Monday, January 18, 2010

Bad Start to Trading

M Jagadish
If you are a day trader and have a bad start (assuming you are not an opening gap specialist,) what do you do when you have a bad start? Suppose you keep $2000 as your worst case loss for the day and for some reason you violated something and ended up -$1800 in quick time, what should you do?

--> Take a break, have some coffee.
--> Breathe deep and analyze the real reason why this happened. Do not justify anything.
--> Promise yourself you will not violate anything for the day and hopefully from this point on.
--> Make sure you keep in mind that you have just $ 200 to go. Do NOT take another $2000 risk.
--> The most important thing. Cut down the trading size drastically. If you were trading 500 shares, try 100 for the rest of the day.

Friday, January 15, 2010


M Jagadish
What do you do if you saddled yourself with more shares/contracts that your money management formula allows and you are stuck at the wrong levels?

OK, here's what I really mean. Just for example, you are a day trader (this applies even to swing, position or other traders as well). Your money management formula says that at this particular time, you are allowed to go long 1000 shares of ACME. As usual, you saw a "golden" chance and banged out 1000 shares immediately. The stock moves up a wee bit. After a few minutes, the stock starts sliding down. Sounds familiar? OK, now even though your first doubts creep in, you look at your buying criteria (could be gap, indicators, price, tick, anything) and then you feel you are still right and you add another 1000. The stock slides another few ticks. Ouch! Now what?

Here's a simple analysis:
--> There is nothing called a "golden" chance really. Or, at least, a trader should not allow onself to believe there ever can be one
--> Don't violate Money Management
--> Never average! If you do want to average, average towards your direction, which means for buying, buy higher, not lower. This just means that the stock is moving in the general direction of your bet.

The first thing you need to do to correct is to immediately liquidate the extra shares that exceed your Money Management formula for the moment. So, in this case, sell the extra 1000. If by the time you do this, the stock is down to your first stop loss, follow your risk management criteria and remove whatever quantity should be removed at that point (say for example, 500). Keep the remaining 500 and again apply Risk management if the stock slides to your next stop loss level.

Thursday, January 14, 2010

Are you in a Trading Slump?

You are now an experienced trader and your results are not that volatile, you are disciplined but you still don't understand why you are experiencing a slow and irritating draw down.

Relax, Trading is clearly a state of mind apart from all the other things that it already is!
I have some interesting observations about this. I play Chess on a leading Chess server that has a range of players that I can play against. I usually choose players at my own strength or slightly above (for that extra challenge). I am always surprised at how the charts of my performance behave as if they are price charts. Forget the patterns (its even more bewildering,) even just the price movement mirrors the state of mind. Many rising waves last a good amount of time, and similarly slumps last an extended period sometimes.

What this explains to me is that the human mind moves in patterns and trends and it takes a while for one to end and the other to start. So make sure you preserve capital while you are in a slump, try different things and you will be on track again after a while and then the whole profitable should hopefully last for good time.