits. They have discovered that the Fibonacci sequence, in fact, occurs in many various patterns of nature.
What started out as a way of counting rabbits has now found a large number of other uses and applications. And as our present day scholars continue to study about the Fibonacci sequence, more and more uses for it continue to be discovered. Today, there are a variety of applications where the Fibonacci sequence, and its derivatives, are being used. It has found use in many computer programs. A ratio derived from the Fibonacci sequence, called the Golden Mean, has been considered by ancient Greeks to be the ideal aesthetic ratio and is now being widely used by many visual artists in their works. The Fibonacci trading system, which is an efficient way of predicting future trends in the world financial markets, has also become popular to expert traders and aspiring traders as well.
Who in the past might have known that such a simple number sequence like the Fibonacci numbers would have a great impact on a lot of things today? Maybe, not even Fibonacci himself.
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More Trading Hints and Tips
1. OPPORTUNITY. There are dozens of these every day, unfortunately you can’t buy them all, so only pick the top 10 and then narrow them down to 2 to 3.
This is done by using your buying criteria which is part of your trading plan which you already have written down. (Hopefully you have one?)
2. BUYING and SELLING. I have a pre planned strategy which I have developed by trial and error; this was achieved by learning by my trading mistakes and the mistakes of others.
3. PATIENCE.This is definitely a virtue worth developing. Sometimes the market is going up in the right direction, but is not going as fast upwards as you would like.
Be patient and use a “stop loss” to lock in those profits. However small they may be.
Also don’t always be in a hurry to “buy that next share” just because you have that money burning a hole in your pocket.
Do your homework and then you have chosen the right share for the right reasons and not just because it looked good
4. STRESS.If it is hurting! Don’t do it, cut your losses or be content with a small profit and get out.
5. THINK and PLAN AHEAD. After I have bought a stock and once it has been cleared. I immediately put a sell order in at the price/ percentage that I had previously worked out using my trading plan.
This trading plan is not set in concrete as it is revised usually on a monthly basis. And always be prepared to improve on it where necessary.
Depending on the volume and the stock’s volatility I occasionally vary my profit margin upwards. If I do this, I always keep a watchful eye on its movement and put in a stop loss to lock in those precious profits.
6.HOPE.This has no place in a trader’s plan, as Hope leads to procrastination (putting thing off).And this will lead to losses which you can ill afford.
7. WORRYING. The same thing applies as above; if you are worrying about a stock then it is time to sell it.
8. FUN. You should enjoy trading for if isn’t fun then it’s time to put your money into managed funds and quit trading.
9. RESPONSIBILITY. Take responsibility for your trading mistakes and learn from them. No one else made you buy that stock.
10. CONFIDENCE.Have faith in your abilities. At all times be a “Student” for you never know it all. And the minute you become complacent, something nasty comes along to bring you back to earth with a thump. I hope these tips will give you some assistance in finding you profitable shares and improves your trading skills.
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Day Trading Systems - Why You Will NEVER Win Day Trading
Not a day goes by without me seeing yet another day trading system with claims that it can make me huge gains. I normally for fun ask for the real track record and of course don’t receive one. Fact is day trading systems will lose you money as by their very nature they can’t work here’s why.
Firstly
If you are ever considering buying a day trading system ask for the real time track record over the long term ( this means 2 years + ) don’t accept a hypothetical track record! Let’s see we know the prices in hindsight can we make a profit?
Of course we can! Anyone can win with a hypothetical track record, they're worthless, so ask for the real time record and you won’t get one here’s why.
1. Short term moves are random
The currency markets trade trillions of dollars per day and short term moves within any daily period are random. You could flip a coin or use a day trading system your odds of winning are the same.
2. Volatility
Is random in short time frames and prices can simply go anywhere. As most day trading systems bang on about keeping losses small, stops are normally taken out creating a loss. Furthermore, your chances of losing are greater as the odds of being taken out are high.
3. Day trading systems never run profits
A day trading system keep your losses small (albeit you have massive odds of being stopped out) but they never seem to do the other essential of making money in FOREX and that’s run profits. Day trading systems normally have short term profit targets and are grateful for any profit they can get.
So what do you have? Lots of small losses and no real profits to make up for them. This means you get wiped out and normally wiped out quickly.
The Myth and The Reality
The myth is that day trading systems make money, the reality is day trading is one of the best ways to not only lose your equity, but lose it quickly. People day trade because they are greedy or simply fools. When I read a lot of the sales blurb of day trading systems its obvious these vendors have never traded, they make their money selling courses.
They make money from book sales not from trading, so they win you lose. Saw one promising me 90% successful trades for a few hundred dollars. Well if I had one of those, would be making millions and certainly wouldn’t sell it I would be to busy enjoying my riches.
Finally
If you want to trade currency markets you can make money, but be realistic and sensible and make sure that you don’t fall for the hype of day trading systems.
If you do get ready to lose your equity and lose it quickly.
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Trading With Discipline Key To Market Timing Success
It is not enough to have a successful market timing strategy if that strategy is not traded with discipline. It is also not enough to trade with discipline if you are overly aggressive with those funds allocated to market timing, and cannot handle the resulting volatility.
Many market timers think that the more they trade, the better they will do. But in reality, market timers do not need to trade aggressively to do well. There are four critical issues market timers must deal with; strategy, discipline, money management and diversification.
Market Timers Must Have An Edge
At FibTimer, our "edge" is trend trading. We know that the financial markets are usually in a trend, either up or down. In fact, our research, going back many years, tells us they are in trends over 80% of the time.
This knowledge is our edge. We know there are times that the markets are not trending, but that these times do not last long. We keep our losses small during non-trending markets using disciplined risk management. And, by trading every trend that occurs, we know absolutely that we will "never" miss a trend.
With the markets trending 80% of the time, we are profitable 80% of the time. This does not mean we are profitable on 80% of our trades. It means that because 80% of the time the markets are trending, and because we trade all trends, we will be making money in those trends.
By limiting losses, and allowing profits to ride, we use our edge to time the markets with great success.
Disciplined Execution
Once you have an edge, you have to be able to execute. Some common trading errors; not taking trades until you see if they are profitable, or jumping the gun and taking trades ahead of time because you "think" a signal will be issued soon, can be a disaster to your profitability.
By not sticking to a plan, you allow emotions to rule your finances, and that places you right in with the majority of investors. Those who are the cause of the market's volatility.
The "herd" followers.
At FibTimer, all of our strategies are non-discretionary. Emotions are not allowed. Our strategies offer disciplined execution of non-emotional buy and sell signals.
The reason for following any timing strategy is to remove yourself from making emotional trades. To remove yourself from the herd, which is often headed in the wrong direction. Towards the nearest cliff.
If you are concerned that following a disciplined non-discretionary timing strategy can result in small losses at times, just try trading the markets using your instincts. The deadly results of emotional trading are usually evident quickly.
A second reason for following a non-discretionary timing strategy is, it gets you out of losing buy and sell signals fast while limiting draw downs. You are not subject to the emotional pitfalls of trading, such as holding onto a trade in hopes it will come back to profitability, then finally making a panic exit after taking a large loss.
The disciplined execution of a timing strategy avoids all of these pitfalls. You just follow the buy and sell signals with the absolute assurance that your losses will be limited and you will never miss a trend. Over any fair time frame, you will beat the markets.
Diversification... Not Just A Word
Many times impulses are difficult to control because of emotional states.
Overly aggressive investment allocations can ruin even a good timing strategy with excessive drawdowns, while overly conservative allocations of capital will not optimize your total returns.
If you are a conservative investor who wishes to use market timing to protect against losses in a bear markets, do NOT invest 100% of your funds in an aggressive bull and bear strategy that you are not prepared for. Yes, they make a great deal of money over time, but aggressive timing strategies do have more frequent buy and sell signals, and more frequent small losses.
If, as a conservative investor you are unable to handle those losses, you are likely to exit the trade, thus locking the losses in at just the wrong time!
Stick to strategies that fit your emotions. Market timers should know themselves and use timing strategies that they will be able to stick with over long time frames. Patience is the market timing key to success!
Even aggressive market timers should not time 100% of their funds in a single aggressive strategy. Diversification is not just a word, it is a prerequisite to having a successful timing strategy.
At Fibtimer, we rarely invest more than 20-30% of our own funds in bull and bear strategies. The rest is diversified in sector funds (Sector Timer), a small percentage in the Gold Timer, Bond Timer and Smallcap Timer.
Using at least some diversification takes the stress out of investing, and makes it much easier to follow buy and sell signals with discipline.
Conclusion
At FibTimer, we never question buy and sell signals and follow them faithfully. Over the years, our disciplined approach has resulted in excellent gains, year after year. We hope that we can instill this disciplined trading into all of our subscribers.
It does not take blind faith. What it takes is a realization that our own emotions and instincts are usually wrong, and that a non-discretionary timing strategy that trades all trends and limits losses in non-trending periods, is the most successful approach to profiting in the stock market.
Once you realize this, you will relax and allow the strategies to successfully grow your investments as they are designed to do.
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Cut Losses Short
Cut losses short is the sister rule to the let profit run, and is usually just as difficult to implement. In the same way that profitability comes from a few large winning trades, capital preservation comes from avoiding the few large losers that the market will toss your way each year. Setting a maximum loss point before you enter the trade so you know before-hand approximately how much you are risking on this particular position is relatively straightforward. You simply need to have a exit price that says to you this trade is a loser and I will exit before it gets any bigger. Due to gaps at the open, or limit moves in futures we can never be 100%
certain that we can get out with our maximum loss, but simply having the rules, and always sticking to it will save us from the nasty trades that just keep on going and going against our position until we have lost more than many winning trades can make back.
If you have a losing position that is at you maximum loss point, just get out. Do not hope that it will turn around. Given that trades are either winners or losers, and this one is shouting Loser at you, the chances that it will turn around and become a large winner is tiny. Why risk any more money on this losing trade, when you could simply close it out (accept the loss) and move on. This will leave you in a much better place financially and mentally, than holding the position and hoping it will go back your way. Even if it did do this, the mental energy and negative feelings from holding the losing position are not worth it. Always stick to your rules and exit a position if it hits your stop point.
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Consistent And Discipline
In order to realize the full potential of your trading systems it is critical that you take every trading entry, adjust every stop, and close out every trade as and when your system says you should do. This takes extreme confidence in your trading systems, good robust reliable technology, and the mental discipline to stick to your trading plan whatever happens.
An underlying assumption about being consistent and disciplined is that you have a pre-defined plan for every situation you may face in your trading, so that you know how you are defining what being consistent is. Your plan needs to include at least the following items:
All your trading rules for entering, adding to, and exiting positions
What you will do if your trading computer, internet connection, broker, power, telephone
etc. fails
What you will do if you are unable to trade
What you will do if you lose X% of your account
What you will do if all the markets are closed and you cant exit your positions
Unless you write the answers down to all these issues, you cannot be consistent and disciplined in your approach to trading and if you lose money you will not know whether it is because you didnt follow your plan, because your plan is incomplete, because your systems do not work, or simply because you are going through a losing period.
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Psychological
The goal of any trader is to turn profits on a regular basis, yet so few people ever really make consistent money as traders. What accounts for the small percentage of traders who are consistently successful is psychological—the consistent winners think differently from everyone else.
The defining characteristic that separates the consistent winners from everyone else is this: The winners have attained a mind-set—aunique set of attitudes—that allows them to remain disciplined, focused,and, above all, confident in spite of the adverse conditions.
Those traders who have confidence in their own trades, who trust themselves to do what needs to be done without hesitation, are the ones who become successful.They
no longer fear the erratic behavior of the market. They learn to focus on the information that helps them spot opportunities to make a profit, rather than focusing on the information that reinforces their fears.
You don't need to know what's going to happen next to make money; anything can happen, and every moment is unique, meaning every edge and outcome is truly a unique experience.
The trader that it's his attitude and "state of mind" that determine his results.
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The Psychology of Investing
Investors need to pay a great deal of attention to what influences their behavior. Three tendencies are particularly relevant for investor: consistency and commitment, social validation, and scarcity.
Psychologist discovered that after bettors at a racetrack put down their money, they are more confident in the prospects of their horses winning than immediately before they placed their bets. After making a decision, we feel both internal and external pressure to remain consistent to that view, even if subsequent evidence questions the validity of the initial decision.
So an investor who has taken a position in a particular stock, recommended it publicly, or encouraged colleagues to participate, we feel the need to stick with the call. Related to this tendency is the confirmation trap: post decision openness to confirming data coupled with disavowal of denial of dis confirming data.One useful technique to mitigate consistency is to think about the world in ranges of values with associated probabilities instead of a series of single points. Acknowledging multiple scenarios provides psychological shelter to change views when appropriate.
There is a large body of work about the role of social validation in investing. Investing is an inherently social activity, and investors periodically act in concert. Awareness of breakdowns in the diversity of opinion and respect for extreme valuations can help offset the deleterious impact of social validation.
Finally, scarcity has an important role in investing (and certainly plays a large role in the minds of corporate executives). Investors in particular seek informational scarcity. The challenge is to distinguish between what is truly scarce information and what is not. One means to do this is to reverse engineer market expectations- in other words, figure out what the market already thinks.
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Money Management
The overwhelming reason that traders win or lose is not because of their entry method, but because of their money management skills.
By "money management" it simply mean keeping losses and drawdowns to an absolute minimum while making the most of opportunities for profit.Good Trader must keep his losses to a minimum to ensure his survival. If you keep your losses to a minimum on every trade, you will have 80 percent of the battle won.
Important‑if the market starts to move parabolically or has a rangeexpansion move, take profits on the entire position. This is very likely climax!
'When the ducks quack, feed them." In other words, when everybody wants something, that's probably the perfect spot to sell it to them. The price has already been bid way up. Emotions drive the markets to extremes, and these extremes are the ideal spot to exit our trades.
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Dont Take Too Much Risk
One of the most devastating mistakes any trader can make is risking too much of their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game. Why risk so much you could be prevented from continuing? There is a saying in
poker than going all-in (risking all your chips) works every time but once. This is true of trading.
If you risk all your account on every trade it only takes one loser to wipe you out (and no trading method is 100% accurate), so you will be out of the game at some point it is only a question of time.
In general, we only risk 1-3% of the available capital allocated to a system on any individual trade. This is calculated using the size and, the difference between our entry price and our maximum stop price, and the amount of capital allocated to the system. With the win probability
and ratio of size of winning trades to losing trades we are almost certain never to lose all of our trading capital. In fact, the chance of us hitting our maximum drawdown for the year is tiny.
All trades should be of a size that almost seems insignificant. If you are worried about the size of a trade then it is too big and you should reduce the size immediately. Remember that longevity is the key to making money by trading slowly over a long time with minimal risk, is always preferable to rapidly with too much risk.
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Risk and Stock Trading Fees: The Two Barriers To Overcome If You Want A Successful Trading Career.
You know the old joke:
"How do you make a million in the stock market? Start with two million?"
There is no way around it, risk and stock market fees are a part of trading that you can`t avoid. But, you can manage your risk. You can also manage the brokerage stock trading fees that eat away at your trading float. All it takes is some planning and making good choices.
If you think you`re ready to start trading, look carefully at where you`re getting your money from. Maybe you`ve been considering trading for a while and built up some savings. That`s good planning. Or maybe you`re considering borrowing money. This is generally a bad idea. Maxing out your credit cards is a quick and easy way to get cash, but the effects can be devastating.
It`s hard enough to worry about making trading profits along with the stock market fees you have to pay. But, worrying about the debt servicing on your credit cards builds too much stress. You will be too concerned with making payments to be concerned about good trading. Don Miller talks about this in Trading Markets World Meet the Traders when he tells new traders to worry about trading well, not making money. One of the best ways to learn trading is to begin on a part-time basis. This allows you to hone your skills while you still have an income stream. As a trader, you need to realize the risk you`re taking by simply putting your money into the market.
With good money management, you`ll be able to limit your risk. But, there is a kind of risk that can`t be minimized, and that`s "market riskâ€. This is the risk that the market might not be there tomorrow. Just by putting money in the market you are putting it at risk, so make sure you only trade with money you are willing to lose. This isn`t to say that you are going to lose all your capital - it`s just to say that you need to be able to focus on trading well, not trading to make money. See, you can only do this if you work with money you can afford to lose.
Once you`ve got your capital together, you can consider the next barrier to trading, stock trading fees. Although there is no perfect amount of capital to start trading with it`s no secret that the bigger the trading float you begin with, the easier it is to trade and the less percentage of stock trading fees you will have to pay. This is because of the single biggest expense in trading - brokerage stock trading fees.
Every broker has many different stock trading fees, but many charge flat stock trading fees per trade. These flat stock trading fees are easier on traders with larger fund sizes. For example, to obtain a better understanding on how stock trading fees work, let`s consider two traders. One is starting with an opening position of $1,000 and the second is starting with an opening position of $10,000. All traders are charged flat stock market fees of $100. So, our first trader, with a position of $1,000 has to make back ten percent of his float on each trade before he breaks even. But, our second trader only has to realize a one percent gain to reach his break-even point. This doesn`t mean that you can`t start trading with a smaller float, but if you do you are at a bit of a disadvantage.
However, you can use your trading float size to help determine your trading system. If you have a very small trading float, it`s recommended that you look at a long-term system. With a long-term system, you will be incurring far fewer stock trading fees. A short-term system, where you are receiving lots of buy and sell signals will chew up your trading float very quickly with the cost of the different stock trading fees.
This is why short-term systems, such as day-trading, are best suited to larger trading sizes - it is easier on the stock trading fees. I actually recommend that when you begin trading that you look at a longer-term system. You can manage a long-term system while still working full-time. Once you are successful with the long-term time frame, you might look at moving to a shorter-term system and focussing more time on your trading.
You can mange both risk and stock trading fees with planning, and by making good choices. Your level of capital will be set by what you can afford, and what you are comfortable risking. How that capital grows will be set by the time-frame of the systems your planning to trade, and the instruments you trade with. from winter's barrenness, they desert us too quickly!
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Only buy stocks when the market declines 10% from that date a year ago, which happens once or twice a decade.— Eugene D. Brody (Oppenheimer Capital)
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Falling
You know a country is falling apart when even the government will not accept its own currency.— Jim Rogers (Financier, Adventure Capitalist, b. 1942)
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Humble
Become more humble as the market goes your way.— Bernard Baruch
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Success
No profession requires more hard work, intelligence, patience, and mental discipline than successful speculation.— Robert Rhea
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Mistake
The worst mistake investors make is taking their profits too soon, and their losses too long.— Michael Price (Mutual Shares Fund)
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Success
Success is going from failure to failure without loss of enthusiasm.— Winston Churchill (British statesman, 1874-1965)
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Return
In investing, the return you want should depend on whether you want to eat well or sleep well. — J. Kenfield Morley
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Earning
When a company reports higher earnings for its first quarter (over its previous year’s first quarter), chances are almost five to one it will also have increased earnings in its second quarter. — Niederhoffer, Cross & Zeckhauser
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Falling
You know a country is falling apart when even the government will not accept its own currency.— Jim Rogers (Financier, Adventure Capitalist, b. 1942)
----------------------
Humble
Become more humble as the market goes your way.— Bernard Baruch
----------------------
Success
No profession requires more hard work, intelligence, patience, and mental discipline than successful speculation.— Robert Rhea
----------------------
Mistake
The worst mistake investors make is taking their profits too soon, and their losses too long.— Michael Price (Mutual Shares Fund)
----------------------
Success
Success is going from failure to failure without loss of enthusiasm.— Winston Churchill (British statesman, 1874-1965)
-----------------------
Return
In investing, the return you want should depend on whether you want to eat well or sleep well. — J. Kenfield Morley
-----------------------
Earning
When a company reports higher earnings for its first quarter (over its previous year’s first quarter), chances are almost five to one it will also have increased earnings in its second quarter. — Niederhoffer, Cross & Zeckhauser
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Day traders end each business day flat, with no positions. They are immune to any adverse economic news that might break while the markets are closed, and this immunity is deemed one of the advantages of day trading. Because fundamental market factors change very slowly, day trading decisions are mostly based on technical analysis. Price support and resistance levels are especially important; They can be established with a few days of price action.
The requirements for successful day trading are
(1) a liquid, volatile futures/STOCKS market;
(2) a futures brokerage firm that offers online order entry, low commissions, and good FASTER trade executions;
(3) access to up-to-the-minute market and price information;
(4) a willingness to spend a large part of the business day tracking price movements and placing buy or sell orders; and (5) a strong stomach.
Seasoned day traders do not recommend having more than one futures position on at any one time. If you are juggling two or more day trades, you won't be able to give any one of them the attention it requires.
There are risks of loss associated with Day Trading.
The requirements for successful day trading are
(1) a liquid, volatile futures/STOCKS market;
(2) a futures brokerage firm that offers online order entry, low commissions, and good FASTER trade executions;
(3) access to up-to-the-minute market and price information;
(4) a willingness to spend a large part of the business day tracking price movements and placing buy or sell orders; and (5) a strong stomach.
Seasoned day traders do not recommend having more than one futures position on at any one time. If you are juggling two or more day trades, you won't be able to give any one of them the attention it requires.
There are risks of loss associated with Day Trading.
There are Futures and options.
First let us see some interesting things about options
These categories need a bit education,a bit more study,a bit more alertness to deadline dates(options may expire worthless beyond expiry dates),need more funds as compared to stocks.
First thing to trade options,thanks to a backward sighted government,you need to be an income tax payer and need to be having a PAN number,
only then you are eligible.
Income tax?
What can you expect from a finance ministry who if left free and unchecked would like to tax a 10000 rupee cash withdrawal by common man from a bank? All the Harvard education goes down to tax the common mans meagre earnings.It is no wonder the government seems to have no idea about day to day cost of living in cities.Thanks the communist party who keep things under control. Enough of that useless stuff.
What are options?
A Call Option
In the case of an equity option, a contract that gives the buyer the right, but not the obligation, to purchase a set amount of stock (usually 100 shares) at a predetermined price anytime before the contract expires (American Style option) or at expiration only (European Style Option). The predetermined price is known as the strike price.
A Put Option
In the case of an equity option, a contract that gives the holder the right, but not the obligation, to sell a stock at a set price for limited period of time. The seller or writer of the option is obligated to buy the stock at the strike price in the event that the option is assigned.
Holder (Buyer) Writer (Seller)
BUYER OF Call Option= HAS Right to buy OF OPTION HAS AND SELLER Obligation to sell
BUYER OF Put Option = HAS Right to sell AND SELLER OF PUT OPTION HAS Obligation to buy
There are some advantages of options.
Let us look into those things.
Options are used in Direction based Trading
Most stock traders first begin using options, it is to purchase a call or a put for direction based trading, which traders practice when they are confident that a stock price will move in a select direction and they open an option position to take advantage of the expected movement. They may decide to invest in options rather than the stock due to the limited risk, high profits and less amount of capital needed to control the same number of stock.
If you are (bullish), buying a call option gives the opportunity to benefit from upside potential of a stock without having to risk more than a fraction of its market value.
If you are bearish (expect a downward price movement), buying a put gives you advantage of a fall in the stock price without paying the large margin needed to short a stock.
With stocks you only have to worry about one thing: price.
option traders have to think differently because of the additional variables that affect an option's price and the resulting complexity of choosing the right strategy.
So, once a stock trader becomes good at predicting the future movement of a stock's price, he may figure it is an easy transition from stocks to options.
In options you have three shifting parameters that affect an option's price:
price of the stock, time and volatility. Changes in any one of these three variables will affect the value of your options.
With options you have some advantages like leverage, pay less buy more.
you can play the market both ways,buy or sell unlike stocks.
If the underlying stock price goes up by say, 5%,the options may shoot up by 15% or 20%.Similarly the fall in stock price by 3% may reflect by a 10% fall in optionvalue.
There is limited risk and unlimited profits under certain conditions.
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It is desirable to trade put and call options on the "buy" side exclusively.Some people Strictly avoid trading on the "sell" side of options where your risk is unlimited. A buy trade (when entered as a limit order) has a strictly limited and pre-determined risk with theoretically unlimited profit potential. Literally, it is impossible to lose more than what you pay for the options you buy. Using this strategy guarantees no margin call or deficit.
Option trading affords us one of the highest degrees of leverage to be found in any investment.
All these advantage factors mean nothing if you don't know what to buy and when. That's why you need to track the markets and select only those trades considered to have the highest probability of success with the lowest risk. And do remember there is an expiry date.
You can catch truly great leverage in option trades, and when you combine leverage with the strictly limited risk and precise market timing, then surely you can have the best with limited risk capital and unlimited profits.
Options work very simply: If the underlying stock upon which you bought your option doesn't move the way you choose, you can lose all or a portion of whatever amount of money you decide to put in. It could be as little as $500 if you like -- you decide how much you want to risk...
However -- if the stock does move the way you bet -- you can make a great deal of money.
Because while your downside is always limited to the amount you decide to risk -- your upside profit potential is unlimited! And therein lies the powerful secret to profiting from options: limited risk, but unlimited return.
Another great thing about options is that they let you profit in any market. You can profit when prices are going up -- and when prices are going down.
First let us see some interesting things about options
These categories need a bit education,a bit more study,a bit more alertness to deadline dates(options may expire worthless beyond expiry dates),need more funds as compared to stocks.
First thing to trade options,thanks to a backward sighted government,you need to be an income tax payer and need to be having a PAN number,
only then you are eligible.
Income tax?
What can you expect from a finance ministry who if left free and unchecked would like to tax a 10000 rupee cash withdrawal by common man from a bank? All the Harvard education goes down to tax the common mans meagre earnings.It is no wonder the government seems to have no idea about day to day cost of living in cities.Thanks the communist party who keep things under control. Enough of that useless stuff.
What are options?
A Call Option
In the case of an equity option, a contract that gives the buyer the right, but not the obligation, to purchase a set amount of stock (usually 100 shares) at a predetermined price anytime before the contract expires (American Style option) or at expiration only (European Style Option). The predetermined price is known as the strike price.
A Put Option
In the case of an equity option, a contract that gives the holder the right, but not the obligation, to sell a stock at a set price for limited period of time. The seller or writer of the option is obligated to buy the stock at the strike price in the event that the option is assigned.
Holder (Buyer) Writer (Seller)
BUYER OF Call Option= HAS Right to buy OF OPTION HAS AND SELLER Obligation to sell
BUYER OF Put Option = HAS Right to sell AND SELLER OF PUT OPTION HAS Obligation to buy
There are some advantages of options.
Let us look into those things.
Options are used in Direction based Trading
Most stock traders first begin using options, it is to purchase a call or a put for direction based trading, which traders practice when they are confident that a stock price will move in a select direction and they open an option position to take advantage of the expected movement. They may decide to invest in options rather than the stock due to the limited risk, high profits and less amount of capital needed to control the same number of stock.
If you are (bullish), buying a call option gives the opportunity to benefit from upside potential of a stock without having to risk more than a fraction of its market value.
If you are bearish (expect a downward price movement), buying a put gives you advantage of a fall in the stock price without paying the large margin needed to short a stock.
With stocks you only have to worry about one thing: price.
option traders have to think differently because of the additional variables that affect an option's price and the resulting complexity of choosing the right strategy.
So, once a stock trader becomes good at predicting the future movement of a stock's price, he may figure it is an easy transition from stocks to options.
In options you have three shifting parameters that affect an option's price:
price of the stock, time and volatility. Changes in any one of these three variables will affect the value of your options.
With options you have some advantages like leverage, pay less buy more.
you can play the market both ways,buy or sell unlike stocks.
If the underlying stock price goes up by say, 5%,the options may shoot up by 15% or 20%.Similarly the fall in stock price by 3% may reflect by a 10% fall in optionvalue.
There is limited risk and unlimited profits under certain conditions.
----------------
It is desirable to trade put and call options on the "buy" side exclusively.Some people Strictly avoid trading on the "sell" side of options where your risk is unlimited. A buy trade (when entered as a limit order) has a strictly limited and pre-determined risk with theoretically unlimited profit potential. Literally, it is impossible to lose more than what you pay for the options you buy. Using this strategy guarantees no margin call or deficit.
Option trading affords us one of the highest degrees of leverage to be found in any investment.
All these advantage factors mean nothing if you don't know what to buy and when. That's why you need to track the markets and select only those trades considered to have the highest probability of success with the lowest risk. And do remember there is an expiry date.
You can catch truly great leverage in option trades, and when you combine leverage with the strictly limited risk and precise market timing, then surely you can have the best with limited risk capital and unlimited profits.
Options work very simply: If the underlying stock upon which you bought your option doesn't move the way you choose, you can lose all or a portion of whatever amount of money you decide to put in. It could be as little as $500 if you like -- you decide how much you want to risk...
However -- if the stock does move the way you bet -- you can make a great deal of money.
Because while your downside is always limited to the amount you decide to risk -- your upside profit potential is unlimited! And therein lies the powerful secret to profiting from options: limited risk, but unlimited return.
Another great thing about options is that they let you profit in any market. You can profit when prices are going up -- and when prices are going down.
Options vs. Stocks
Similarities:
Listed Options are securities, just like stocks.
Options trade like stocks, with buyers making bids and sellers making offers.
Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.
Differences:
Options are derivatives, unlike stocks (i.e, options derive their value from something else, the underlying security).
Options have expiration dates, while stocks do not.
There is not a fixed number of options, as there are with stock shares available.
Stock owners have a share of the company, with voting and dividend rights. Options convey no such rights.
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Call Options and Put Options
Some people remain puzzled by options. The truth is that most people have been using options for some time, because option-ality is built into everything from mortgages to auto insurance. In the listed options world, however, their existence is much more clear.
To begin, there are only two kinds of options:
Call Options and Put Options.
A Call option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits.
If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned.
If you never returned, you would give up your security deposit, but you would have no other liability. Call options usually increase in value as the value of the underlying instrument increases.
When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price, called the strike price.
If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium.
A Put option ia an options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies.
If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases.
If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk.
With a Put option, you can "insure" a stock by fixing a selling price.
If something happens which causes the stock price to fall, and thus, "damages" your asset, you can exercise your option and sell it at its "insured" price level.
If the price of your stock goes up, and there is no "damage," then you do not need to use the insurance, and, once again, your only cost is the premium.
This is the primary function of listed options, to allow investors ways to manage risk.
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Types Of Expiration
There are two different types of options with respect to expiration.
There is a European style option and an American style option.
The European style option cannot be exercised until the expiration date.
Once an investor has purchased the option, it must be held until expiration.
An American style option can be exercised at any time after it is purchased.
Today, most stock options which are traded are American style options. And many index options are American style. However, there are many index options which are European style options. An investor should be aware of this when considering the purchase of an index option. The Nifty Options are European Style options.
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Options Premiums
An option Premium is the price of the option.
It is the price you pay to purchase the option.
For example, an XYZ May 30 Call (thus it is an option to buy Company XYZ stock) may have an option premium of Rs.2.
This means that this option costs Rs. 200.00. Why? Because most listed options are for 100 shares of stock(market lot), and all equity option prices are quoted on a per share basis, so they need to be multiplied times 100 (market lot).
In the Indian Stock Market context the market lot is specified by the exchange. This is such that the lot size, in terms of value, is Rs. 200000 (Two Lakhs) per market lot.Hence the market lot varies from 100 for the Nifty to more than 15000 for some stocks. More in-depth pricing concepts will be covered in detail in other section.
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Strike Price
The Strike (or Exercise) Price is the price at which the underlying security (in this case, XYZ) can be bought or sold as specified in the option contract.
For example, with the XYZ May 30 Call, the strike price of 30 means the stock can be bought for Rs. 30 per share. Were this the XYZ May 30 Put, it would allow the holder the right to sell the stock at Rs. 30 per share.
The strike price also helps to identify whether an option is in-the-money, at-the-money, or out-of-the-money when compared to the price of the underlying security. You will learn about these terms later.
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Expiration Date
The Expiration Date is the day on which the option is no longer valid and ceases to exist.
The expiration date for all listed stock options in the U.S. is the third Friday of the month (except when it falls on a holiday, in which case it is on Thursday).
The expiration date in the Indian context is the Fourth Thursday of the month (except when it falls on a holiday, in which case it is on the previous day).
For example, the XYZ May 30 Call option will expire on the Fourth Thursday of May.
-----------------------
Exercising Options
People who buy options have a Right, and that is the right to Exercise.
For a Call exercise, Call holders may buy stock at the strike price (from the Call seller).
For a Put exercise, Put holders may sell stock at the strike price (to the Put seller).
Neither Call holders nor Put holders are obligated to buy or sell; they simply have the rights to do so, and may choose to Exercise or not to Exercise based upon their own logic.
-----------------------
Assignment of Options
When an option holder chooses to exercise an option, a process begins to find a writer who is short the same kind of option (i.e., class, strike price and option type). Once found, that writer may be Assigned.
This means that when buyers exercise, sellers may be chosen to make good on their obligations.
For a Call assignment, Call writers are required to sell stock at the strike price to the Call holder.
For a Put assignment, Put writers are required to buy stock at the strike price from the Put holder.
-----------------------
Some Basic Terms Explained
Strike price
The predetermined price upon which the buyer and the seller of an option have agreed is the strike price, also called the exercise price or the striking price. Each option on a underlying instrument shall have multiple strike prices.
In the money:
Call option - underlying instrument price is higher than the strike price.
Put option - underlying instrument price is lower than the strike price.
Out of the money:
Call option - underlying instrument price is lower than the strike price.
Put option - underlying instrument price is higher than the strike price.
At the money:
The underlying price is equivalent to the strike price.
Expiration day Options have finite lives. The expiration day of the option is the last day that the option owner can exercise the option. American style options can be exercised any time before the expiration date at the owner's discretion.
Thus, the expiration and exercise days can be different. European style options can only be exercised on the expiration day.
Underlying Instrument
The something that an option gives a person the right to buy or sell is the underlying instrument. In case of index options, the underlying shall be an index like the Sensitive index (Sensex) or S&P CNX NIFTY or individual stocks. A class of options is all the puts and calls on a particular underlying instrument.
Liquidating an option
An option can be liquidated in three ways.
A closing buy or sell, abandonment or exercising. Buying and selling of options are the most common methods of liquidation.
An option gives the right to buy or sell a underlying instrument at a set price.
Call option owners can exercise their right to buy the underlying instrument.
The put option holders can exercise their right to sell the underlying instrument.
Only options holders can exercise the option.
In general, exercising an option is considered the equivalent of buying or selling the underlying instrument for a consideration.
Options that are in-the-money are almost certain to be exercised at expiration.
The only exceptions are those options that are less in-the-money than the transactions costs to exercise them at expiration.
Most option exercise occur within a few days of expiration because the time premium has dropped to a negligible or non-existent level.
An option can be abandoned if the premium left is less than the transaction costs of liquidating the same.
Option Pricing
Options prices are set by the negotiations between buyers and sellers.
Prices of options are influenced mainly by the expectations of future prices of the buyers and sellers and the relationship of the option's price with the price of the instrument.
An option price or premium has two components : intrinsic value and time or extrinsic value.
The intrinsic value of an option is a function of its price and the strike price. The intrinsic value equals the in-the-money amount of the option.
The time value of an option is the amount that the premium exceeds the intrinsic value. Time value = Option premium - intrinsic value.
-----------------------
Similarities:
Listed Options are securities, just like stocks.
Options trade like stocks, with buyers making bids and sellers making offers.
Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.
Differences:
Options are derivatives, unlike stocks (i.e, options derive their value from something else, the underlying security).
Options have expiration dates, while stocks do not.
There is not a fixed number of options, as there are with stock shares available.
Stock owners have a share of the company, with voting and dividend rights. Options convey no such rights.
----------------------
Call Options and Put Options
Some people remain puzzled by options. The truth is that most people have been using options for some time, because option-ality is built into everything from mortgages to auto insurance. In the listed options world, however, their existence is much more clear.
To begin, there are only two kinds of options:
Call Options and Put Options.
A Call option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits.
If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned.
If you never returned, you would give up your security deposit, but you would have no other liability. Call options usually increase in value as the value of the underlying instrument increases.
When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price, called the strike price.
If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium.
A Put option ia an options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies.
If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases.
If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk.
With a Put option, you can "insure" a stock by fixing a selling price.
If something happens which causes the stock price to fall, and thus, "damages" your asset, you can exercise your option and sell it at its "insured" price level.
If the price of your stock goes up, and there is no "damage," then you do not need to use the insurance, and, once again, your only cost is the premium.
This is the primary function of listed options, to allow investors ways to manage risk.
-----------------------
Types Of Expiration
There are two different types of options with respect to expiration.
There is a European style option and an American style option.
The European style option cannot be exercised until the expiration date.
Once an investor has purchased the option, it must be held until expiration.
An American style option can be exercised at any time after it is purchased.
Today, most stock options which are traded are American style options. And many index options are American style. However, there are many index options which are European style options. An investor should be aware of this when considering the purchase of an index option. The Nifty Options are European Style options.
----------------------
Options Premiums
An option Premium is the price of the option.
It is the price you pay to purchase the option.
For example, an XYZ May 30 Call (thus it is an option to buy Company XYZ stock) may have an option premium of Rs.2.
This means that this option costs Rs. 200.00. Why? Because most listed options are for 100 shares of stock(market lot), and all equity option prices are quoted on a per share basis, so they need to be multiplied times 100 (market lot).
In the Indian Stock Market context the market lot is specified by the exchange. This is such that the lot size, in terms of value, is Rs. 200000 (Two Lakhs) per market lot.Hence the market lot varies from 100 for the Nifty to more than 15000 for some stocks. More in-depth pricing concepts will be covered in detail in other section.
-----------------------
Strike Price
The Strike (or Exercise) Price is the price at which the underlying security (in this case, XYZ) can be bought or sold as specified in the option contract.
For example, with the XYZ May 30 Call, the strike price of 30 means the stock can be bought for Rs. 30 per share. Were this the XYZ May 30 Put, it would allow the holder the right to sell the stock at Rs. 30 per share.
The strike price also helps to identify whether an option is in-the-money, at-the-money, or out-of-the-money when compared to the price of the underlying security. You will learn about these terms later.
-----------------------
Expiration Date
The Expiration Date is the day on which the option is no longer valid and ceases to exist.
The expiration date for all listed stock options in the U.S. is the third Friday of the month (except when it falls on a holiday, in which case it is on Thursday).
The expiration date in the Indian context is the Fourth Thursday of the month (except when it falls on a holiday, in which case it is on the previous day).
For example, the XYZ May 30 Call option will expire on the Fourth Thursday of May.
-----------------------
Exercising Options
People who buy options have a Right, and that is the right to Exercise.
For a Call exercise, Call holders may buy stock at the strike price (from the Call seller).
For a Put exercise, Put holders may sell stock at the strike price (to the Put seller).
Neither Call holders nor Put holders are obligated to buy or sell; they simply have the rights to do so, and may choose to Exercise or not to Exercise based upon their own logic.
-----------------------
Assignment of Options
When an option holder chooses to exercise an option, a process begins to find a writer who is short the same kind of option (i.e., class, strike price and option type). Once found, that writer may be Assigned.
This means that when buyers exercise, sellers may be chosen to make good on their obligations.
For a Call assignment, Call writers are required to sell stock at the strike price to the Call holder.
For a Put assignment, Put writers are required to buy stock at the strike price from the Put holder.
-----------------------
Some Basic Terms Explained
Strike price
The predetermined price upon which the buyer and the seller of an option have agreed is the strike price, also called the exercise price or the striking price. Each option on a underlying instrument shall have multiple strike prices.
In the money:
Call option - underlying instrument price is higher than the strike price.
Put option - underlying instrument price is lower than the strike price.
Out of the money:
Call option - underlying instrument price is lower than the strike price.
Put option - underlying instrument price is higher than the strike price.
At the money:
The underlying price is equivalent to the strike price.
Expiration day Options have finite lives. The expiration day of the option is the last day that the option owner can exercise the option. American style options can be exercised any time before the expiration date at the owner's discretion.
Thus, the expiration and exercise days can be different. European style options can only be exercised on the expiration day.
Underlying Instrument
The something that an option gives a person the right to buy or sell is the underlying instrument. In case of index options, the underlying shall be an index like the Sensitive index (Sensex) or S&P CNX NIFTY or individual stocks. A class of options is all the puts and calls on a particular underlying instrument.
Liquidating an option
An option can be liquidated in three ways.
A closing buy or sell, abandonment or exercising. Buying and selling of options are the most common methods of liquidation.
An option gives the right to buy or sell a underlying instrument at a set price.
Call option owners can exercise their right to buy the underlying instrument.
The put option holders can exercise their right to sell the underlying instrument.
Only options holders can exercise the option.
In general, exercising an option is considered the equivalent of buying or selling the underlying instrument for a consideration.
Options that are in-the-money are almost certain to be exercised at expiration.
The only exceptions are those options that are less in-the-money than the transactions costs to exercise them at expiration.
Most option exercise occur within a few days of expiration because the time premium has dropped to a negligible or non-existent level.
An option can be abandoned if the premium left is less than the transaction costs of liquidating the same.
Option Pricing
Options prices are set by the negotiations between buyers and sellers.
Prices of options are influenced mainly by the expectations of future prices of the buyers and sellers and the relationship of the option's price with the price of the instrument.
An option price or premium has two components : intrinsic value and time or extrinsic value.
The intrinsic value of an option is a function of its price and the strike price. The intrinsic value equals the in-the-money amount of the option.
The time value of an option is the amount that the premium exceeds the intrinsic value. Time value = Option premium - intrinsic value.
-----------------------
Trading Rule No -01
THE MARKET PAYS YOU TO BE DISCIPLINED.
Trading with discipline will putmore money in your pocket and
take less money out. The one constant truth concerning the
markets is that discipline = increased profits.
-----------------------
Trading Rule No -02
BE DISCIPLINED EVERY DAY, IN EVERY TRADE, AND THE MARKET WILL REWARD YOU. BUT DON’T CLAIM TO BE DISCIPLINED IF YOU ARE NOT 100 PERCENT OF THE TIME.
Being disciplined is of the utmost importance, but it’s not a sometimes thing, like claiming you quit a bad habit, such as smoking. If you claim to quit smoking but you sneak a cigarette every once in a while, then you clearly have not quit smoking. If you trade with discipline nine out of ten trades, then you can’t claim to be a disciplined trader. It is the one undisciplined trade that will really hurt your overall performance for the day. Discipline must be practiced on every trade.
When I state that “the market will reward you,” typically it is in recognizing less of a loss on a losing trade than if you were stubborn and held on too long to a bad trade. Thus, if I lose Rs 200 on a trade, but I would have lost Rs. 1,000 if I had remained in that losing trade, I can claim that I “saved” myself Rs. 800 in additional losses by exiting the bad trade with haste
-----------------------
Trading Rule No -03
ALWAYS LOWER YOUR TRADE SIZE WHEN YOU’RE TRADING POORLY.
All good traders follow this rule. Why continue to lose on five lots (contracts) per trade when you could save yourself a lot of money by lowering your trade size down to a one lot on your next trade? If I have two losing trades in a row, I always lower my trade size down to a one lot. If my next two trades are profitable, then I move my trade size back up to my original lot size. It’s like a batter in baseball who has struck out his last two times at bat. The next time up he will choke up on the bat, shorten his swing and try to make contact. Trading is the same: lower your trade size, try to make a tick or two — or even scratch the trade — and then raise your trade size after two consecutive winning trades.
----------------------
Trading Rule No -04
NEVER TURN A WINNER INTO A LOSER
We have all violated this rule.However, it should be our goal to try harder not to violate it in the future. What we are really talking about here is the greed factor. The market has rewarded you by moving in the direction of your position, however, you are not satisfied with a small winner. Thus you hold
onto the trade in the hopes of a larger gain, only to watch the market turn and move against you. Of course, inevitably you now hesitate and the trade further deteriorates into a substantial loss. There’s no need to be greedy. It’s only one trade. You’ll make many more trades throughout the session and many more throughout the next trading sessions. Opportunity exists in the marketplace all of the time. Remember: No one trade should make or break your performance
for the day. Don’t be greedy
-----------------------
Trading Rule No -05
YOUR BIGGEST LOSER CAN’T EXCEED YOUR BIGGEST WINNER.
Keep a trade log of all your trades throughout the session. If, for example, you know that, so far, your biggest winner on the day is five e-Mini S& P points, then do not allow a losing trade to exceed those five points. If you do allow a loss to exceed your biggest gain then, effectively, what you have when you net out the biggest winner and biggest loss is a net loss on the two trades. Not good.
-----------------------
Trading Rule No -06
DEVELOP A METHODOLOGY AND STICK WITH IT. DON’T CHANGE METHODOLOGIES FROM DAY TO DAY.
I require my “students” to actually write down the specific market prerequisites (setups) that must take place in order for them to make a trade. I don’t necessarily care what the methodology is, but I do want them to make sure that they have a set of rules, market setups or price action that must appear in order for them to take the trade. You must have a game plan. If you have a proven methodology but it doesn’t seem to be working in a given trading session, don’t go home that night and try to devise another one. If your methodology works more than one-half of the trading sessions, then stick with it.
----------------------
Trading Rule No -07
BE YOURSELF. DON’T TRY TO BE SOMEONE ELSE.
In all of my years as a trader I never traded more than a 50 lot on any individual trade. Sure, I would have liked to be able to trade like colleagues in the pit who were regularly trading 100 or 200 lots per trade. However, I didn’t possess the emotional or psychological skill set necessary to trade such big size. That’s OK. I knew that my comfort zone was somewhere between 10 and 20 lots per trade. Typically, if I traded more than 20 lots, I would “butcher” the trade. Emotionally I could not handle that size. The trade would inevitably turn into a loser because I could not trade with the same talent level that I possessed with a 10 lot. Learn to accept your comfort zone as it relates to trade size. You are who you are.
-----------------------
Trading Rule No -08
YOU ALWAYS WANT TO BE ABLE TO COME BACK AND PLAY THE NEXT DAY.
Never put yourself in the precarious position of losing more money than you can afford. The worst feeling in the world is wanting to trade and not being able to do so because the equity in your account is too low and your brokerage firm will not allow you to continue unless you submit more funds. I require my students to place daily downside limits on their performance. For example, your daily loss limit can never exceed Rs. 5000. Once you reach the Rs. 5000 loss limit, you must turn your PC off and call it a day. You can always come back tomorrow.
-----------------------
Trading Rule No -09
EARN THE RIGHT TO TRADE BIGGER.
Too many new traders think that because they have $25,000 equity in their trading account that they somehow have the right to trade five or ten e-Mini S&P contracts. This cannot be further from the truth. If you can’t trade a one lot successfully, what makes you think that you have the right to trade a 10 lot?
I demand that my students show me a trading profit over the course of ten consecutive trading days trading a one lot only. When they have achieved a profitable ten-day period, in my eyes, they have earned the right to trade a two lot for the next ten trading sessions.
Remember: if you are trading poorly with two lots you must lower your trade size down to a one lot.
-----------------------
Trading Rule No -10
GET OUT OF 0F YOUR LOSERS
You are not a “loser” because you have a losing trade on. You are, however, a loser if you do not get out of the losing trade once you recognize that the trade is no good. It’s amazing to me how accurate your gut is as a market indicator. If, in your gut, you have the idea that the trade is no good then it’s probably no good. Time to exit.
Every trader has losing trades throughout the session. A typical trade
day for me consists of 33 percent losing trades, 33 percent scratches and 33 percent winners. I exit my losers very quickly. They don’t cost me much. So, although I have either lost or scratched over two-thirds of my trades for the day, I still go home a winner.
-----------------------
Trading Rule No -11
THE FIRST LOSS IS THE BEST LOSS.
Once you come to the realization that your trade is no good it’s best to exit immediately. “It’s never a loser until you get out” and “Not to worry, it’ll come back” are often said tongue in cheek, by traders in the pit. Once the phrase is stated, it is an affirmation that the trader realizes that the trade is no good, it is not coming back and it is time to exit.
-----------------------
Trading Rule No -12
DON’T HOPE AND PRAY. IF YOU DO, YOU WILL LOSE.
When I was a new and undisciplined trader, I can’t tell you how many times that I prayed to the “Bond god.” My prayers were a plea to help me out of a less-than-pleasant trade position. I would pray for some sort of divine intervention that, by the way, never materialized. I soon realized that praying to the “Bond god” or any other “futures god” was a wasted exercise. Just get out!
----------------------
Trading Rule No -13
DON’T WORRY ABOUT NEWS. IT’S HISTORY.
I have never understood why so many electronic traders listen to or watch CNBC, MSNBC, Bloomberg News or FNN all day long. The “talking heads” on these programs know very little about market dynamics and market price action. Very few, if any, have ever even traded a one lot in any pit on any exchange. Yet they claim to be experts on everything.
Before becoming a “trading and markets expert,” the guy on CNBC reporting hourly from the Bond Pit, was a phone clerk on the trading floor. Obviously this qualifies him to be an expert! He, and others, can provide no utility to you. Treat it for what it really is…. entertainment.
The fact is: The reporting that you hear on the business programs is “old news.” The story has already been dissected and consumed by the professional market participants long before the “news” has been disseminated. Do not trade off of the reporting. It’s too late.
-----------------------
Trading Rule No -14
DON’T SPECULATE. IF YOU DO,YOU WILL LOSE.
In all of the years that I have been a trader and associated with traders, I have never met a successful speculator. It is impossible to speculate and consistently print large winners. Don’t be a speculator. Be a trader. Short-term scalping of the markets is the answer. The probability of a winning day or week is greatly increased if you trade short term: small winners and even smaller losses.
-----------------------
Trading Rule No -15
LOVE TO LOSE MONEY.
This rule is the one that I get the most questions and feedback on by traders from all over the world. Traders ask, “What do you mean, love to lose money. Are you crazy?” No, I’m not crazy. What I mean is to accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly. It will save you
a lot of trading capital and will make you a much better trader.
----------------------
THE MARKET PAYS YOU TO BE DISCIPLINED.
Trading with discipline will putmore money in your pocket and
take less money out. The one constant truth concerning the
markets is that discipline = increased profits.
-----------------------
Trading Rule No -02
BE DISCIPLINED EVERY DAY, IN EVERY TRADE, AND THE MARKET WILL REWARD YOU. BUT DON’T CLAIM TO BE DISCIPLINED IF YOU ARE NOT 100 PERCENT OF THE TIME.
Being disciplined is of the utmost importance, but it’s not a sometimes thing, like claiming you quit a bad habit, such as smoking. If you claim to quit smoking but you sneak a cigarette every once in a while, then you clearly have not quit smoking. If you trade with discipline nine out of ten trades, then you can’t claim to be a disciplined trader. It is the one undisciplined trade that will really hurt your overall performance for the day. Discipline must be practiced on every trade.
When I state that “the market will reward you,” typically it is in recognizing less of a loss on a losing trade than if you were stubborn and held on too long to a bad trade. Thus, if I lose Rs 200 on a trade, but I would have lost Rs. 1,000 if I had remained in that losing trade, I can claim that I “saved” myself Rs. 800 in additional losses by exiting the bad trade with haste
-----------------------
Trading Rule No -03
ALWAYS LOWER YOUR TRADE SIZE WHEN YOU’RE TRADING POORLY.
All good traders follow this rule. Why continue to lose on five lots (contracts) per trade when you could save yourself a lot of money by lowering your trade size down to a one lot on your next trade? If I have two losing trades in a row, I always lower my trade size down to a one lot. If my next two trades are profitable, then I move my trade size back up to my original lot size. It’s like a batter in baseball who has struck out his last two times at bat. The next time up he will choke up on the bat, shorten his swing and try to make contact. Trading is the same: lower your trade size, try to make a tick or two — or even scratch the trade — and then raise your trade size after two consecutive winning trades.
----------------------
Trading Rule No -04
NEVER TURN A WINNER INTO A LOSER
We have all violated this rule.However, it should be our goal to try harder not to violate it in the future. What we are really talking about here is the greed factor. The market has rewarded you by moving in the direction of your position, however, you are not satisfied with a small winner. Thus you hold
onto the trade in the hopes of a larger gain, only to watch the market turn and move against you. Of course, inevitably you now hesitate and the trade further deteriorates into a substantial loss. There’s no need to be greedy. It’s only one trade. You’ll make many more trades throughout the session and many more throughout the next trading sessions. Opportunity exists in the marketplace all of the time. Remember: No one trade should make or break your performance
for the day. Don’t be greedy
-----------------------
Trading Rule No -05
YOUR BIGGEST LOSER CAN’T EXCEED YOUR BIGGEST WINNER.
Keep a trade log of all your trades throughout the session. If, for example, you know that, so far, your biggest winner on the day is five e-Mini S& P points, then do not allow a losing trade to exceed those five points. If you do allow a loss to exceed your biggest gain then, effectively, what you have when you net out the biggest winner and biggest loss is a net loss on the two trades. Not good.
-----------------------
Trading Rule No -06
DEVELOP A METHODOLOGY AND STICK WITH IT. DON’T CHANGE METHODOLOGIES FROM DAY TO DAY.
I require my “students” to actually write down the specific market prerequisites (setups) that must take place in order for them to make a trade. I don’t necessarily care what the methodology is, but I do want them to make sure that they have a set of rules, market setups or price action that must appear in order for them to take the trade. You must have a game plan. If you have a proven methodology but it doesn’t seem to be working in a given trading session, don’t go home that night and try to devise another one. If your methodology works more than one-half of the trading sessions, then stick with it.
----------------------
Trading Rule No -07
BE YOURSELF. DON’T TRY TO BE SOMEONE ELSE.
In all of my years as a trader I never traded more than a 50 lot on any individual trade. Sure, I would have liked to be able to trade like colleagues in the pit who were regularly trading 100 or 200 lots per trade. However, I didn’t possess the emotional or psychological skill set necessary to trade such big size. That’s OK. I knew that my comfort zone was somewhere between 10 and 20 lots per trade. Typically, if I traded more than 20 lots, I would “butcher” the trade. Emotionally I could not handle that size. The trade would inevitably turn into a loser because I could not trade with the same talent level that I possessed with a 10 lot. Learn to accept your comfort zone as it relates to trade size. You are who you are.
-----------------------
Trading Rule No -08
YOU ALWAYS WANT TO BE ABLE TO COME BACK AND PLAY THE NEXT DAY.
Never put yourself in the precarious position of losing more money than you can afford. The worst feeling in the world is wanting to trade and not being able to do so because the equity in your account is too low and your brokerage firm will not allow you to continue unless you submit more funds. I require my students to place daily downside limits on their performance. For example, your daily loss limit can never exceed Rs. 5000. Once you reach the Rs. 5000 loss limit, you must turn your PC off and call it a day. You can always come back tomorrow.
-----------------------
Trading Rule No -09
EARN THE RIGHT TO TRADE BIGGER.
Too many new traders think that because they have $25,000 equity in their trading account that they somehow have the right to trade five or ten e-Mini S&P contracts. This cannot be further from the truth. If you can’t trade a one lot successfully, what makes you think that you have the right to trade a 10 lot?
I demand that my students show me a trading profit over the course of ten consecutive trading days trading a one lot only. When they have achieved a profitable ten-day period, in my eyes, they have earned the right to trade a two lot for the next ten trading sessions.
Remember: if you are trading poorly with two lots you must lower your trade size down to a one lot.
-----------------------
Trading Rule No -10
GET OUT OF 0F YOUR LOSERS
You are not a “loser” because you have a losing trade on. You are, however, a loser if you do not get out of the losing trade once you recognize that the trade is no good. It’s amazing to me how accurate your gut is as a market indicator. If, in your gut, you have the idea that the trade is no good then it’s probably no good. Time to exit.
Every trader has losing trades throughout the session. A typical trade
day for me consists of 33 percent losing trades, 33 percent scratches and 33 percent winners. I exit my losers very quickly. They don’t cost me much. So, although I have either lost or scratched over two-thirds of my trades for the day, I still go home a winner.
-----------------------
Trading Rule No -11
THE FIRST LOSS IS THE BEST LOSS.
Once you come to the realization that your trade is no good it’s best to exit immediately. “It’s never a loser until you get out” and “Not to worry, it’ll come back” are often said tongue in cheek, by traders in the pit. Once the phrase is stated, it is an affirmation that the trader realizes that the trade is no good, it is not coming back and it is time to exit.
-----------------------
Trading Rule No -12
DON’T HOPE AND PRAY. IF YOU DO, YOU WILL LOSE.
When I was a new and undisciplined trader, I can’t tell you how many times that I prayed to the “Bond god.” My prayers were a plea to help me out of a less-than-pleasant trade position. I would pray for some sort of divine intervention that, by the way, never materialized. I soon realized that praying to the “Bond god” or any other “futures god” was a wasted exercise. Just get out!
----------------------
Trading Rule No -13
DON’T WORRY ABOUT NEWS. IT’S HISTORY.
I have never understood why so many electronic traders listen to or watch CNBC, MSNBC, Bloomberg News or FNN all day long. The “talking heads” on these programs know very little about market dynamics and market price action. Very few, if any, have ever even traded a one lot in any pit on any exchange. Yet they claim to be experts on everything.
Before becoming a “trading and markets expert,” the guy on CNBC reporting hourly from the Bond Pit, was a phone clerk on the trading floor. Obviously this qualifies him to be an expert! He, and others, can provide no utility to you. Treat it for what it really is…. entertainment.
The fact is: The reporting that you hear on the business programs is “old news.” The story has already been dissected and consumed by the professional market participants long before the “news” has been disseminated. Do not trade off of the reporting. It’s too late.
-----------------------
Trading Rule No -14
DON’T SPECULATE. IF YOU DO,YOU WILL LOSE.
In all of the years that I have been a trader and associated with traders, I have never met a successful speculator. It is impossible to speculate and consistently print large winners. Don’t be a speculator. Be a trader. Short-term scalping of the markets is the answer. The probability of a winning day or week is greatly increased if you trade short term: small winners and even smaller losses.
-----------------------
Trading Rule No -15
LOVE TO LOSE MONEY.
This rule is the one that I get the most questions and feedback on by traders from all over the world. Traders ask, “What do you mean, love to lose money. Are you crazy?” No, I’m not crazy. What I mean is to accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly. It will save you
a lot of trading capital and will make you a much better trader.
----------------------
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