The things I wish I'd known at the beginning were:
A: The "classic texts" (Murphy, Edwards & Magee etc.)
B: Capitalization
C: Risk Management
D: "Don't quit your day job"
E: Psychology
I was lucky enough to find an honest and supportive broker. I found it an important fact that large funds, big traders and small traders all use different methodologies. They can all be successful.
I think a set of End Of Day charts and some good books that you study in the evening after work are probably the most cost effective and sensible tools to use until you become profitable. Trend-lines, 1-2-3 bottoms and patience...
The most daunting aspect of day trading, is that it's a full time endeavor. You cannot work another job. Any beginner who tries to go full time, runs the risk of becoming another casualty of the Market.
As with all walks of business the only way to learn is to:
(1) Do it with a make or break attitude,
(2) Go work with someone or a group of people for an extended period of time, watching, learning and doing before going out on your own.
You cannot pay Rupees, spend one week looking over the shoulder of a "master trader", read some material and then go out on your own - it does not work that way!! Its not that easy!!
What makes you think that you can let someone else endure the years or hard work, perspiration and sickly feeling at the bottom of their stomach. The sleepless nights. The loss of appetite. The feeling of having failed.... pay them a few Rupees and expect to buy the end result of their hard work and think you can make it work for you. It doesn't work that way.
If you want the results you must pay the price and the cost is not just measured in RUPEE terms.
There are people who can take short cuts and succeed, but they are exceptions and are far and few between.
As long as your are disciplined and know when to admit you are wrong and have the guts to jump right back on top of the horse then you'll do just fine.
Don't get so worked up about learning the new fad or secret approach to markets. Relax. Prices can either go up or go down or maybe stay the same.
Trading is as difficult as you want it to be.
Friday, August 14, 2009
Tuesday, August 4, 2009
Be prepared Whipsaws happen
WHIPSAW: A change of trading signals within a relatively short period of time.
Trading aims to reduce risk and to compound gains. The better trading systems reduce the number of whipsaws, but they all have them.
Two types of whipsaws
BUY signal SOON after a SELL signal. In this type of whipsaw, traders usually BUY BACK AT HIGHER PRICES.
SELL signal SOON after a BUY signal: In this type of whipsaw, traders often LOSE MONEY.
Worst case scenario: Even in the best of trading systems, you can have type 1 whipsaw followed by type 2.
Problem #1: No-one can be emotionally prepared for whipsaws.
Problem #2: Whipsaws can come in consecutive trades.
Problem #3: After being whipsawed a few times, there's a tendency to ignore signals -- which can be VERY costly.
Are they worth it?
WHIPSAW frustrations are the PRICE traders pay for:
Lowering risks (by being out of the market part of the time) and,
Significantly increasing profit potential (by finding the "better mousetrap").
Protections
Use more than one trading system.
Select a time frame (short, intermediate, long) which suits your personality.
Prefer trading systems back tested for long periods of time.
Corollaries: The shorter the time frame of a trading system -- the more whipsaws it is likely to have. With a longer time frame, you have fewer profits over a ten year period -- and fewer whipsaws -- everything else being equal.
Systems which attempt to eliminate ALL whipsaws miss many good profit opportunities.
Traders have no alternative except to learn to live with whipsaws. It's part of the discipline. Those who don't have the courage and patience to endure trading losses are very likely to pay a much larger price for holding on to bad trades.
Trading aims to reduce risk and to compound gains. The better trading systems reduce the number of whipsaws, but they all have them.
Two types of whipsaws
BUY signal SOON after a SELL signal. In this type of whipsaw, traders usually BUY BACK AT HIGHER PRICES.
SELL signal SOON after a BUY signal: In this type of whipsaw, traders often LOSE MONEY.
Worst case scenario: Even in the best of trading systems, you can have type 1 whipsaw followed by type 2.
Problem #1: No-one can be emotionally prepared for whipsaws.
Problem #2: Whipsaws can come in consecutive trades.
Problem #3: After being whipsawed a few times, there's a tendency to ignore signals -- which can be VERY costly.
Are they worth it?
WHIPSAW frustrations are the PRICE traders pay for:
Lowering risks (by being out of the market part of the time) and,
Significantly increasing profit potential (by finding the "better mousetrap").
Protections
Use more than one trading system.
Select a time frame (short, intermediate, long) which suits your personality.
Prefer trading systems back tested for long periods of time.
Corollaries: The shorter the time frame of a trading system -- the more whipsaws it is likely to have. With a longer time frame, you have fewer profits over a ten year period -- and fewer whipsaws -- everything else being equal.
Systems which attempt to eliminate ALL whipsaws miss many good profit opportunities.
Traders have no alternative except to learn to live with whipsaws. It's part of the discipline. Those who don't have the courage and patience to endure trading losses are very likely to pay a much larger price for holding on to bad trades.
Trading Is Not Investing
The problem with day trading, an expert on financial markets says, is that few people bother to learn the rules first. college roommate, half a century ago, was a lean, athletic young man who cared about sports in mind as well as in body. He could tell you the batting averages of the 20 leading hitters for the last 20 years, or cite such arcane facts as the name (and the time) of the man who came in third in the Wanamaker Mile at the Millrose Games in 1935.
When he finished college, he went to work at a Wall Street firm that knew how to use his talents: He became a tape reader. If you gave him the symbol for any of some hundreds of stocks, he could tell you how often two upticks in its price produced a third uptick or a downtick the next time the stock traded at a different price. He sat in a cell of a room on Wall Street, the physical ticker tape scrolling through his hands. Ideally, he had no position when he came to work and none when he went home. But every day he made millions of dollars of purchases and sales and over the year a noticeable contribution to the profits of his firm.
Ordinary people couldn't hope to compete with my friend, quite apart from his extraordinary personal storage and retrieval capacities. Those were days when fixed commissions cost outsiders 1 to 1.5 percent of every trade, with no volume discounts. And the spread between bid and asked was normally half a point; the outsider bought at the top of the spread and sold at the bottom. Fees, spreads, and commissions would eat traders alive even if they got their markets right.
But my friend's trading imposed virtually no costs on his firm. All he had to do was get it right more often than not. And there's no question that different stocks, because they draw different sorts of people as followers, have different short-term activity patterns.
There was also another kind of trading, which tried to find price movements that might last for several days or even weeks. This, too, was best done by members on the floor of an exchange-indeed, the Securities and Exchange commission had occasional fits about "floor traders." Only a handful of these traders were left in the 1950s. I asked one of them what he did for a living: "I listen for the streetcar," he said. "When I hear it coming, I get on; when it seems to be slowing down, I get off." Outsiders had the handicap that they weren't on the streetcar's route.
The chance ordinary people had to play these games profitably opened up first in Chicago in the 1960s, when the commodities markets began to clean up what had been a pretty dubious act. People could buy their way in for a few tens of thousands of dollars, and stand in a trading pit, "spreading" the price of corn against the price of hogs, or June contracts against September contracts, "scalping" the short-term movements in the prices of contracts-first for the prices of agricultural commodities and then, with a whoosh, for currencies and interest-rate futures and all sorts of financial commodities. Because relatively small sums of money could control relatively large purchases and sales in the low-margin world of the commodities markets, outsiders were not so severely handicapped as the visitors to brokerage offices.
Very recently, trading as a business has been democratized. Today, anybody with a computer and a modem can buy a service that delivers up-to-the-minute detailed information about trades and prices in markets all over the world. One such service, MarketWatch.com, went public in January with a prospectus claiming 2.2 million hits per month on its Website-and the price of the stock more than quintupled in the first day of trading. The cable networks run commercials all day from brokers offering to execute transactions at commission rates measured in tenths of a percent of the value of the trade.
Much Internet "trading" is performed by people who have a barber who's plugged in to technology or a brother-in-law who lives near San Jose and keeps a keen ear open at cocktail parties. Buying stocks on the basis of tips or comments in chat rooms is like betting on the advice of touts at the racetracks: It's not a business, and over time it's not going to be profitable. Even for people who know what they're doing, cyberstreets are not paved with gold. The vigorish is still with the house, and the electronic customer, like his ancestor who hung around at the broker's office, still buys at the asked and sells at the bid. But in actively traded stocks the spread may be as little as a sixteenth of a point, or six and one quarter cents a share, a manageable handicap.
The first rule for success in the trading world is to take the work seriously, to concentrate as hard as my roommate concentrated on his tape. Leo Melamed, who invented the first financial futures contracts, remembered that as long as he continued to practice law on the side, he lost money as a trader. This was and is a business of numbers and psychology, not economics: You have to live the numbers and practice the psychology. The trader's be-all and end-all is the most recent movement of prices in the markets-not just his one market, but many others: The walls of the rooms that hold the giant trading floors are covered with lights telling traders what's happening in the world's major markets for all the big commodities and financial instruments. If you're trading, say, interest-rate futures, you'd better keep abreast of what's happening in oil and gold.
The second rule, then, offered to novice commodity traders in a lecture by Charles DiFrancesca, is to know why you take positions, why you hold them, and why you sell them. DiFrancesca, whose advice is transcribed in William Falloon's book Charlie D.: The Story of the Legendary Bond Trader (Wiley), was the most admired independent bond trader in the busiest pit in the world. He thought the best discipline for young traders was "spreading"-taking long positions in one contract against short positions in another, to exploit changes in relative prices that would disappear as normal patterns reasserted themselves.
Once a trader was fairly consistently profitable in this low-margin business, he was more likely to succeed at the trickier business of "scalping," taking positions in one contract to catch brief waves of motion. The legacy of spreading was that traders should always have a reason for what they did. "If you're standing in the pit like a nail," he told the novices, "you don't have a reason for everything you do. Rely on your outside crutches as a scalper who spreads price relationships and imbalances that you see developing inside and outside the pit."
But those outside crutches, those reasons, are there only to prevent aimless activity. Like every trader, DiFrancesca agreed with the notion that good traders have to take their losses, quickly, and cannot ask Divine Providence to bail them out: "The people who survive at the Board of Trade have a low puke point....God doesn't trade bonds....He doesn't care what kind of trouble you're in; He doesn't trade bonds. You want to throw those future contracts up all over your shoes....There has to be a feeling inside of you that won't let you stay with something too long."
Human nature leads people to deny their mistakes. Even traders may acquire a crazy kind of loyalty to the positions they have taken, especially if they've talked to friends and neighbors about them. Television's Adam Smith likes to remind people that "the stock doesn't know you own it." If you scratch a money-losing trader, you are all but certain to find that he tries to cut his losses by hanging on until the stock or the commodity "comes back."
By the same token, traders find it hard to resist taking profits too fast. One of the most successful big traders in the currency and interest-rate markets says that he expects that 70 percent of his trades will be losers. But when he loses he loses small, and when he wins he wins big. Others who work in his trading room will say that they are profitable on 70 percent of their trades-but most of them lose money, because they grab for small winnings.
In the current lingo of the business, the two different species of trader are those that "sell volatility" and those that "buy volatility." My college friend sold volatility-that is, his essential bet was that market prices wouldn't move much, which meant he could always reverse his trades when he wanted to do so. All the hedge funds that claim to be market neutral-they can make money whichever way the market goes because they are betting on anomalies-are sellers of volatility and rely on a lot of liquidity in the market. This includes the infamous Long-Term Capital Management, which last fall had to be rescued from destruction. And, at the extreme, Nick Leeson of Barings, who sold out-of-the-money puts and calls on Japanese stocks, leaving him a little cash to put in his pockets if the markets didn't move much and a big hole in Barings's capital if they did.
These are the descendants of the classic Wall Street stock trader, the "contrarian" who assumed that the public was usually wrong, that most of the price movement in the market was noise, and that one could make money by selling on small rises and buying on small dips. Even more than other traders, the seller of volatility needs a talent for smelling when to head for the hills. George Soros said recently that he thought the LTCM "convergence" strategy would work 99.9 percent of the time, which was very generous of him, but even on those terms it's easy to be a loser. If you make a few bucks every day for 999 days and lose millions on the thousandth day, you will leave your children memories rather than estates.
Those who expect to overwhelm frequent small losses with less frequent large winnings come from a different school. They "buy volatility." Far from adopting a contrarian position, they take as their motto the old line from the Chicago pits, that "the trend is your friend." This is still trading, not investing. Buyers of volatility couldn't care less about the future earnings stream or purchasing power associated with what they buy: Such factors, presumably, are already in the price. The best of them are often ready for crises, because they limit their downside with something in the nature of "stop loss" orders, which in the modern world may mean fancy schemes for dynamic hedging.
These days, one can buy computer programs that purport to flag opportunities for short-term trading profits. They are useful for practice, like the programs that teach you card games, but following a strategy that's for sale to everybody is not likely to tap into an income-producing spread. There is no aptitude test for trading-the successful traders I know come from all sorts of backgrounds, from the most rarefied academic specialties to the jock worlds.
It's not socially responsible to encourage people to try their hand at trading. Just as the worst thing that can happen to an adolescent is to win big on that first visit to the racetrack or the casino, a profitable first month as a trader is a real danger. It's only after you've had a few bloody noses and moved on that you begin to understand what you're doing. Still, traders love what they do, though only a minority of them prosper; and technology has made it possible for almost anyone to try.
When he finished college, he went to work at a Wall Street firm that knew how to use his talents: He became a tape reader. If you gave him the symbol for any of some hundreds of stocks, he could tell you how often two upticks in its price produced a third uptick or a downtick the next time the stock traded at a different price. He sat in a cell of a room on Wall Street, the physical ticker tape scrolling through his hands. Ideally, he had no position when he came to work and none when he went home. But every day he made millions of dollars of purchases and sales and over the year a noticeable contribution to the profits of his firm.
Ordinary people couldn't hope to compete with my friend, quite apart from his extraordinary personal storage and retrieval capacities. Those were days when fixed commissions cost outsiders 1 to 1.5 percent of every trade, with no volume discounts. And the spread between bid and asked was normally half a point; the outsider bought at the top of the spread and sold at the bottom. Fees, spreads, and commissions would eat traders alive even if they got their markets right.
But my friend's trading imposed virtually no costs on his firm. All he had to do was get it right more often than not. And there's no question that different stocks, because they draw different sorts of people as followers, have different short-term activity patterns.
There was also another kind of trading, which tried to find price movements that might last for several days or even weeks. This, too, was best done by members on the floor of an exchange-indeed, the Securities and Exchange commission had occasional fits about "floor traders." Only a handful of these traders were left in the 1950s. I asked one of them what he did for a living: "I listen for the streetcar," he said. "When I hear it coming, I get on; when it seems to be slowing down, I get off." Outsiders had the handicap that they weren't on the streetcar's route.
The chance ordinary people had to play these games profitably opened up first in Chicago in the 1960s, when the commodities markets began to clean up what had been a pretty dubious act. People could buy their way in for a few tens of thousands of dollars, and stand in a trading pit, "spreading" the price of corn against the price of hogs, or June contracts against September contracts, "scalping" the short-term movements in the prices of contracts-first for the prices of agricultural commodities and then, with a whoosh, for currencies and interest-rate futures and all sorts of financial commodities. Because relatively small sums of money could control relatively large purchases and sales in the low-margin world of the commodities markets, outsiders were not so severely handicapped as the visitors to brokerage offices.
Very recently, trading as a business has been democratized. Today, anybody with a computer and a modem can buy a service that delivers up-to-the-minute detailed information about trades and prices in markets all over the world. One such service, MarketWatch.com, went public in January with a prospectus claiming 2.2 million hits per month on its Website-and the price of the stock more than quintupled in the first day of trading. The cable networks run commercials all day from brokers offering to execute transactions at commission rates measured in tenths of a percent of the value of the trade.
Much Internet "trading" is performed by people who have a barber who's plugged in to technology or a brother-in-law who lives near San Jose and keeps a keen ear open at cocktail parties. Buying stocks on the basis of tips or comments in chat rooms is like betting on the advice of touts at the racetracks: It's not a business, and over time it's not going to be profitable. Even for people who know what they're doing, cyberstreets are not paved with gold. The vigorish is still with the house, and the electronic customer, like his ancestor who hung around at the broker's office, still buys at the asked and sells at the bid. But in actively traded stocks the spread may be as little as a sixteenth of a point, or six and one quarter cents a share, a manageable handicap.
The first rule for success in the trading world is to take the work seriously, to concentrate as hard as my roommate concentrated on his tape. Leo Melamed, who invented the first financial futures contracts, remembered that as long as he continued to practice law on the side, he lost money as a trader. This was and is a business of numbers and psychology, not economics: You have to live the numbers and practice the psychology. The trader's be-all and end-all is the most recent movement of prices in the markets-not just his one market, but many others: The walls of the rooms that hold the giant trading floors are covered with lights telling traders what's happening in the world's major markets for all the big commodities and financial instruments. If you're trading, say, interest-rate futures, you'd better keep abreast of what's happening in oil and gold.
The second rule, then, offered to novice commodity traders in a lecture by Charles DiFrancesca, is to know why you take positions, why you hold them, and why you sell them. DiFrancesca, whose advice is transcribed in William Falloon's book Charlie D.: The Story of the Legendary Bond Trader (Wiley), was the most admired independent bond trader in the busiest pit in the world. He thought the best discipline for young traders was "spreading"-taking long positions in one contract against short positions in another, to exploit changes in relative prices that would disappear as normal patterns reasserted themselves.
Once a trader was fairly consistently profitable in this low-margin business, he was more likely to succeed at the trickier business of "scalping," taking positions in one contract to catch brief waves of motion. The legacy of spreading was that traders should always have a reason for what they did. "If you're standing in the pit like a nail," he told the novices, "you don't have a reason for everything you do. Rely on your outside crutches as a scalper who spreads price relationships and imbalances that you see developing inside and outside the pit."
But those outside crutches, those reasons, are there only to prevent aimless activity. Like every trader, DiFrancesca agreed with the notion that good traders have to take their losses, quickly, and cannot ask Divine Providence to bail them out: "The people who survive at the Board of Trade have a low puke point....God doesn't trade bonds....He doesn't care what kind of trouble you're in; He doesn't trade bonds. You want to throw those future contracts up all over your shoes....There has to be a feeling inside of you that won't let you stay with something too long."
Human nature leads people to deny their mistakes. Even traders may acquire a crazy kind of loyalty to the positions they have taken, especially if they've talked to friends and neighbors about them. Television's Adam Smith likes to remind people that "the stock doesn't know you own it." If you scratch a money-losing trader, you are all but certain to find that he tries to cut his losses by hanging on until the stock or the commodity "comes back."
By the same token, traders find it hard to resist taking profits too fast. One of the most successful big traders in the currency and interest-rate markets says that he expects that 70 percent of his trades will be losers. But when he loses he loses small, and when he wins he wins big. Others who work in his trading room will say that they are profitable on 70 percent of their trades-but most of them lose money, because they grab for small winnings.
In the current lingo of the business, the two different species of trader are those that "sell volatility" and those that "buy volatility." My college friend sold volatility-that is, his essential bet was that market prices wouldn't move much, which meant he could always reverse his trades when he wanted to do so. All the hedge funds that claim to be market neutral-they can make money whichever way the market goes because they are betting on anomalies-are sellers of volatility and rely on a lot of liquidity in the market. This includes the infamous Long-Term Capital Management, which last fall had to be rescued from destruction. And, at the extreme, Nick Leeson of Barings, who sold out-of-the-money puts and calls on Japanese stocks, leaving him a little cash to put in his pockets if the markets didn't move much and a big hole in Barings's capital if they did.
These are the descendants of the classic Wall Street stock trader, the "contrarian" who assumed that the public was usually wrong, that most of the price movement in the market was noise, and that one could make money by selling on small rises and buying on small dips. Even more than other traders, the seller of volatility needs a talent for smelling when to head for the hills. George Soros said recently that he thought the LTCM "convergence" strategy would work 99.9 percent of the time, which was very generous of him, but even on those terms it's easy to be a loser. If you make a few bucks every day for 999 days and lose millions on the thousandth day, you will leave your children memories rather than estates.
Those who expect to overwhelm frequent small losses with less frequent large winnings come from a different school. They "buy volatility." Far from adopting a contrarian position, they take as their motto the old line from the Chicago pits, that "the trend is your friend." This is still trading, not investing. Buyers of volatility couldn't care less about the future earnings stream or purchasing power associated with what they buy: Such factors, presumably, are already in the price. The best of them are often ready for crises, because they limit their downside with something in the nature of "stop loss" orders, which in the modern world may mean fancy schemes for dynamic hedging.
These days, one can buy computer programs that purport to flag opportunities for short-term trading profits. They are useful for practice, like the programs that teach you card games, but following a strategy that's for sale to everybody is not likely to tap into an income-producing spread. There is no aptitude test for trading-the successful traders I know come from all sorts of backgrounds, from the most rarefied academic specialties to the jock worlds.
It's not socially responsible to encourage people to try their hand at trading. Just as the worst thing that can happen to an adolescent is to win big on that first visit to the racetrack or the casino, a profitable first month as a trader is a real danger. It's only after you've had a few bloody noses and moved on that you begin to understand what you're doing. Still, traders love what they do, though only a minority of them prosper; and technology has made it possible for almost anyone to try.
Overtrading - Are you Guilty?
One of the most common mistakes I encounter in traders is overtrading. First, let me define what I mean by overtrading.
Overtrading - Initiating or maintaining a position too large relative to your account equity.
What is too large? In my accounts I don't like to risk more than 2% of the account equity on any single trade. I learned a while back that the worst enemy of a trader is fear (greed is easier to deal with). When you're scared, you're apt to display the following characteristics:
* Sweaty palms, a few palpitations here and there
* Staring at the ceiling at 2:00 am
* Maybe mumbling or yelling at your spouse
* calling your broker every 5 minutes during the day
* unwinding a position at a loss so you can feel "normal" again only to see it turn, right after you exit (the markets are
conspiring against you, right?)
You get the picture. This is no way to live and the best defense is to trade small. Each position you carry should seem almost insignificant. You're probably thinking "How can I make any money this way?" or "How can I do that in a "RS 50,000 account?". I'll address both these questions.
On trading small:
My thinking is that if you're a good trader with good ideas, each trade you make isn't significant. It's the sum total of a lot of good ideas over a lot of years that will make you wealthy. Everyone is wrong sometimes and what happens If you risk it all (or most of it) on a single trade, and you're wrong? If what I'm saying makes sense, then trading small makes sense. Good opportunities come along fairly often. If they didn't, then I might have a different opinion. As a professional, I would never intentionally expose a large portion of my money to one market or one trade. I always trade a variety of markets with a variety of positions.
On trading a small account: Here are some suggestions for trading a small account properly.
* Trade less number of shares
* Trade futures contracts that usually aren't as volatile as stocks
* Learn about option strategies to hedge risk
* Get familiar with vertical options spreads and ratio spreads to limit risk and volatility, while allowing you to stay in a
trade for a long period of time.
Having said that, the problem with a small account is that slippage and transaction costs become larger relative to the trading gains. This problem is eased if you trade longer term (believe it or not, I've got an opinion on that too).
Trading Rules
1. Do not be a Tradaholic.
2. You trade to make money--not for fun & games or to escape boredom.
3. Never add to a bad trade.
4. Once you have a profit on a trade, never let it become a loss.
5. NO HOPING - NO WISHING - NO WOULD'VE - NO PRAYING - NO OPINIONS - NO SHOULD'VE.
6. Don't be a one-way trader be flexible.
7. Know your risk on each trade. Trade with stops.
8. Look for a 3-1 profit objective.
9. When initiating a trade, always get your price.
10. When liquidating a bad trade, always use a market order.
11. A scratch trade is a "winner."
12. Make ten points on a million trades not a million points on ten trades.
13. Learn from your own mistakes.
14. Have a plan. Trade it. Monitor it.
15. 3 Losing Trades in a Row Rule. Stop! Take a break.
16. DISCIPLINE! 90% of the public lose without it.
17. Pay attention to weekly lows and highs.
18. "Guru" software systems make money for the sales rep. Develop your own approach.
19. Understand spreading and options.
20. Technicals and fundamentals are equally important. Trading may not be suitable for everyone. The risk of
loss can be substantial.
Overtrading - Initiating or maintaining a position too large relative to your account equity.
What is too large? In my accounts I don't like to risk more than 2% of the account equity on any single trade. I learned a while back that the worst enemy of a trader is fear (greed is easier to deal with). When you're scared, you're apt to display the following characteristics:
* Sweaty palms, a few palpitations here and there
* Staring at the ceiling at 2:00 am
* Maybe mumbling or yelling at your spouse
* calling your broker every 5 minutes during the day
* unwinding a position at a loss so you can feel "normal" again only to see it turn, right after you exit (the markets are
conspiring against you, right?)
You get the picture. This is no way to live and the best defense is to trade small. Each position you carry should seem almost insignificant. You're probably thinking "How can I make any money this way?" or "How can I do that in a "RS 50,000 account?". I'll address both these questions.
On trading small:
My thinking is that if you're a good trader with good ideas, each trade you make isn't significant. It's the sum total of a lot of good ideas over a lot of years that will make you wealthy. Everyone is wrong sometimes and what happens If you risk it all (or most of it) on a single trade, and you're wrong? If what I'm saying makes sense, then trading small makes sense. Good opportunities come along fairly often. If they didn't, then I might have a different opinion. As a professional, I would never intentionally expose a large portion of my money to one market or one trade. I always trade a variety of markets with a variety of positions.
On trading a small account: Here are some suggestions for trading a small account properly.
* Trade less number of shares
* Trade futures contracts that usually aren't as volatile as stocks
* Learn about option strategies to hedge risk
* Get familiar with vertical options spreads and ratio spreads to limit risk and volatility, while allowing you to stay in a
trade for a long period of time.
Having said that, the problem with a small account is that slippage and transaction costs become larger relative to the trading gains. This problem is eased if you trade longer term (believe it or not, I've got an opinion on that too).
Trading Rules
1. Do not be a Tradaholic.
2. You trade to make money--not for fun & games or to escape boredom.
3. Never add to a bad trade.
4. Once you have a profit on a trade, never let it become a loss.
5. NO HOPING - NO WISHING - NO WOULD'VE - NO PRAYING - NO OPINIONS - NO SHOULD'VE.
6. Don't be a one-way trader be flexible.
7. Know your risk on each trade. Trade with stops.
8. Look for a 3-1 profit objective.
9. When initiating a trade, always get your price.
10. When liquidating a bad trade, always use a market order.
11. A scratch trade is a "winner."
12. Make ten points on a million trades not a million points on ten trades.
13. Learn from your own mistakes.
14. Have a plan. Trade it. Monitor it.
15. 3 Losing Trades in a Row Rule. Stop! Take a break.
16. DISCIPLINE! 90% of the public lose without it.
17. Pay attention to weekly lows and highs.
18. "Guru" software systems make money for the sales rep. Develop your own approach.
19. Understand spreading and options.
20. Technicals and fundamentals are equally important. Trading may not be suitable for everyone. The risk of
loss can be substantial.
Chart Patterns on larger time frames
Often, technical chartists will identify chart patterns on Weekly and Monthly charts.
These patterns take many years to complete. They are likely to take equal number of years to fulfill. As investors and traders, we are unlikely to have the patience and discipline to sit through the fulfillment period.
My suggestion is that we should not invest or trade based on patterns developing on longer time frame charts.
We should stay focused on charts in daily and intra day time frames. Big picture charts are mainly of academic interest only.
We suggest that readers should be careful when they read about some ’88 year supercycle’ or ‘Elliot Wave that started in 1938’ or something similar.
It is difficult to believe that market movements in 1938 can still influence the stock markets in 2002.
Short term trends are easier to forecast. Momentum and investor psychology today can influence events in the next few months, but how can they influence events 5 years hence?
I soemtimes read about some ‘grand elliot wave count that will peak out in 2012’. How can anyone know what will happen in 2012 or similar?
Again, suppose that the ‘grand elliot wave count that will peak out in 2012’ is correct. So, what are you going to do now? Buy and wait till 2012?
Finally, trading and investing is about clear cut trading signals. If this happens we buy. If this happens we get stopped out for profit or loss….
We will offer many charts of big picture patterns. Given below is a digial weekly chart.
After a sharp down move in September 2001, Digital made a bullish head and shoulder. This patten broke out on the upside around 628. An investor looking at this breakout would be justified in buying Digital at 628 with a target of 1050.
Now, what would be his stop loss? The Right shoulder low is at 509. The stop will have to be put below 500.
How can anyone say that Digital will rally to 1050 in one year or two years? What will be the economy be like in the next few years? It is easier to look at the next two months than at the next two years.
Chart patterns often fail. When a pattern on a daily chart fails we end up with small losses. And we know about it in a few days. If a weely or monthly chart pattern fails, we will about it in many weeks or years. Not a pleasing idea.
These patterns take many years to complete. They are likely to take equal number of years to fulfill. As investors and traders, we are unlikely to have the patience and discipline to sit through the fulfillment period.
My suggestion is that we should not invest or trade based on patterns developing on longer time frame charts.
We should stay focused on charts in daily and intra day time frames. Big picture charts are mainly of academic interest only.
We suggest that readers should be careful when they read about some ’88 year supercycle’ or ‘Elliot Wave that started in 1938’ or something similar.
It is difficult to believe that market movements in 1938 can still influence the stock markets in 2002.
Short term trends are easier to forecast. Momentum and investor psychology today can influence events in the next few months, but how can they influence events 5 years hence?
I soemtimes read about some ‘grand elliot wave count that will peak out in 2012’. How can anyone know what will happen in 2012 or similar?
Again, suppose that the ‘grand elliot wave count that will peak out in 2012’ is correct. So, what are you going to do now? Buy and wait till 2012?
Finally, trading and investing is about clear cut trading signals. If this happens we buy. If this happens we get stopped out for profit or loss….
We will offer many charts of big picture patterns. Given below is a digial weekly chart.
After a sharp down move in September 2001, Digital made a bullish head and shoulder. This patten broke out on the upside around 628. An investor looking at this breakout would be justified in buying Digital at 628 with a target of 1050.
Now, what would be his stop loss? The Right shoulder low is at 509. The stop will have to be put below 500.
How can anyone say that Digital will rally to 1050 in one year or two years? What will be the economy be like in the next few years? It is easier to look at the next two months than at the next two years.
Chart patterns often fail. When a pattern on a daily chart fails we end up with small losses. And we know about it in a few days. If a weely or monthly chart pattern fails, we will about it in many weeks or years. Not a pleasing idea.
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