Trading and Capital preservation

Capital Preservation

Very simple. If you don’t have money, you cannot trade. This means protecting your money is your prime concern when you trade frequently. Profits will come eventually. The best way to minimize risk is not to trade when conditions are not to your liking. Also, trading in a sideways market is not healthy for a professional trader. Volatility is alright as long as you know how to manage risk. Use leverage only if you can trade responsibly, not recklessly. Leverage is a curse for those who do not trade responsibly.It is famously said that you should trade money that you can lose. For most of us, that amount is very difficult to define. You should spend a lot of time to think what it is for you. There are established money management calculations to help in doing this. Before starting to trade, you should indulge in judicious planning. When you have started active trading, never forget to keep the concepts of Money Management in you mind all the time.

Trading is Boring

The popular myth that draws most people to the stock markets is because they think that trading is easy and exciting. This is as far as it can get from the thruth. Trading is boring to professionals when executed well. There is Buying and Selling. But the most time should be spent in Waiting. Waiting for the right opportunity to surface, waiting while holding good positions. If you seek thrill, try the roller-coaster ride, your kids too can enjoy !

OK, today lets look at the kind of approach that gets the pros the kind of money they earn.
Five Steps that Pros follow to Make the Most of their Trades

1. Do analysis take a position
2. Keep a smart stop loss. Stop loss triggered ? You're out of the position. The position goes in the direction you predicted ? Move to step 3
3. The market is communicating that you are right, in that case, add to the position.
4. Trail the position with smart stop losses.
5. Out of the position only when your stop gets you out.

Trading quotes

Efficient market hypothesis

“I'd be a bum on the street with a tin cup if the markets were always efficient."
"Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn't do any good to look at the cards."
"It has been helpful to me to have tens of thousands (of students) turned out of business schools taught that it didn't do any good to think.”

~ Warren Buffet on Efficient Market Hypothesis

Directional call

Having a view on the market or taking a call is the flawed approach of a noob. One should move from such an approach as soon as possible. Taking a view is important and tools such as Technical Analysis help. However, once you take a view throw it in the waste basket. The difference between a noob and a pro is that the pro now focuses on riding the position as far as possible or getting out with the correct stop. You must remember to concentrate on making the most of the trade. Endless thoughts on making a fortune have to stop.
Keep smart trailing stop losses. Kick out the loser smartly.

Breathing and virtues

Breathing

Patterns in Day TradingWatch your breath when you take a position in day trading. It will definitely not be normal. My observation is that more brittle the emotional make-up of the individual, more hurried is the breathing. In any case do emotional traders really survive eventually ? Maybe if they learn to channelize it into useful energy. But that is a hard and long story. We will deal with that some other time.

Humility

Being Humble is not just a heavenly virtue heard in churches. The mature trader is always humble, after being battered time and again in the markets. So why not start it a bit earlier ? Believe me, it pays to be humble, otherwise one goes to the market every day with confidence only to be smashed time and again. This is very common among traders early in their career.

Trading Direction Bias

It is natural to have a tendency to be comfortable either on the Buy side or Sell side. That is, going long or short.
There is a danger here that if it becomes a habit it can lead to losses.
You make money if you are right with your directional call. It is observed that many traders make losses on days that the market goes in the direction that they are not comfortable with.
If your system is solid and you are following the correct risk management and money management technqiues and still noting that you are making losses, more often than not, the culprit is market direction.
Simply stop trading for a while. Wait for the trend to reverse (if it does happen) and only then start again.

Smart Trailing Stops

In the figure, suppose you have bought 100 shares of the stock at the point shown in the diagram and add to it after the next pull back. You will see that hypothetically, you can keep riding the profits. The first stop loss is SL 1 when the stock is at level MP 1. Note that the stop loss is slightly below the last wave low. The stop loss is SL 2 when the stock is at level MP 2, SL 3 at MP 3 and so on.
In situations where the prices move up violently such as the point SL 7, shown in the figure, stop loss may be kept by following other methods such as mid points of large-bodied candlesticks, gaps and so on.

Technical Analysis is one thing, but if you correctly trail the position with smart stop losses, you will see that you will be able to ride the profits since the stock continues to make higher highs and higher lows. Similarly in the case of a position where you are short and the stock or futures product makes lower highs and lower lows, you can keep moving your stop loss lower and lower (but higher than the last wave’s top.)

Trailing stop loss is an art that can take a life time for many to master.
I take a position and keep a smart stop. Now I want to trail. There is a scare early that probably makes a peep at marked to market loss. If I'm right (which is not that big a deal for any self-respecting analyst) then I should be well on my way to break even and profits. This is natural.
Now how do you know when to exit ? This is a tricky question for many, especially for those who do ultra-short term trading, scalping, jobbing, whatever the name.

Do I book my profit a couple of points after my "target profit?" No, say experts, trail till your last breath :). The best way to deal with, in my experience is, once you have reached a level of good profits, (that can come handy in loss making up for loss making trades) start tightening the stop. But never loosen your grip. If your stop is reached, make an exit. If there is a jump and your stop loss level is exceeded, exit at whatever best price you get. I for one, never keep a stop loss. Its always mental (Warning: This is only for experienced traders, beginners must always keep real system stop losses.)

But there is some skill required when you keep a mental stop loss, because the mind starts playing games. So observe your behavior carefully. Note down every step, discuss with an expert and then come to a conclusion on what works best for you.

Trading process and evolution

Trading a minimum system ? Sounds strange ? Not really, I guess to those in the trading game for some time. Let me explain.

1. You decided to trade
2. Did the homework
3. You went after other's systems and it didn't work. Sounds familiar ?

This should be done:

1. You decided to trade
2. Did the homework
3. Trading is very personal. One person's indicator is another person's misdirection. Or something to that effect. Get the message ?
4. Get the system checked by an "expert" (a very rare species, let me warn you.)
5. This is a system that you will go by for the time being. It works for you. You will know soon enough anyways. The market is a ruthless teacher, isn't it ?
6. If this system is true to your personality, you will grow with it. By growth, I mean you will only have to make nudges and pushes to the system, not overhauls.
7. One key clue that can be noted from your performance is that you know instinctively that you have committed a mistake when you really do. This is the verification that indeed the system you have chosen is consistent with your psychological make-up

World Markets

Lets look at some interesting markets of the world.

US

The US (United States of America) markets are so far the model and in every way a huge giant. Very deserving for someone who has laid the foundation of capitalism and enterprise, encourging the best talent in the world to themselves. The stocks here are very liquid and you have an entire universe of big and small stocks in different markets. NYSE (New York Stock Exchange) and Nasdaq are the premium stock exchanges. CME at Chicago (Chicago Mercantile Exchange) and CBOT (Chicago Board of Trade) are leading derivatives exchange with an awesome array of products on offer for trading. One wonders if the basic idea of derivatives is being served purposefully or is it excessive trading behavior that Warren Buffet at Berkshire Hathaway says will go ka phut. I love futures and I hope some one will really prove that the excess is required :)

Asia

Japan is by far the biggie in Asia. Hong Kong too does premium, cool business. Nikkei still stands tall even though it saw a mountain and a valley.
Singapore, China, India are other markets of note. Thailand, Indonesia, Malaysia too have their own niches catering to regional demands.

Europe

Europe is another story altogether. These guys somehow manage to do things efficiently. Neat and tidy. London is one global hub. Other than that there are giants in Germany, The Netherlands. France and Italy lag a bit behind the leaders.
Canada, Russia, some south American markets like Brazil, Argentina and so on have their own places. Now, it will be interesting to see how things shape up in the future. Imagine a situation where terrorism drives people indoors. It will be a different world with the new trading pits being the bunkers, basements, underground haunts. The networked world will pose interesting changes. Lets see.

Legends of the Trading World

Legendary traders like Jesse Livermore, Ed Seykota, Richard Dennis, Bill Dunn, George Soros, William O’Neal and so on, who have given astounding returns in a short period are evidence to the fact that it is certainly possible to outperform the markets even in very short time frames. Each one of them had their own tools and techniques of the trade, not necessarily pure technical analysis, but what was definitely common is their risk appetite, fire-in-the-belly attitude, discipline and tremendous strength of will to succeed in the shark infested waters of the securities markets.

Jesse Livermore

The wall-street legend who made and lost millions in a career spanning three decades. He was most famously blamed for the biggest crash in the history of humanity, the 1929 “Great Depression Crash”. He wrote many classics and also gave the trading world gems like “Fear your losses and let your profits run” and “Markets are never wrong, opinions are”.

Ed Seykota

A classic exponent of Trend Following®, he reportedly traded a model account for a period of 12 years and turned $ 5,000 into $ 15,000,000 ! He was mostly self-taught and trained many successful traders into profit making machines. He is special in the sense that he continually tries to make improvements in systems despite being hugely successful and rich.Richard DennisMost famous for training the legendary “Turtles”. He placed an advertisement and selected random people including gamblers, accountants and teachers. He took a challenge by betting with a friend that traders can be made and are not born with the natural instinct. He succeeded and many of his former pupils now manage multi-million dollars. Before he even took this challenge, he had made his millions with his prodigal talent.

Bill Dunn

Bill Dunn, the Founder and Chairman of the very successful DUNN Capital Management, Inc and is known for his futures-based portfolio management and the extraordinary returns that they have managed to deliver to their clients. He is also a pioneer in introducing computer technology in managing portfolios. One very famous episode was how they made money in the sharply rising and falling Yen in 1995, which was unprecedented since most traders are known to have biases either towards the long or the short side.

George Soros

The Hungarian Soros, co-founded Quantum Fund with Jim Rogers. The fund reportedly returned 3,365 % in the next decade, making him a billionaire. He was dubbed the “Man who broke the Bank of England”, when in 1992, he sold $ 10 Billion worth of Pounds and made $ 1.1 Billion in the bargain.William O’Neal
Follows a mix of quantitative and qualitative methods to pick stocks and is a medium term investor. He is known to have turned $ 5,000 into $ 200,000 within a year early in his career. He is also famous for following a strict stop loss criteria for his holdings.

Improving at Day Trading Continuously

Preparing for the day as usual. I may be a bit late to office, which usually means that I am not fully prepared. I feel prepared if I am at least 45 minutes before the open and have a look at the daily and hourly charts. This, despite the fact that I may have seen it on Saturday. A lot depends on the global markets these days. So one eye is always on those markets and the markets in Asia opening earlier than ours. There is great risk in keeping overnight positions if one does not have a respectable stop loss. Intra day swing trades are far safer in some ways provided trading expenses are at a minimum (for example, US commission rates)

Rewards from the market

The market (especially the futures) always reward you more than you should normally be if you are right with your directional call.
Listen to the market. It talks to you. If you are right, there is a subtle message it gives
In the futures market, the risk takers have already loaded up and they show their approval by moving the market in your direction.
If you are wrong better be out with your normal stop.

Impulse Trading and Early entry

• Impulse Trading

Impulse trading almost always never goes unpunished. Never take a position just because you feel the market is reversing. You MUST allow your condition to be met before you take a position. This is especially true in case of day trading.
The reason is very simple. When you don't make enough money trading your Edge, how can you hope to do so with something that you are unsure. If you are in it for the long run, abandon such behaviour. You may be lucky a couple times, but the law of averages will hunt you down easily.

• Timing Entries

One problem most day traders face is the timing of the entries. They say you can't time the markets. Wrong ! For intra-day trading there is no option but to time it well. Catching pullbacks after your condition is satisfied is a very good way of trying to beat the markets.
Example: Suppose you use a simple Stochastics buy signal to enter. If you scalp based on 1 min chart, allow the Stochastics to give a clean buy. In case of futures trading you always get a pullback to enter safely. The key of course, is how well you ride the trade when you are right and cut out the loser early.
Almost always, check the higher level time period chart. It helps if you are in the direction of the larger trend.

Full Concentration - No Compromise

Anything less than full concentration is destined for failure on the average. How many of us carry our personal worries to the trading room ? Avoid completely !Its simple, the trading mind requires as much computing power as possible, nothing less.OK, I do concentrate, now what ? Now, don't relax ! Keeping going at the same level of concentration. The only trap here is that you tire. So regular breaks are a must. One very important point you must note: after taking a break the performance may not be as good. Scalpers will generally make this observation.

Impulse Trades

Three things to know about Impulse trades for scalpers:

• Impulse Trades are a strict No-No
• If you do take it by mistake, don't do it again if you want to be a serious profit-making trader
• Ok, you did take an impulse trade ? Do the following:
  Watch it more carefully than you would do with a normal trade that follows your system.
  Keep a stop loss or limit in mind immediately and no matter what, GET OUT at that level. If it moves in your direction, trail it with the same rigourous discipline.

Psychology vs Tools

More important than the tools, equipments, news is one's psychological or personality make-up. In the long run, the most experienced traders realize the battle is only against onself. The more you polish yourself, the more profits pour.One of the first excercises i teach my trading students is just to toss a coin every day and take paper trades: heads you Buy and Tails you sell. After that is the important part. How you hold on to winners well and cut out the losers early. Adding to winners is an art that comes much later.But this in itself is a perfect profitable package.

Waves and their Importance in Day Trading

It has been proved beyond doubt that Elliot waves work from a longer term perspective. But for those who study Elliot in depth, it is a challenge to try and decipher the short term or intra-day movement at least of indices.It is surely possible but requires a lot of hard study. The key point here is that the risk management is very important. One can get carried away thinking that a certain wave is ready to unfold and a bet is taken but pain follows when it is discovered that it didn't happen exactly as planned or didn't happen at all. The best way to try and take advantage of waves is to try and catch the 3rd wave of Elliot's 5 waves. This is not only profitable but does not require the kind of research that other waves (especially the correctives) require. The biggest risk of this strategy is that if the 3rd wave does not work out, another bottom (in case of expected upmove) or top (in case of a downward move) is observed that can easily take away stop losses.

Fear and greed

These aspects are slightly different from the fear and greed to be dealt with say, in position trading or investing. The reason is that a new trader will learn soon enough (with painful losses) that it is smarter to live and trade without having to deal with them. For a professional trader, the concepts assume a kind of surreal, subtle form. Greed should be honed into a system of "how to let the winners run" and fear into a "trailing stop". The same thing actually ! Two sides of the same coin. The most successful traders are like well-oiled machines not reacting to anything but catastrophes, if at all. It is the moment at hand that is important to them and a very spiritual experience to make the most of it wisely, with humility and patience.

Never reinvent the wheel in trading

This point is very important for those who are pretty new to trading in the securities markets. Yes, by trying to reinvent the wheel, you contribute by paying your fees to the market to learn the art. But I'm sure we all can do with a little more capital to trade. So, why not preserve it? Stop hunting for holy grails or new magic formulae. The reason is that there are far more important things to be honed, such as, Risk Management and Money Management.

Trading expenses

Trading expenses form an inescapable reality for a trader. The shorter the time frame that your trades last, the more the importance of expenses. By expenses what I mean is not the car fuel, phone expenses and so on, but the taxes and commissions that are imposed on the trades.In the US, the environment is conducive for traders who make their living out of this activity alone. The expenses are commissions, SEC and other tax. The total expense for a retail scalper can be as low as .0028 % (all inclusive) compared to .033% for an equivalent trader in India. Far more than 10 times !From information that I recently got, trading even in Europe cannot be easy either, but the costs are much lower than India. Trading the US markets from London though can be one solution. Guys in the US have it good !

Trading tips in the stock markets

Focus on the process and not the fruit

Risk vs Reward

More on Trading Emotions

Confidence
Without confidence it is not possible to achieve much in other streams of life. In the equity markets, it is doubly true. If you lack in self-confidence, doubts may creep up in your mind. This may lead to indecision, which in turn lead to missed opportunities and losses. For day-trading and short interval trades, confidence is of utmost importance.On the other hand, on down days be careful. In many instances, you may be tempted to book small profits just to make your day balance sheet look pretty. This is not the issue. When you are faced with loss-making trades sooner or later, that same daily balance sheet will not look pretty at all.Never be far away from the correct principles of trading no matter what your mind is tempted to think. It is just too painful to reinvent the wheel.
Discipline
In order to be a successful investor/trader, you must be very disciplined. Stick to the plan of action. This means that you will stick to trading policies, trading plans and so on. Know your objective and work accordingly.
Ideas
Do not seek to implement new ideas that come all the time during markets. Remember, ideas are just ideas. If you feel there is value in them, they have to be thought about, refined, tested and then brought to the trading room. If you try to implement new ideas immediately to trading all you will do is to erode capital and confidence.
Hope
Do not allow hope to loiter anywhere close to your trading system. Hope has the potential to do maximum damage to your capital.

Trading Emotions

Fear
No Risk No Return. This phrase is well known and it is not required for most of us. But for those who find taking the plunge difficult, it applies strongly. In addition to this, you will not learn unless you dive.
Despair
Despair generally arises when you are not applying your rules and are taking the wrong bets. The thinking process is retarded when despair arises. Take a break, take a deep look and you will generally find that you are doing something very wrong. That is, if you are following generally known good principles of trading.You will notice that in your bad times, if you have very little capital left, you will start compromising on the very principles that will give you any hope of recovering from your losses.
Doubt
When in doubt, don’t. Follow this simple rule and you will be better off in trading. There are many factors that influence the markets. At any point in time, even technical indicators, support levels, patterns may conflict each other. For example, there is a buy signal on the basis of 15 min charts but weakness in the 1 hour chart. If you cannot verify and come to a clear conclusion, just leave that opportunity alone. There will be many more coming your way.

Flaws in Technical Analysis

There is a popular way of looking at Technical Analysis. “What is your success percentage?” is asked. This is a very wrong way to look at analysis. The reason is that a profit may be $ 10 at one time but a loss maybe $ 100 at another. There is no comparison. You will be surprised to know that many successful traders get only around forty percent calls correct but they ride them to maximum profits. The wrong approach has earned the science and art of technical analysis being labelled as suspect. Do it is the individuals using it who make the tool good or bad. While the science of Technical Analysis is criticized by some as having many defects, it is the user who has to be aware that it is just a tool to enhance your chances. Many new traders come to the market believing they have made the next big discovery of a money minting machine. Only Technical analysis combined with prudent risk management, money management and trade optimization can help you make profits. Technical Analysis tools are just a beginning to becoming a professional analyst. There are higher challenges most of which involve an individual’s psychological make-up.Remember that Technical Analysis is almost always the best tool if your time horizon is short, but only if used correctly.It is very common to see retail traders flocking to a new analyst with a new technique. Remember, your growth as a good trader will accelerate only once you give up the search for the next magic formula. You grow to be a professional trader once you stop looking for the next amazing trading indicator or the next amazing Technical Analyst giving great technical calls. You must start concentrating on trade Optimization instead.

Listen to the markets

The market has a lot to say, just pay attention and you will find loads of useful information. For example, the principle “Do not add to your positions unless the markets prove it". This is shockingly true in the Futures markets. The players in the futures markets are generally those with high risk appetite. Most of the time they are well equipped, skilled and well informed. It is not a surprise that they are correct most of the time.

Haste makes waste

You have a specialized, tested system. Wait for your conditions to be satisfied. Patience is an invaluable virtue for a trader.Futures how big players take positions before amateurs. They consider their bets as only that. It is a chance. More often than not the efficient or the big player has the advantage of leverage, information, infrastructure and so on. He may also be trading in the proprietary account or at very low commissions (brokerage) making him very difficult to beat.Follow trends, that should be your best chance. It requires patience to wait for trend changes. You will also have to time the point of entry very well since your margin for error is minimal, especially for a day trader.

Quote by J W Marriott, It is what you learn after you know everything that counts

Famous quote by a famous personality who made fame and money in his life time - J W Marriott.

Spiritual Angle to Trading

Does a person’s spiritual approach affect performance in the stock markets ? Is it linked to professional trading in any way? It is a debatable point. We all know about Warren Buffet’s generous philanthropic gesture in donating most of his hard-earned fortune to the Bill and Melinda Gates foundation. Money is important but probably not as much as many make it appear. Successful traders routinely give away a good percentage of their trading profits. Other things to be noted is that Greed is punished remorselessly. It is alright to expect to earn huge sums of money. But overdoing it may attract punishment.Unfortunately, there is no proof or measurement that so much greed attracts so much punishment, but such issues are interesting and need to be contemplated nevertheless ! Many profitable traders routinely give out a part of their earnings in charity. But for those who are just starting out, you do not have to face this issue yet ! Patience is a strong virtue in the securities markets. Nothing valuable can be earned in a tearing hurry. Everything has to be methodically earned. Even if you manage to earn a huge sum in a short while, it will be lost in no time since the ego makes sure you squander. Easy come, easy go, they say ! At the end of the day, one has to remember that desperation only leads to chaos. The moral of the story is that one must treat the securities markets as a serious game and money can be earned with the right knowledge, right approach and at the right timing.