The key takeaways
one rule
There is one single cardinal rule to always keep in mind.The preservation of capital.By strictly following this rule ,we counter the self destructive behaviour our emotions and hopium set us on.
keeping it simple helps
have to choose whether they are investing or stocks trading.investor will have a diversified portfolio spread across multiple asset classes.trader focusses on one or two markets and might trade a single instrument repeatedly.
if there is choice between lost capital or lost opportunity, you know what to do. in stocks Trading opportunity does not comes once, it keeps coming.
fundamental analysis,technical analysis. Both styles have their strengths and shortcoming
always use protective stops, basically a stop loss order. Apart from closing a losing trade protective stop ring fence your financial exposure.
Whipsaw
it happens when the price hits a protective stop, closes a position and then reverses trend and starts trading higher except the trader is out of the position. The trader has to fine tune the stop loss point to avoid this and also if the stop loss gets hit ,enter the stocks trade again if the initial thesis and condition still holds good.
lag
protective stop is placed deeper down the charts to avoid whipsaw.although it can help you in avoiding triggering stop loss but it can result in large drawdowns and resulting in smaller trade size.
there are no perfect answer to choose between whipsaw or lag.These are different styles and different probabilities and we have to take our pick.
markets
shares,etfs,futures,forex, cods,crypto,
three styles of trading
trend following, swing trading and day trading
a share which is rising on a daily chart,might be falling in weekly chart and rising on monthly chart all at the same time.
TREND FOLLOWING
With the trend following, we take a position in a stock when its moving up.we stick with the trend till it ends.also known as positional trading style is suited for trading on long side and woks best with established stocks.
we can rarely get in at the start of a trend and time our exit at the top of the trend. in reality we will get in once the trend has been established and get out after the trend has topped out.
Attempting to predict the bottom will just see us catching the falling knife and buying into loss.similarly predicting the top will see us getting out with just small profit.
trending stocks have two things in common ,a good fundamental and they keep going far longer than anyone expects.To fully embrace a trend following we must be committed laggards.we must accept our exit point and protective stop will be long way from the current price.This means we may have to sit through long pull backs too.
Monthly trend following
In this slow and steady style each bar or candle on our chart represents a full month of trading activity. its purely technical ,entry and exit on pre defined signals. Trending a monthly chart is like investing in property market.Trend changes are common knowledge by the time they are technically confirmed.monthly trend following is incredibly easy but very few have the required discipline and patience. Every price bar takes a full month to form ,so waiting for the last day before taking action can prove impossible.
Dow theory
With this we need to be aware of sector rotation as profitability passes from one area of the economy to another. Practitioners of this trend should be familiar of dow theory also,particulary accumulation and distribution phase.
Monthly trend following is suitable for long term accounts which means practitioners of this trade are also DIY fund managers.Its good idea to let a friend or fellow trader know if you are trading a monthly strategy.they should know your entry and exit signals and review them once a month. we can choose a trading platform which allows conditional orders. This allow us to programme orders which will trigger at the end of month if our requirements are met.
ACTIVELY PASSIVE
Monthly trend following also needs to be considered in terms of passive vs active debate.Passive investors build a portfolio of assets which match the weighing of a specific index or they simply buy some index tracking ETFs.The trick is to be passive when market is trending and active when its turning.
WEEKLY TREND FOLLOWING
Weekly trend following is more demanding than monthly trend following.We have to be prepared to move our protective stops at least every weekend. Might be monitoring the price action on daily basis.To trade this style we need to understand the basics of trend structure and have the patience to wait for each weekly bar to slowly print out without jumping in or anticipating.
Daily swing trading
in this case each price bar represents one full day of trading.Swing trading is all about identifying the moment when energy in the trade shifts from potential to kinetic and stock sparkles to life. It can be with prevailing market trend or against it. Normally we expect to be in swing trade for a few days or a week at most.As soon as the move ends we get out of our position.This type of trade works quickly or not at all. Once we are in the trade we need to adjust orders only after the market closes. Good entry and exits are important.We move our protective stop to a break even position as soon as possible. common error is dropping down to intra day time frame to monitor at the action more closely.
holding a swing trade position over weekend is something we need to consider If at all we hold a swing trade during the weekend we during the week take partial profit and move the protective stop loss to break even.
Day trading
we trade intraday and actively trade throughout the day.If we know what we are doing we can make serious money very quickly.Technical indicators are less useful on intraday time frames.Day traders place more emphasis on the interpretation of price action alone. Any time frame shorter than 30 minutes when trading equities produces too much random movement to be tradable. The Taiwan and france studies of day traders concluded that over half of all day trading can be traced to traders with history of losses. Day trading is better be avoided for beginners.
four legs
The attributes to support a successful trader
Reason
How we deal with our emotions is what makes or breaks a trader. Mass psychology is what the markets are all about. success in market is 80% psychological and 20 % methodology be it fundamental or technical. Over time as we learn to invest less expectation and fear into each trade, our emotional reaction to the outcome will diminish accordingly. Get the ego out and just trade.Groupthink is destructive in market environment.When everyone rushes to one side of see saw because its going up their collective weight pushes it back down again.
when the market is trending strongly , we go with the crowd . a traders involvement with market trends is based on temporary mutual interest.
fluidity of our mind will determine our success in market.solid and stodgy view on how things (markets) should operate will not let us succeed in markets.
Risk
usa and uk have prospered because of their entrepreneurial spirit and willingness to embrace risk.Without risk there will be no reward. Traders have to be professional risk takers ,because that is where thr reward lies.They have to have confidence to take the steps others dread.The key to embracing risk is to understand it and become familiar with it.Every day before we trade, we conduct a risk assessment where we identify the current risk ,quantify the potential loss and put measures in place to manage it.
probability versus prediction
markets can go uptown or sideways. as soon as we expect one of these to happen, we are excluding two other possibilities and reduce our chances of success by 66.6%.We have no control over markets but we have total control over our response to it.When the market moves we implement the plan appropriate to that direction even when we believe market is going the wrong way.market never goes the wrong way, we do.
The five limits of risk
the 1% limit
The total amount of money placed in a trade must be less than 1% of the daily turnover of the a stock.
The 2% limit
Extensive testing has shown that the maximum amount a trader may lose on a single without damaging his long term prospects is 2 percent of his equity. so a trader must not risk more than 2% of his capital.T
The 6 % limit
Monthly limit of 6 % of capital for losses, then stop trading for the month.
The 20% limit
The total exposure in a single trade should not be more than 20% of the capital.
The 40% limit
Risk reward ratio should never be greater than 40% (1/2.5) This ensures that we emerge winner even after losing more than half the time.
Responsibility
trading coach
trading records
Good records are what separate successful traders from gamblers.
Market karma
Routine
Trading strategies
our strategy should clearly identify how and when we enter trade,how we manage it once we are in and what needs to happen for us to exit.At no stage of the process we should be confused about what to do.
trading signals
every trading strategies should have a number of clearly defined requirements which must be met before we embark on trade.These will normally be technical indicators
Five stages of trader’s career
Reckless
lovestory begins with reckless romance. Its important we lose money while starting trading.Our acceptance and understanding of loss is the bedrock on which our future success will be built.
Recognition
we once recognise we have been trading recklessly, we need to stop the cash bleeding from our account.to do this we need to stop trading.Excessive trading is one of the major causes of mortality among newly opened trading accounts.
dunning and kruger state
we propose that those with limited knowledge in a domain suffer a dual burden.Not only do they reach mistaken conclusion and make regrettable errors but their incompetence robs them of the ability to realise it.
Revival
once a losing trader has stopped trading, they need to take some time out and make a decision to revive.
they must do
realistically assess their ability to trade
accept a reasonable return on investment
identify the market they will trade
find a stocks trading style which suits their personality, life style and resources
learn a trading statregy with proven profitable outcome
constantly apply risk management tools
keep good records
stay humble and keep an open mind
when we wash our clothes we don’t actually wash anything we just arrange the infrastructure and circumstances which allow it to happen.The composition of water does the washing we just facilitate the event.Same way in market we don’t make money from trading, we arrange a financial infra structure and create circumstances which allow our account to benefit from inherent opportunities in the market.
equipment a good laptop
predictions
we know the market moves in recurring patterns.Rather than wasting our time predicting the future direction of the market, we should spend the time more productively by learning how to recognise these patterns and have a plan to trade them when they occur.
expertise
a true market expert always sees them as beginner
we need to have good source of news, economist is considered to be great apart from few others.
Routine
we have to follow a definite routine consistently.
reward
having learned to control our losses, the profits will look after them selves.
SIX Edges
Generosity
we must be prepared to give up our time freely and not expect a reward for every minute we spend in front of the screen.We cannot bill the market by the hour.if our strategy is flagging entry signals we must be generous with cash.because maybe we can make a years wages in a short period of time.
Discipline
Discipline in trading means sticking to the trading plan.
Patience
diligence
mindfulness
wisdom
SEVEN RECORDS
Trading diary
personal experience of public events.stats and charts are far removed from the strong emotions which power the market.for this reason we should keep a personal diary when trading.this allows us to create our history which should be read in conjunction with the official statistical version of events. Records be honest. good trade and bad trades are not the issue ,the thinking and motivation behind them is what we are trying to identify. we should also do a year end review and keep a couple of days to do this task.
we are essentially trying to learn from our past.
STUDY notes
we should keep our study notes printed and keep them in folder.During the year we should periodically flick back over our study notes. Concepts and advice about the market which passed over our head as beginner will offer fresh insights when we revisit them later.
trade logs
we should keep a trade log and learn from it
day, date and time
accounts
strategy
market
ticker or symbol
direction short or long
source
setup how many of required indicators were present
earning date we note next earnings date and place a reminder in our trading calendar.
Quantity,
entry and exit price
entry chart
trade comments
exit chart
follow up date
Our equity curve
we should create a equity curve ,record the closing balance of account every month.These figures should be plotted on a graph.Equity curve should be going up.
Trading strategies
when trading ,our mission is to follow the strategy.The strategy should be clear enough for other people to understand when we write it down.It should have a name for it to resonate with us on personal level.
general trading rules
round positions to nearest multiple of 50
do not move stop closer to price
don’t trade on monday morning
maintain constant position size
only trade filtered stocks
follow the five limits of risk
source/scan
indicators
Entry and exit criteria
comments
Manually sourced data
the End day data we collect ourselves and keep them saved in 3 copies.
Eight checks
a pre trading check list
.myself-mood,physical condition, our previous days trading, schedule of the day ahead.
macro
economic calendar,e.g. interest rate anouncement,opec meeting or things like that.
Market
Markets are open 24 hours, one market is starting after one market has closed. us markets start after indian markets,
Methods
green-we can trade strategy today
orange means not today but maybe soon
red means no trading
Money
monthly opening a/c balance
current a/c balance
monthly gain/loss%
current exposure
exposure risk available
trade risk
MEMOS
Earning reminders are set for all our open position
we confirm our open orders
Mentors and mates
we check opinions of mates and mentors to look for overlooked points
Media to be avoided but for some macroeconomic calendars
Nine filters
selecting stocks to trade
run the filters at the latter end of february,may august and november to discount the quarterly business earnings .
Ethics and eccentrics
find the sector and industries to trade
ETFs
SIZE
Liquidity
Blue chip stocks
first limit of risk
profitability scan
liquidity ratios of the company
STARTEGY SPECIFIC FILTERS
optional and shortable
volatility
Percent average true range -dividing the ATR by the current price. % ATR between 2-6 % is good enough to trade.
TEN TOOLS
Technical indicators and orders
PRICE ACTION
Open high low close (OHLC)
Reversals and price washouts
a washout occurs when the price drops to a level which is lower than the previous days low reversed and closes higher than the previous days close Washouts are important because they clear the air and settle the current disagreement between bulls and bears.
MOVING average-price and value
two types simple and exponential avearges
21 emac line is a good place to start.on a daily chart it will be past 21 days
on weekly chart 21 emac covers almost a month
on monthly chart covers almost 2 years of data
when we are unsure about the markets weekly chart with 21 EMAC on it reminds us of the trend of the market.
50 days and 200 days SMA are frequently used by large institutions to identify the trend changes.When the 50 days SMA crosses the 200 days SMA from below its called golden cross over because the trend is changing to the upside and things are looking golden.
ATR (average true range) channels
Stocks fluctuate up and down as they move along the chart but healthy stocks stay inside a channel like a sober pedestrian stays on a footpath.
Volume
Volume and price when viewed together give us and indication of effort and reward.
SUPPORT AND RESISTANCE
Support and resistance zones are tasted a few times before the market crowd can burst through.When with a heavy push of traders the S/R are breached ,it is called break out. False break outs to be avoided.a breakout is confirmed when price tests the support and resistance doors from other side and they hold firm.
market order
limit order
stop limit order
protective stop
location of protective stops
Volatility (ATR) based protective stops are the best.
Average true range support and resistance- a rising will often reverse as it encounters the ATR line especially 3 ATR line and falling stock will encounter the support at the -1or -2 ATR line
Trailing stop
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