Overleveraging

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.
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Never Question why the Market Moves in a Certain Way

It is never wise to speculate too much on the market movement and why it will move in a certain direction violently or otherwise. On the contrary, listen to the market and do what it is saying. If you catch a good wave, just concentrate on riding it with risk and money management.

In the short term, markets move under the influences of demand and supply. You do not need to be an expert of Fed Rate cuts, Dollar Movement or any other external factors. I have observed that novices spend endless amounts of time trying to dissect economic, technical, and many other sources of information. What is baffling to them is that they still get in at the wrong time leading to losses.

Advanced Technical Analysis - A Series

In this series, I'll cover advanced Technical Analysis topics. It is assumed that you know the basics of Technical Analysis and have some experience actually trading real money. If you do not have experience, you can easily find study material by googling around. As for trading experience, start a paper trading account if you do not have a trading account already. Do not experiment with real money if you haven't done that already.
It is well known that Technical Analysis is useless without the proper combination of Risk and Management. I'll add Mind Management to this list.
My personal choice of indicators are the following:

• MACD
• Stochastics
• RSI
• Williams% R

In this series, we'll focus more on the behavior and the use of indicators, understanding what they are trying to say and not restrict our focus to the math angle.

The most important element also is the study of waves. Study need not be to the depth of an Elliot or O'Nealy, but enough to give practical chances in the market. The aim is always to ride a good position as far as possible and to cut out a bad one early.

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.

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.