listed below are some examples of the EXIT rules typically used by traders, that may not require deep chart interpretation skill.
1. when the price reach xxxx% above buy price (target based)
2. when the price falls 5% from recent high (trailling stop)
3. when the price close lower than yesterday's low (tight trailling stop)
4. when the price breaks uptrend line (trailling stop)
5. when the weekly EMA turns flat (trailling stop)
6. when there is a dead cross on 2MA/EMA (trailling stop)
7. when the price breaks selected ATR line (trailling stop)
there are many other rules and criteria, it is up to us to specify them. The important thing is to write them down, so that the PLAN could serves as a guide during the period when our 'emotions' and 'rationality' is put under test.
One of the most dangerous mind set is refusing to cut-loss and stubbornly holding in losing position(s). For example, a person who entered a position was initially wanted to take advantage of an uptrend, and later price breaks below the uptrend, but this person refuse to cut-loss, but trying to look for excuses or reasons to convince himself to be a 'long term investor', be it good earnings, dividend, contracts awarded, or anything that he could think of. But in reality, this person only want to break even, and if he was lucky, and price returned to his break-even point, he would sell and clear his position, and all the above reasons such as dividend, contracts, and good earnings would seem irrelevant anymore. This is a typical double standard of a loser, and the biggest account killer.
PLAN THE TRADE, TRADE THE PLAN
Wednesday, June 30, 2010
Monday, June 28, 2010
Preserve Capital
RISK MANAGEMENT: PRESERVE CAPITALl before dreaming of making consistent and huge PROFITS.
Familiar with the quote “risk only the amount you can afford to lose”? Wow! Does it mean If I have a capital of RM50k, in order to be involved in the stock market , I have to be prepared to lose them all ? Does it mean if I bought any shares for say RM10,000, I must be prepared to lose all that RM10k ?
Eiyaaa be logical larrr…in order for me to lose all that RM10k, I have to watch helplessly the stock tumbling down to zero or until the stock get delisted ? will you allow that – watching helplessly your stock tumbling down? CRAZY ! no larrrr kan = we are not that insane to do that, we are like PRO Traders oso, we will intervene –stop the losses.
The question is how much losses are we willing to tolerate ? Some say up to the level that we can still feel ‘comfortable’ and boleh tido malam peacefully - That is our RISK TOLERENCE. Tapi biasalahhh, what get measured get done…. Damm ! QUANTIFY IT UPFRONT- how much of your capital you are prepared to lose in any one trade. if we don’t define our RISK TOLERANCE UPFRONT – the chances is that it will not get done and we will ‘unconciously’ joining those insane folks.
RISK TOLERANCE How much.... % of your capital ? What! , 20% of your capital per trade ? do you know that with that kind of risk level, your Capital will be wiped out, if you have a 5 losing trades in a row, ? NO MORE MONEY NO TRADE… lahhh period.
Hey! would you believe if I said that most Pro traders risk < 3% of their Capital per trade ? at 3% capital risk per trade means one can afford to have 33 losing trades in a row before the capital get wiped out.... In fact to some, risking 3% of their capital is too much. If they use 1%, they can afford to have 99 lose trades in a row before get capital wiped out. What do you think the probability for these Pro to lose 33 trades or 99 trades in a row ? hey!, what about yours !what's the probability for you to suffer 33 lose trades in a row ? Low isnt it.... then, wouldnt you like to adopt this money management strategy - where the risk of getting wiped out is low ? you decide, what is your risk tolerace per trade express in term of % capital. or nak quote in term of RM pun ok larrrr.
Well!, it should be noted that it doesn’t mean that since we can afford to lose 33 trades or 99 trades in a row we need to continue trading until 33 or 99 times after experiencing a series of losing trades in a row, without intervention and check and balance in between , if we did that it will be too late for us , no more money left. NO MONEY MEANS NO TRADE.
Most professional traders would stop trading for the month, and some even close all positions if they had 5 losses in a row. This will give them time to recuperate and to review their trading habits and methods to find out what they have done right and what they have done wrong, and making preparation for the next trades. By doing this they are able to minimise their capital erosion (the technical trading word is 'capital drawdown' to only 5-15% of their Capital- they still have plenty of money left for the next trades.
Definition of risk. For TRADERS, RISK (the amount we are prepared to lose) is defined as (ENTRY PRICE – STOP LOSS) x position size i.e number of shares bought., cant use the terms ‘position sizing’ sparingly, as it is the trademark of Dr Van Tharp.
Of course lahh , by definition if we don’t have a STOP LOSS position, the RISK equation will become Entry Price x No of shares bought , i.e this means we are prepared to risk the whole money we use to buy that particular stock okkkkk. By definition, If one decides to use a wider stops, the one need to reduce the number of shares bought in order to maintain the same amount of CAPITAL RISK (the amount we are prepared to lose if we are wrong) per trade. In order not to be knocked out by the 'noises' there is a need for one to place the STOP LOSS position at where the price structure / trend violated.
It’s a free world, we define what our risk tolerance is and be responsible of the exposure that we are subject ourselves to.
There are many ways to manage the CAPITAL RISK, the following examples illustrate some of them; for a single position and for multiple positions at any one time.
EXAMPLE 1: controlling risk through position sizing: iN this example assume a single open position at any one time, total Capital =RM50,000 and risk tolerance 3%.
Capital = RM50,000
Risk tolerance per trade (CAPITAL RISK) = 3% capital = 3% x RM50k = RM1,500 ( this means we are prepared to lose this amount per trade if we were wrong)
Assuming our entry rules shows that RM1.00 is a good entry level for the stock and the our stop loss position below pivot is at 90 sen. Therefore our TRADING RISK is 10 sen or 10%. Of entry price.
In order to maintain our Capital risk tolerance of RM1,500, we should not buy more than RM1,500/0.1= 15,000 shares of that stock. Should we want to use a deeper stop loss, then by definition of the equation, we need to reduce the number of shares we wanted buy, until the risk is maintain at RM1,500.
EXAMPLE 2: For Multiple stocks at any one time, capital RM50,000 and risk tolerance still 3% capital per position or trade.
In this situation, I suggest we divide our capital into 5 equal portions. This means each portion is RM10,000. Buy a stok up to this maximum amount. We can still control the risk up to 3% Capital per trade by limiting our STOP LOSS (TRADING RISK) not more than 12% of entry price. Why 12% not 15% ? well I have taken into consideration for possible slippage+ transaction costs …he he he.
Anyway make sure your stoploss position is placed below the last turning points/pivot/your trailling stops. (this is to indicate that if it is triggered it means the price structure or trend is changing)
Ok larrr I am tired already…but whatever
KNOW AND QUANTIFY OUR RISK TOLERANCE- express in term of % of TOTAL CAPITAL
And remeber, to TRADERS like us, RISK = (ENTRY – STOP LOSS ) x NUMBER of shares ... not anything else.
tak jadi PRO TRADER pun tak apa... tapi trade like them pun ok laaaaa
TRADE LIKE A PRO- BE DISCIPLINED
"Professionals take a trade when they are comfortable with the risk, while amateurs do it when they like the potential profit." - Vadym Graifer and Christopher Schumacher
read this article on STOP LOSS
http://www.yourtradingcoach.com/Articles-Risk-Management/Tight-Stops.html
see these videos on the right way to place STOPLOSS POSITION
http://www.youtube.com/YourTradingCoach#p/u/10/Q42PGn7B8jM
how to trade breakouts
http://www.youtube.com/YourTradingCoach#p/u/11/6YZ4ORz-UJ0
http://www.yourtradingcoach.com/Table/Videos-Risk-Management/
http://www.yourtradingcoach.com/Table/Videos-Money-Management/
happy trading!
Familiar with the quote “risk only the amount you can afford to lose”? Wow! Does it mean If I have a capital of RM50k, in order to be involved in the stock market , I have to be prepared to lose them all ? Does it mean if I bought any shares for say RM10,000, I must be prepared to lose all that RM10k ?
Eiyaaa be logical larrr…in order for me to lose all that RM10k, I have to watch helplessly the stock tumbling down to zero or until the stock get delisted ? will you allow that – watching helplessly your stock tumbling down? CRAZY ! no larrrr kan = we are not that insane to do that, we are like PRO Traders oso, we will intervene –stop the losses.
The question is how much losses are we willing to tolerate ? Some say up to the level that we can still feel ‘comfortable’ and boleh tido malam peacefully - That is our RISK TOLERENCE. Tapi biasalahhh, what get measured get done…. Damm ! QUANTIFY IT UPFRONT- how much of your capital you are prepared to lose in any one trade. if we don’t define our RISK TOLERANCE UPFRONT – the chances is that it will not get done and we will ‘unconciously’ joining those insane folks.
RISK TOLERANCE How much.... % of your capital ? What! , 20% of your capital per trade ? do you know that with that kind of risk level, your Capital will be wiped out, if you have a 5 losing trades in a row, ? NO MORE MONEY NO TRADE… lahhh period.
Hey! would you believe if I said that most Pro traders risk < 3% of their Capital per trade ? at 3% capital risk per trade means one can afford to have 33 losing trades in a row before the capital get wiped out.... In fact to some, risking 3% of their capital is too much. If they use 1%, they can afford to have 99 lose trades in a row before get capital wiped out. What do you think the probability for these Pro to lose 33 trades or 99 trades in a row ? hey!, what about yours !what's the probability for you to suffer 33 lose trades in a row ? Low isnt it.... then, wouldnt you like to adopt this money management strategy - where the risk of getting wiped out is low ? you decide, what is your risk tolerace per trade express in term of % capital. or nak quote in term of RM pun ok larrrr.
Well!, it should be noted that it doesn’t mean that since we can afford to lose 33 trades or 99 trades in a row we need to continue trading until 33 or 99 times after experiencing a series of losing trades in a row, without intervention and check and balance in between , if we did that it will be too late for us , no more money left. NO MONEY MEANS NO TRADE.
Most professional traders would stop trading for the month, and some even close all positions if they had 5 losses in a row. This will give them time to recuperate and to review their trading habits and methods to find out what they have done right and what they have done wrong, and making preparation for the next trades. By doing this they are able to minimise their capital erosion (the technical trading word is 'capital drawdown' to only 5-15% of their Capital- they still have plenty of money left for the next trades.
Definition of risk. For TRADERS, RISK (the amount we are prepared to lose) is defined as (ENTRY PRICE – STOP LOSS) x position size i.e number of shares bought., cant use the terms ‘position sizing’ sparingly, as it is the trademark of Dr Van Tharp.
Of course lahh , by definition if we don’t have a STOP LOSS position, the RISK equation will become Entry Price x No of shares bought , i.e this means we are prepared to risk the whole money we use to buy that particular stock okkkkk. By definition, If one decides to use a wider stops, the one need to reduce the number of shares bought in order to maintain the same amount of CAPITAL RISK (the amount we are prepared to lose if we are wrong) per trade. In order not to be knocked out by the 'noises' there is a need for one to place the STOP LOSS position at where the price structure / trend violated.
It’s a free world, we define what our risk tolerance is and be responsible of the exposure that we are subject ourselves to.
There are many ways to manage the CAPITAL RISK, the following examples illustrate some of them; for a single position and for multiple positions at any one time.
EXAMPLE 1: controlling risk through position sizing: iN this example assume a single open position at any one time, total Capital =RM50,000 and risk tolerance 3%.
Capital = RM50,000
Risk tolerance per trade (CAPITAL RISK) = 3% capital = 3% x RM50k = RM1,500 ( this means we are prepared to lose this amount per trade if we were wrong)
Assuming our entry rules shows that RM1.00 is a good entry level for the stock and the our stop loss position below pivot is at 90 sen. Therefore our TRADING RISK is 10 sen or 10%. Of entry price.
In order to maintain our Capital risk tolerance of RM1,500, we should not buy more than RM1,500/0.1= 15,000 shares of that stock. Should we want to use a deeper stop loss, then by definition of the equation, we need to reduce the number of shares we wanted buy, until the risk is maintain at RM1,500.
EXAMPLE 2: For Multiple stocks at any one time, capital RM50,000 and risk tolerance still 3% capital per position or trade.
In this situation, I suggest we divide our capital into 5 equal portions. This means each portion is RM10,000. Buy a stok up to this maximum amount. We can still control the risk up to 3% Capital per trade by limiting our STOP LOSS (TRADING RISK) not more than 12% of entry price. Why 12% not 15% ? well I have taken into consideration for possible slippage+ transaction costs …he he he.
Anyway make sure your stoploss position is placed below the last turning points/pivot/your trailling stops. (this is to indicate that if it is triggered it means the price structure or trend is changing)
Ok larrr I am tired already…but whatever
KNOW AND QUANTIFY OUR RISK TOLERANCE- express in term of % of TOTAL CAPITAL
And remeber, to TRADERS like us, RISK = (ENTRY – STOP LOSS ) x NUMBER of shares ... not anything else.
tak jadi PRO TRADER pun tak apa... tapi trade like them pun ok laaaaa
TRADE LIKE A PRO- BE DISCIPLINED
"Professionals take a trade when they are comfortable with the risk, while amateurs do it when they like the potential profit." - Vadym Graifer and Christopher Schumacher
read this article on STOP LOSS
http://www.yourtradingcoach.com/Articles-Risk-Management/Tight-Stops.html
see these videos on the right way to place STOPLOSS POSITION
http://www.youtube.com/YourTradingCoach#p/u/10/Q42PGn7B8jM
how to trade breakouts
http://www.youtube.com/YourTradingCoach#p/u/11/6YZ4ORz-UJ0
http://www.yourtradingcoach.com/Table/Videos-Risk-Management/
http://www.yourtradingcoach.com/Table/Videos-Money-Management/
happy trading!
ASSEMBLE YOUR ARMOUR AND WIN THE NEXT BATTLES - ITS YOUR EDGE
ASSEMBLE YOUR ARMOUR AND WIN THE NEXT BATTLES - ITS YOUR EDGE
WORDS OF ADVICE FROM CHIEF STRATEGIST - MASTER SUN TZU
"More planning shall give greater possibility of winning,
while less planning, lesser possibility of winning,
so how about those without planning ?
by this measure I can clearly foresee winning or losing
and Dan 10 Golden Rules by Dan Zanger- the guy who turned US 10, 775 capital into USD 18 mil in 18 months.
http://www.chartpattern.com/10_golden_rules.html
before assembling the weapons, lets hear words of advice from " Your Trading Coach"
PRICE ANALYSIS: TOP DOWN APPROACH- DEFINE MARKET STRUCTURE- DEFINE TREND - PRICE ANALYSIS http://www.youtube.com/watch?v=AKKdB8EwYj0&feature=related
STRATEGY 1: http://www.youtube.com/watch?v=JoBrQ-D6xmw
STRATEGY 2: http://www.youtube.com/watch?v=VbyifVYQdxA&feature=related
MORE TRADING STRATEGIES and IDEAS here:
http://chart-patterns.netfirms.com/trading-strategies.htm
WEAPON 1.SUPPORT AND RESISTANCE: Define the market structure and then look for triggers (like candle reversal patterns within its vicinity)
http://www.yourtradingcoach.com/Articles-Technical-Analysis/Support-and-Resistance.html
WEAPON 2:TRENDLINES TRADING: BOUNCE and BREAKOUTS
http://stockcharts.com/school/doku.php?id=chart_school%3Achart_analysis%3Atrend_lines
http://www.learn-stock-options-trading.com/trendlines.html
see the applications of trading using trendline here
http://www.youtube.com/watch?v=0fy9hqWx4xQ&feature=related
http://www.youtube.com/watch?v=SlVmp5YxG_k&feature=related
WEAPON 3: CHANNEL TRADING: BUY AT SWING LOW AND SELL AT SWING HIGH
In Uptrend channel: Lower Channel line = Uptrend Line = Dynamic Support, also known as Demand line . The Upper channel line is the Dynamic resistance line, also known as supply line
In Downtrend channel: Upper channel line= Downtrend line = Dynamic resistance line. The Lower Channel line = Dynamic support line
How to trade channel ? One way is to use canddle reversal patterns as trigges. Take long position when candle bounce off (bullish reversal) at vicinity of lower channel line. Exit on candle bearish reversal at upper channel vicinity.
from chartschool
http://stockcharts.com/school/doku.php?id=chart_school%3Achart_analysis%3Achart_patterns%3Aprice_channel_contin
from investopedia: Channeling: Charting A Path To Success
Find out how to build these charts showing buy, sell, stop-loss and take-profit points, and even estimate length of trade
http://www.investopedia.com/articles/trading/05/020905.asp
WEAPON 4: THE POWER OF JAPANESE CANDLESTICKS: may the light of the candle light your path to success
website yourtradingcoach provide a list of them. Enjoy the videos on candlesticks
http://www.yourtradingcoach.com/Videos-Technical-Analysis/Candlestick-Charting-Videos.html
WEAPON 5: THE CHART PATTERNS USED BY DAN ZANGER - learn from the person himself here
http://www.chartpattern.com/understanding_chart_patterns.html
http://www.chartpattern.com/flat_base.html FLAT BASE
http://www.chartpattern.com/cup_handle.html CUP WITH HANDLE
l and dont forget to go through his 10 golden rules here http://www.chartpattern.com/10_golden_rules.html
if you want an article on the interview with him ... that one you got to email me larrrr ok
http://chart-patterns.netfirms.com/
ok , learn regarding chart patterns at informedtraders
http://www.informedtrades.com/f134/
and from CHARTSCHOOL
http://stockcharts.com/help/doku.php?id=chart_school%3Achart_analysis%3Achart_patterns
MAIN BULLISH REVERSAL PATTERNS: Double/triple bottom, higher low, inverted head and shoulder, rounded or saucer shaped bottom and decending wedge
MAIN BEARISH REVERSAL PATTERNS: Double/Triple top, Lower High, Head and Shoulder, Rounded or mushroom shaped top and ascending wedge
CONTINUATION PATTERNS: CUP WITH HANDLE (William O neil & Dan Zanger's favourite), flag, pennant, RECTANGLES (flat based) and triangles.
hey that is enough larrr... if you want more, do your own research larrrr or visit Bicarajutawan Forum
http://www.bicarajutawan.com/forum/thread13631.html
or join a discussion on FB group KLSE Technical Analysis discussion http://www.facebook.com/group.php?gid=200892098420
TAKE OUR TRADING BUSINESS TO THE NEXT LEVEL: VOLUME SPREAD ANALYSIS
THE Wyckoff 3 PRINCIPLES
1. THE LAW OF SUPPLY AND DEMAND
2. THE LAW OF CAUSE AND EFFECT
3. THE LAW OF EFFORT VERSUS RESULTS.
for those who think that they are already advanced and those wanted to understand the market dynamics; supply and demad dynamics and learn about VSA, please visit Informedtraders site
http://www.informedtrades.com/f302/
WELL EVERY ONE! THAT IS THE MAGIC OF TECHNICAL ANALYSIS-ENJOY THIS VIDEO from "yourtrading coach website"
http://www.youtube.com/watch?v=1SL09dlEVio&feature=related
MAY THE CANDLE LIGHTS YOUR PATH TO PROFITABLE TRADING
happy trading !!!!
Khalid.
- RECUPERATE - RECHARGE - SHARPEN OUR EDGE
- THE SELF FULFILLING PROPHECY: SELL IN MAY AND GO AWAY
well well well, what a hectic month blood spills all over, hopefully it is not yours. The addage "sell in May and go away" fulfills its prophecy....if you escape the battle unscatch -congratulations ! if you are dead... well you are out of the game.. if you are just nyawa nyawa ikan.. still got hope .. if you are just by standers..gheee you may not want to get involve in the stock market....
tak kira you all luka sikit ke , luka banyak ke....MARI MARI MARI lets GO BACK TO THE BASICS... recuperate..recharge yourself and fit your self with better armour for the next battles.
BACK TO BASIC
Just sharing a collection of Trading educational videos by successful trader Lance Beggs via his website:
http://www.yourtradingcoach.com/. this is the beginning, you are encouraged to watch his other videos and read more trading articles from his webpage in order to improve our game. Trading Psychology, Money management, risk management and trading system.
TRADERS CHECKLIST; http://www.youtube.com/YourTradingCoach#p/u/35/ZwsfSDzUJY0
get the printable checklist here: Steps to trading success
http://www.yourtradingcoach.com/Articles-Business-Management/Trader-s-Checklist-Steps-to-Trading-Success.html
1 TRADING .PSYCHOLOGY: Are we still in the game ? yes TRADIN IS HARD..VERY HARD...many lesson to learn....TRADING IS SIMPLE BUT NOT EASYtake babty steps.. improve litle by little... today a little better than yesterday. TAKE ACTION forLEARNING IS AN INTEGRATION OF THINKING AND DOING. so, JUST DO IT - and improve ourselves along the way
http://www.youtube.com/YourTradingCoach#p/u/29/jONXdXYdh4k
2.MONEY & RISK MANAGEMENT
Manage our TRADING RISK through Stop Loss Position. Manage Capital Risk through position sizing. Limit Capital risk to <3% per trade. This is to AVOID SHARK BITE
if experiencing losses max 5 trades in a row, Stop trading. take a back seat and review what and where we have done wrong. This is to minimise the impact of PIRANHA BITES-ya that small but lethal bites. If not control we will be eaten to our bone.
Trading risk is defined as ENTRY PRICE - STOP LOSS
Caqpital risk is defined as ( ENTRY PRICE -STOP LOSS) X POSITION SIZE
MONEY MANAGEMENT: RECOVERING LOSSES: WHY IT IS HARD TO GET BACK TO BREAKEVEN- watch this video. manage our losses before it destroy us.
http://www.youtube.com/YourTradingCoach#p/u/18/n5z3_XwqK3s
TIGHT OR WIDE STOPS
http://www.youtube.com/YourTradingCoach#p/u/10/Q42PGn7B8jM
3.EXITS STRATEGIES: Pay attention to our EXITS. Define it clearly for EXIT determine the outcomes of out trade. There is no fixed rules nor perfect exits. Whatever, it should take us out when we are wrong.
should we use wide or tight stop ? should we use target or trailling stops? find the answer here.
Exit Stratey 1; DEFINE THE DRIVERS
http://www.youtube.com/YourTradingCoach#p/u/25/8KV5BCWQrNM
Exit Strategy 2; NO FIXED RULES- NO PERFECT EXIT STRATEGY - BUT IF DONT HAVE ONE, THE REAL DAMAGE WILL BE OUR PSYCHOLOGY - WHEN THE EDGE IS GONE, GET OUT !.
http://www.youtube.com/YourTradingCoach#p/u/24/pgw1cZEGh-c
Exit Strategy 3: SEE HOW THE EXIT CONCEPTS BEING APPLIED HERE
http://www.youtube.com/YourTradingCoach#p/u/23/4x86460t4eg exit strategy 3
4 FINDING HIGH PROBABILITY and LOW RISK TRADES. - LOOK AT THE MARKET STRUCTURE 1st AND THEN THE THE ENTRY TRIGGER.
See the big picture 1st get to know the MARKET STRUCTURE: Market structure tells us where to trade (at the major resistance or support) then look at the ENTRY TRIGGER. Triggers tells us when to get in . The trigger can be candle reversal patterns, moving avg golden/dead crosses or simply the oscillators like momentum, Macd, Stochastic etc.
DISCOVER THE HIDDEN SECRETS OF TECHNICAL ANALYSIS HERE
http://www.youtube.com/watch?v=1SL09dlEVio&feature=related
PRICE ANALYSIS -TOP DOWN APPROACH : MARKET STRUCTURE - TREND - PRICE ACTION
http://www.youtube.com/YourTradingCoach#p/u/36/AKKdB8EwYj0
strategy 1: look at MARKET STRUCTURE and then TRIGGERS.
market structure tells us where to trade and triggers when to get in
htthttp://www.youtube.com/watch?v=1SL09dlEVio&feature=relatedp%3A%2F%2Fwww.youtube.com%2FYourTradingCoach#p/u/38/JoBrQ-D6xmw
strategy 2; trade the trend between major support and resistance
http://www.youtube.com/YourTradingCoach#p/u/37/VbyifVYQdxA
strategy 3: trading breakouts
http://www.youtube.com/YourTradingCoach#p/u/11/6YZ4ORz-UJ0
5. IMPORTANCE OF A TRADING JOURNAL
http://www.youtube.com/YourTradingCoach#p/u/2/yhpCON99QlQ
use A TRADING PLAN TO CONTROL OUR EMOTIONS
PLAN YOUR TRADE AND TRADE YOUR PLAN
EXPECT NOTHING BUT BE PREPARED FOR EVERYTHING
Happty Trading.....
Khalid
hey you wanted to be a serious investor/traders meddling around with the stock markets or capital markets huh! ...before that read this article.. of course lahhhh when it is well written .... it is definitely not by me because I cant write this well and eloquent... it is from Dr Van Tharp -who wrote a popular books call " Trade your way to financial freedom' and "super trader"... enjoy your reading reading...this article is >4000 words long... lets see if it makes you a better trader...
What Is a Trading System?
By Van K. Tharp, Ph.D.
Beginning traders and investors to some seasoned investors are constantly asking us “What exactly is a system?” The purpose of this article will be to give you that information as clearly as possible. First, we’ll go through some background information to help you understand what a system is outside of the context of trading. You’ll learn how different people relate to systems according to how they relate to money. The second part of this article will focus on clearly defining what a trading system is. The third part of this article will focus on the broader picture of your system—your trading plan. Finally, we’ll focus on some key elements in system development.
Business Systems
In Robert Kiyosaki’s book, Cash-Flow Quadrant, he distinguishes two types of people who work for money and two types of people who have money working for them. In each case, one of the major distinguishing characteristics is how they deal with systems.
First, let’s look at the idea of business systems. McDonald’s, as a major franchise, is basically a large set of systems that one buys. In fact, a person who buys a McDonald’s franchise must go to Hamburger University for about six months (I believe that’s the length of it) to learn the systems for operating the franchise. There are systems for food delivery, preparing food, greeting customers, serving them within a minute, cleanup, etc. And all of these systems can easily be carried out by a manager who has a college degree and employees who might even be high school dropouts. In other words, a system is something that is repeatable, simple enough to be run by a 16 year old who might not be that bright, and works well enough to keep many people returning as customers.
Now, knowing that definition of a system, let’s look at how people in the four cash flow quadrants relate to systems.
The Employee: Employees are basically motivated by security. They have a job and they do their work to get money. Employees basically run the systems. They don’t necessarily know that they are running a system, but that is their function. For example, one employee at McDonald’s will greet customers and take their order. This employee is basically running the “customer-greeting” system.
Most employees do not understand systems. Instead, they just know what their job is. And this is typical of employees who become traders or employees who work as traders. They typically ask questions such as “What stocks should I buy?” “What is the market going to do?” Or “How do I go about doing this?” We see it all the time in the questions we get. For example, a gentleman just called into CNBC, as I’m writing this, and asked the guest, “What direction do you think the market may go with respect to 'the war' and how might one profit from it?” These are typically employee questions. And they amount to saying, “I don’t really understand anything, please tell me what to do!” The financial media thrives by answering the questions of the employee investor/trader.
The Self-Employed Person: The self-employed person is basically motivated by control and doing it right. Notice that I have often talked about how these motivations constitute some of the biases that most traders have—the need to be right and the need to control the markets. The self-employed person is the entire system. They are basically running on a treadmill only they don’t know it. And the more they work, the more tired they get.
Like the employee, the self-employed are working for money. However, they like it a little better, because they are in charge. They think working harder will make them more money—and to a certain extent it does. But mostly, working harder gets them tired. Nevertheless, they continue to plough forward thinking that they are the only ones who can do it right.
As I said earlier, the self-employed person basically is the system. And quite often they cannot see the system because they are so much a part of it. They are stuck in all the details. In addition, they have a strong tendency to want to “complexify” things. They are always looking for perfectionism and they believe that the perfect system must be complex. They are always asking, “What will make my system perfect?”
A lot of people come into trading from the self-employed mentality—doctors, dentists, and other professionals who had their own small business in which they were basically all of the systems in one. This is all they tend to know and they approach trading the same way. They keep adding complexity “until it works,” even though this strategy seldom works. The self-employed person would be likely to have a discretionary system that is constantly being changed.
The Business Owner: A good business owner should be able to walk away from the business for a year and come back to find it running better than before. While this is an ideal type of statement, it has some theoretical truth to it. This should occur because the job of the business owner is to design a group of systems to run the business so well that his employees can do the job by themselves (or at least with a manager in place). In other words, the business owner is someone who designs systems and these are usually simple systems.
The business owner usually does very well in the trading arena if they approach the process the same way that they’ve run a business before. And, of course, the business owner would usually hire someone to run their trading system, at a much lower wage.
When Tom Basso,1 who is interviewed in The New Market Wizards, did workshops with me, he always described himself as a businessman first and a trader second. Part of Tom’s perspective was to look for repetitive tasks that a human being in his organization has to repeat over and over again. When he found such tasks, his job was to develop a program to take that task out of human hands. Routine computer programs are great examples of simple systems.
The Investor: The last person on the quadrant is the investor. The investor is someone who invests in businesses and his/her most important criterion should be, “What is the rate of return of the business?” In other words, this person is continuing to ask, “If I put money in this investment, what kind of return will I get on it?” High return investments (e.g., high returns on equity) are typically good businesses in which to put your money.
Robert Kiyosaki describes this as the quadrant in which money is converted to wealth. Rich people, according to Kiyosaki, derive 70% of their income from investments and 30% or less of their income from wages.
Most traders are probably not investors by this definition. They buy low or sell high, trading stocks. As a result, there is something they must do to generate their money. Investors, in contrast, are people who typically look for places where they can put their money that generate rates of returns of 25% or higher without them doing anything. If you know how to get those types of returns, then you want to hold onto those investments as long as possible. Many high tech stocks were showing earnings growth rates of well over 25%, and when they did, the prices went up dramatically because this is what investors want. The problem with such investments is they are not guaranteed to continue forever. Many of you have probably discovered that in the last few years.
What is a Trading System?
What most people think of as a trading system, I would call a trading strategy. This would consist of eight parts:
a market filter
set up conditions
an entry signal
a worst-case stop loss
re-entry when it is appropriate
profit-taking exits
a position sizing algorithm, and
you might need multiple systems for different market conditions.
A market filter is a way of looking at the market to determine if the market is appropriate for your system. For example, we can have quiet trending markets, volatile trending markets, flat quiet markets, and flat volatile markets. And, of course, the trending markets can either be bullish or bearish. Your system might only work well in one of those market conditions. As a result, you need a filter to determine whether your system has a high probability of working. Should you trade your system or not?
The set up conditions amount to your screening criteria. For example, if you trade stocks, there are 7,000+ stocks that you might decide to invest in at any time. As a result, most people employ a series of screening criteria to reduce that number down to 50 stocks or less. Examples of screens might include William O’Neil’s CANSLIM criteria2 or a value screen for stocks with good PERs or a good PEG ratio or a fundamental screen having to do with management and its return on assets. You might also have a technical set up, just prior to entry such as watching the stock to go down for seven straight days.
The entry signal would be a unique signal that you’d use on stocks that meet your initial screen to determine when you might enter a position—either long or short. There are all sorts of signals one might use for entry, but it typically involves some sort of move in your direction that occurs after a particular set-up occurs.
The next component of your trading system is your protective stop. This is the worst-case loss that you would want to experience and it defined 1R (or your initial risk) for you. Your stop might be some value that will keep you in the stock for a long time (e.g., a 25% drop in the price of the stock) or something that will get you out quickly if the market turns against you (e.g., a 25 cent drop). Protective stops are absolutely essential. Markets don’t go up forever and they don’t go down forever. You need stops to protect yourself. As I said in Trade Your Way To Financial Freedom, entering the market without a protective stop is like driving through town ignoring red lights. You might get to your destination eventually, but your chances of doing so successfully and safely are very slim.
The fifth component of a trading system is your re-entry strategy. Quite often when you get stopped out of a position, the stock will turn around in the direction that favors your old position. When this happens, you might have a perfect chance for profits that is not covered by your original set-up and entry conditions. As a result, you also need to think about re-entry criteria. When might you want to get back into a closed out position? Under what conditions would this be feasible and what criteria would trigger your re-entry?
The sixth component of a trading system is your exit strategy. The exit strategy could be very simple. For example, it might simply be a 25% trailing stop where you adjust the stop to 75% of the closing price whenever a stock makes a new high. The stop is always adjusted up, never down.
However, you may have many possible exits in addition to a trailing stop. For example, a large volatility move (e.g., 1.5 times the average daily volatility) against you in a single day is a good exit. Crossing a significant moving average (e.g., the 50 day) might be a great exit. Technical signals are good exits (e.g., breaking a significant trend line.)
Exits are one of the more critical parts of your system. It is one factor in your trading of which you have total control. And it is your exits that control whether or not you make money in the market or have small losses. You should spend a great deal of time and thought on your exit strategies.
The seventh component of your system is your position sizing algorithm. Position sizing is that part of your system that controls how much you trade. It determines how many shares of stock should you buy. A general recommendation would be to continually risk 1% of your portfolio. Thus, if you have a $25,000 portfolio, you wouldn’t want to risk more than $250.
Let’s say you wanted to buy a stock at $10. You decided to keep a 25% trailing stop, meaning if the stock dropped 25% to $7.50 you would exit your position. Since your stop is your risk per share, you would divide that $2.50 risk into $250 to determine the number of shares to purchase. Since $2.50 goes into $250 100 times, you would purchase 100 shares of stock. Notice that you would be buying $1,000 worth of stock (100 shares @ $10.00 each) or four times your risk of $250. This makes sense since your stop is 25% of the purchase price. Thus, your risk would be 25% of your total investment. If you want to know more about position sizing, I’d suggest that you read review Trade Your Way to Financial Freedom, and my Money Management Report, or reivew my Position Sizing DVDs.
Finally, depending upon how robust your trading system is, you might need multiple trading systems for each type of market. At minimum, you might need one system for trending markets and another system for flat markets.
The Entire Trading System: Your Business Plan for Trading3
Remember that I said that what most people consider a trading system, is simply a trading strategy that should be part of an overall business plan. Without the overall business plan, many people would still lose money. Let’s look at the overall context in which a trading strategy should be made—your business plan. I have written extensively on this subject, therefore for the purposes of this article, the following is just a brief overview.
Here is a summary of what we consider to be essential for a good trading plan:
1) The Executive Summary. This is usually the last section written. It reviews all of the material of the plan and presents it in summary form. It should describe in detail the objective of the plan and then briefly describe, without a lot of detail, how the objectives will be achieved.
2) A Business Description. The business description should include the mission of the business, an overview of the business and its history, the products and services you provide (which is growth of capital and risk control as a trader), your operations, operational considerations such as equipment needed and site location, and your organization and management of employees (if any). All of these topics are fairly self-explanatory, but you should take the time to write them out as part of your plan.
3) An Industry Overview and Competition. In the industry overview you need to look at the factors influencing the market. For example, Ed Yardeni in his web site lists ten major factors influencing the market. These include a globally competitive economy, a revolution in innovation, wireless access to the Internet, low tech companies having access to high tech tools and changing their businesses as a result, the need to outsource to increase productivity, and many other themes. See www.yardeni.com for more information. In addition, you also need to know who/what your competition is. Who are you trading against? What are their beliefs? What advantages do they have that you don’t? What advantages do you have that they don’t?
4) Self-Knowledge Section: You need to know your strengths and your weaknesses and list them in this section. You need to know how to capitalize on your strengths and avoid (or overcome) your weaknesses.
5) Your Trading Plan Itself. The tactical trading plan should be a part of your trading plan, but it should also include (a) your trading beliefs that form the basis of your plan, (b) any strategic alliances you may have, and (c) what you plan to do in terms of education and coaching.
6) Your Trading Edges: I believe your trading plan should also include a listing of all of the trading edges that you have in the market. When you list your edges, you can review them often and be sure that you capitalize upon them. For example, your edges might include a) the fact that you don’t have to trade, b) your understanding of R-multiples and position sizing (which give people a huge edge over those who have no idea about these concepts), c) your ability to read a level II screen to get excellent stock trades, d) your sources of information, e) your ability to plan well in advance so that you have a game plan each day, f) your skill in following the ten tasks of trading, g) your knowledge of yourself and your strengths and weaknesses. This is just a sample of the possible edges that you might have over the average trader/investor.
7) Financial Information. This section should include three parts. The first part is your budget. How much money do you have? What will the trading process cost you? The second part will be your cash flow statement. Does your plan make sense in terms of cash flow? And finally, the third part will include profit and loss statements. If you have no trading record, you need to make estimates based on historical testing and based on paper trading.
8) Worst Case Contingency Planning. Things always happen that you have not accounted for or planned for in your trading plan. How will you deal with these elements? What will you do if any of these things come up? How will you make decisions when these elements come up?
If you want more information, I have Market Mastery newsletters that were devoted to business planning.
Developing a System
I am revisiting an interview I did with LTC Ken Long, a systems expert with the U.S. Army. Here’s what Ken said about developing a system:
Define Who You Are: “Before you conduct any planning or system design, you must have a thorough understanding of who you are and what your objectives are. Individual investors, private hedge fund managers, public mutual fund managers, and trust managers will have different dynamics, time frames, and risk profiles. This relates to system design in that the final product must fit the circumstances and dynamics of the group or individual. If you jump into system design without considering these basics, you will sow the seeds of future problems.”
Objectives: “In trading system design, the problem is to define what you want the system to accomplish. With as many ideas, events, circumstances and adjustments that occur in system development, you have to have your objectives crystal clear in your mind. If you don’t know where you are going, then any old road will do.”
“Objectives give you the basis for making choices and prioritizing actions. This is not to say that objectives are static. In fact, they can change as you discover either unexpected limitations or advantages in your system as it matures. But before you start you must have an initial set of goals and objectives to guide you.”
Calibration: “After the system is deployed and operational, part of the process of calibrating the system is checking to see if the objectives still fit the person or organization that you have become. That’s a very exciting part of system design. I can’t tell you how often I’ve been part of a design team that started with a limited set of objectives and discovered in the “imagineering” phase that by adjusting our sights we were able to accomplish far more for much less. But, you have to start somewhere. If you don’t start with objectives, you are spinning your wheels.”
I posed this question to Ken: “This section is critical. How will you know if your system is working or not? What are your performance benchmarks? What are your criteria for knowing that your system is not working? How will you make decisions when these criteria are met? Will you scrap everything or just make position sizing adjustments?" All of these questions are critical to developing and operating a good trading system.
How to Make Decisions Within the System
Here’s what Ken said about this critical topic:
“If you don’t work out how you will make decisions ahead of time, then you will certainly have to sort it out at the time of the first difficult decision. If you make decisions on the spot, with no guidelines, you have two problems: 1) figuring out what to do and 2) how to do it. And these problems must be faced under great stress and limited time. It’s better to calmly sort out the decision making process ahead of time so that the decision mechanism is agreed to before hand.”
“In the Army, no plan usually survives the first contact with the enemy, and so our goal in planning is to develop a range of alternatives that can apply to a number of scenarios. Through rehearsal and analysis, we know which strategy works best for a given set of conditions. The goal of strategy development is to provide the decision maker with a menu of choices that are robust enough to cover a wide range of contingencies.”
“In general system development then, we look for robust, simple plans that can cover a wide range of conditions. When you preplan like this, you don’t try to force the world to adapt to your plan. If you fall in love with a strategy and become emotionally invested in making it work no matter what the market or the world says, you lose the ability to adapt and learn.”
“A real world example for a trading system might be a trader who decides to check his actual trading performance every month against the calculated system expectancy, and determine the statistical significance of the variation. He might decide that any result greater than one or two standard deviations is a signal to stop trading and recalibrate the system or reconfirm the validity of the trading model and its underlying assumptions. If the actual expectancy is close to the predicted expectancy, then the trader knows he’s on target. In modern manufacturing systems this concept is called “Statistical Process Control.”
“It lets the system controller know when the production machines are drifting out of tolerance and degrading the quality of the output to the point where the line is stopped and the machines are retooled.”
I asked Ken about how his advice applies in view of the fact that many trading systems are automated. Here’s how he responded:
“It’s a general problem of the information age, which provides us with a wide range of automated decision support systems that can compile massive amounts of data, analyze and process it, and present us with decision packages for action based on criteria that we can specify. I use a lot of these. However, the key to making them work is to make sure that you understand the underlying business model and system logic. When you do things automatically by computer, you need to understand what the computer is calculating and filtering. I won’t use power tools until I know how they work and I have mastered their use in simulations.”
“If you have done all the preparation work that you outlined in your system design workshop,4 and you have chosen indicators that provide you the right signals for making your trading decisions, then the right thing to do is to rely on the signals to make your decisions. Periodic calibration of the system, however, is still necessary to confirm that you have chosen the correct signals and that your actions are correct. If you have not done that work though, it may be the case that you simply picked up the latest hot indicator and are using it regardless of how appropriate it may be for your trading system. If it fails to work as advertised, you are likely to dump it for the next hot idea that comes along. Then you’re not a system’s trader, you are only reacting to advertising.”
Notes
1. We have two newsletter back issues in which we interviewed Tom Basso for those of you who would like to know more. Call 919-466-0043 for more information.
2. William O’Neil, How to Make Money In Stocks. New York : McGraw-Hill, 1987.
3. We have an audio program on business planning for traders that takes you through the development of a business plan.
4. The workshop Ken is referring to is the, How to Develop a Winning Trading System That Fits You workshop, which we offer once or twice each year.
About the Author: Trading Coach Dr. Van K Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Freedom and his classic Peak Performance Home Study Course for traders and investors. Visit him at www.iitm.com for a FREE trading game or to sign up for his FREE weekly newsletter.
WORDS OF ADVICE FROM CHIEF STRATEGIST - MASTER SUN TZU
"More planning shall give greater possibility of winning,
while less planning, lesser possibility of winning,
so how about those without planning ?
by this measure I can clearly foresee winning or losing
and Dan 10 Golden Rules by Dan Zanger- the guy who turned US 10, 775 capital into USD 18 mil in 18 months.
http://www.chartpattern.com/10_golden_rules.html
before assembling the weapons, lets hear words of advice from " Your Trading Coach"
PRICE ANALYSIS: TOP DOWN APPROACH- DEFINE MARKET STRUCTURE- DEFINE TREND - PRICE ANALYSIS http://www.youtube.com/watch?v=AKKdB8EwYj0&feature=related
STRATEGY 1: http://www.youtube.com/watch?v=JoBrQ-D6xmw
STRATEGY 2: http://www.youtube.com/watch?v=VbyifVYQdxA&feature=related
MORE TRADING STRATEGIES and IDEAS here:
http://chart-patterns.netfirms.com/trading-strategies.htm
WEAPON 1.SUPPORT AND RESISTANCE: Define the market structure and then look for triggers (like candle reversal patterns within its vicinity)
http://www.yourtradingcoach.com/Articles-Technical-Analysis/Support-and-Resistance.html
WEAPON 2:TRENDLINES TRADING: BOUNCE and BREAKOUTS
http://stockcharts.com/school/doku.php?id=chart_school%3Achart_analysis%3Atrend_lines
http://www.learn-stock-options-trading.com/trendlines.html
see the applications of trading using trendline here
http://www.youtube.com/watch?v=0fy9hqWx4xQ&feature=related
http://www.youtube.com/watch?v=SlVmp5YxG_k&feature=related
WEAPON 3: CHANNEL TRADING: BUY AT SWING LOW AND SELL AT SWING HIGH
In Uptrend channel: Lower Channel line = Uptrend Line = Dynamic Support, also known as Demand line . The Upper channel line is the Dynamic resistance line, also known as supply line
In Downtrend channel: Upper channel line= Downtrend line = Dynamic resistance line. The Lower Channel line = Dynamic support line
How to trade channel ? One way is to use canddle reversal patterns as trigges. Take long position when candle bounce off (bullish reversal) at vicinity of lower channel line. Exit on candle bearish reversal at upper channel vicinity.
from chartschool
http://stockcharts.com/school/doku.php?id=chart_school%3Achart_analysis%3Achart_patterns%3Aprice_channel_contin
from investopedia: Channeling: Charting A Path To Success
Find out how to build these charts showing buy, sell, stop-loss and take-profit points, and even estimate length of trade
http://www.investopedia.com/articles/trading/05/020905.asp
WEAPON 4: THE POWER OF JAPANESE CANDLESTICKS: may the light of the candle light your path to success
website yourtradingcoach provide a list of them. Enjoy the videos on candlesticks
http://www.yourtradingcoach.com/Videos-Technical-Analysis/Candlestick-Charting-Videos.html
WEAPON 5: THE CHART PATTERNS USED BY DAN ZANGER - learn from the person himself here
http://www.chartpattern.com/understanding_chart_patterns.html
http://www.chartpattern.com/flat_base.html FLAT BASE
http://www.chartpattern.com/cup_handle.html CUP WITH HANDLE
l and dont forget to go through his 10 golden rules here http://www.chartpattern.com/10_golden_rules.html
if you want an article on the interview with him ... that one you got to email me larrrr ok
http://chart-patterns.netfirms.com/
ok , learn regarding chart patterns at informedtraders
http://www.informedtrades.com/f134/
and from CHARTSCHOOL
http://stockcharts.com/help/doku.php?id=chart_school%3Achart_analysis%3Achart_patterns
MAIN BULLISH REVERSAL PATTERNS: Double/triple bottom, higher low, inverted head and shoulder, rounded or saucer shaped bottom and decending wedge
MAIN BEARISH REVERSAL PATTERNS: Double/Triple top, Lower High, Head and Shoulder, Rounded or mushroom shaped top and ascending wedge
CONTINUATION PATTERNS: CUP WITH HANDLE (William O neil & Dan Zanger's favourite), flag, pennant, RECTANGLES (flat based) and triangles.
hey that is enough larrr... if you want more, do your own research larrrr or visit Bicarajutawan Forum
http://www.bicarajutawan.com/forum/thread13631.html
or join a discussion on FB group KLSE Technical Analysis discussion http://www.facebook.com/group.php?gid=200892098420
TAKE OUR TRADING BUSINESS TO THE NEXT LEVEL: VOLUME SPREAD ANALYSIS
THE Wyckoff 3 PRINCIPLES
1. THE LAW OF SUPPLY AND DEMAND
2. THE LAW OF CAUSE AND EFFECT
3. THE LAW OF EFFORT VERSUS RESULTS.
for those who think that they are already advanced and those wanted to understand the market dynamics; supply and demad dynamics and learn about VSA, please visit Informedtraders site
http://www.informedtrades.com/f302/
WELL EVERY ONE! THAT IS THE MAGIC OF TECHNICAL ANALYSIS-ENJOY THIS VIDEO from "yourtrading coach website"
http://www.youtube.com/watch?v=1SL09dlEVio&feature=related
MAY THE CANDLE LIGHTS YOUR PATH TO PROFITABLE TRADING
happy trading !!!!
Khalid.
- RECUPERATE - RECHARGE - SHARPEN OUR EDGE
- THE SELF FULFILLING PROPHECY: SELL IN MAY AND GO AWAY
well well well, what a hectic month blood spills all over, hopefully it is not yours. The addage "sell in May and go away" fulfills its prophecy....if you escape the battle unscatch -congratulations ! if you are dead... well you are out of the game.. if you are just nyawa nyawa ikan.. still got hope .. if you are just by standers..gheee you may not want to get involve in the stock market....
tak kira you all luka sikit ke , luka banyak ke....MARI MARI MARI lets GO BACK TO THE BASICS... recuperate..recharge yourself and fit your self with better armour for the next battles.
BACK TO BASIC
Just sharing a collection of Trading educational videos by successful trader Lance Beggs via his website:
http://www.yourtradingcoach.com/. this is the beginning, you are encouraged to watch his other videos and read more trading articles from his webpage in order to improve our game. Trading Psychology, Money management, risk management and trading system.
TRADERS CHECKLIST; http://www.youtube.com/YourTradingCoach#p/u/35/ZwsfSDzUJY0
get the printable checklist here: Steps to trading success
http://www.yourtradingcoach.com/Articles-Business-Management/Trader-s-Checklist-Steps-to-Trading-Success.html
1 TRADING .PSYCHOLOGY: Are we still in the game ? yes TRADIN IS HARD..VERY HARD...many lesson to learn....TRADING IS SIMPLE BUT NOT EASYtake babty steps.. improve litle by little... today a little better than yesterday. TAKE ACTION forLEARNING IS AN INTEGRATION OF THINKING AND DOING. so, JUST DO IT - and improve ourselves along the way
http://www.youtube.com/YourTradingCoach#p/u/29/jONXdXYdh4k
2.MONEY & RISK MANAGEMENT
Manage our TRADING RISK through Stop Loss Position. Manage Capital Risk through position sizing. Limit Capital risk to <3% per trade. This is to AVOID SHARK BITE
if experiencing losses max 5 trades in a row, Stop trading. take a back seat and review what and where we have done wrong. This is to minimise the impact of PIRANHA BITES-ya that small but lethal bites. If not control we will be eaten to our bone.
Trading risk is defined as ENTRY PRICE - STOP LOSS
Caqpital risk is defined as ( ENTRY PRICE -STOP LOSS) X POSITION SIZE
MONEY MANAGEMENT: RECOVERING LOSSES: WHY IT IS HARD TO GET BACK TO BREAKEVEN- watch this video. manage our losses before it destroy us.
http://www.youtube.com/YourTradingCoach#p/u/18/n5z3_XwqK3s
TIGHT OR WIDE STOPS
http://www.youtube.com/YourTradingCoach#p/u/10/Q42PGn7B8jM
3.EXITS STRATEGIES: Pay attention to our EXITS. Define it clearly for EXIT determine the outcomes of out trade. There is no fixed rules nor perfect exits. Whatever, it should take us out when we are wrong.
should we use wide or tight stop ? should we use target or trailling stops? find the answer here.
Exit Stratey 1; DEFINE THE DRIVERS
http://www.youtube.com/YourTradingCoach#p/u/25/8KV5BCWQrNM
Exit Strategy 2; NO FIXED RULES- NO PERFECT EXIT STRATEGY - BUT IF DONT HAVE ONE, THE REAL DAMAGE WILL BE OUR PSYCHOLOGY - WHEN THE EDGE IS GONE, GET OUT !.
http://www.youtube.com/YourTradingCoach#p/u/24/pgw1cZEGh-c
Exit Strategy 3: SEE HOW THE EXIT CONCEPTS BEING APPLIED HERE
http://www.youtube.com/YourTradingCoach#p/u/23/4x86460t4eg exit strategy 3
4 FINDING HIGH PROBABILITY and LOW RISK TRADES. - LOOK AT THE MARKET STRUCTURE 1st AND THEN THE THE ENTRY TRIGGER.
See the big picture 1st get to know the MARKET STRUCTURE: Market structure tells us where to trade (at the major resistance or support) then look at the ENTRY TRIGGER. Triggers tells us when to get in . The trigger can be candle reversal patterns, moving avg golden/dead crosses or simply the oscillators like momentum, Macd, Stochastic etc.
DISCOVER THE HIDDEN SECRETS OF TECHNICAL ANALYSIS HERE
http://www.youtube.com/watch?v=1SL09dlEVio&feature=related
PRICE ANALYSIS -TOP DOWN APPROACH : MARKET STRUCTURE - TREND - PRICE ACTION
http://www.youtube.com/YourTradingCoach#p/u/36/AKKdB8EwYj0
strategy 1: look at MARKET STRUCTURE and then TRIGGERS.
market structure tells us where to trade and triggers when to get in
htthttp://www.youtube.com/watch?v=1SL09dlEVio&feature=relatedp%3A%2F%2Fwww.youtube.com%2FYourTradingCoach#p/u/38/JoBrQ-D6xmw
strategy 2; trade the trend between major support and resistance
http://www.youtube.com/YourTradingCoach#p/u/37/VbyifVYQdxA
strategy 3: trading breakouts
http://www.youtube.com/YourTradingCoach#p/u/11/6YZ4ORz-UJ0
5. IMPORTANCE OF A TRADING JOURNAL
http://www.youtube.com/YourTradingCoach#p/u/2/yhpCON99QlQ
use A TRADING PLAN TO CONTROL OUR EMOTIONS
PLAN YOUR TRADE AND TRADE YOUR PLAN
EXPECT NOTHING BUT BE PREPARED FOR EVERYTHING
Happty Trading.....
Khalid
hey you wanted to be a serious investor/traders meddling around with the stock markets or capital markets huh! ...before that read this article.. of course lahhhh when it is well written .... it is definitely not by me because I cant write this well and eloquent... it is from Dr Van Tharp -who wrote a popular books call " Trade your way to financial freedom' and "super trader"... enjoy your reading reading...this article is >4000 words long... lets see if it makes you a better trader...
What Is a Trading System?
By Van K. Tharp, Ph.D.
Beginning traders and investors to some seasoned investors are constantly asking us “What exactly is a system?” The purpose of this article will be to give you that information as clearly as possible. First, we’ll go through some background information to help you understand what a system is outside of the context of trading. You’ll learn how different people relate to systems according to how they relate to money. The second part of this article will focus on clearly defining what a trading system is. The third part of this article will focus on the broader picture of your system—your trading plan. Finally, we’ll focus on some key elements in system development.
Business Systems
In Robert Kiyosaki’s book, Cash-Flow Quadrant, he distinguishes two types of people who work for money and two types of people who have money working for them. In each case, one of the major distinguishing characteristics is how they deal with systems.
First, let’s look at the idea of business systems. McDonald’s, as a major franchise, is basically a large set of systems that one buys. In fact, a person who buys a McDonald’s franchise must go to Hamburger University for about six months (I believe that’s the length of it) to learn the systems for operating the franchise. There are systems for food delivery, preparing food, greeting customers, serving them within a minute, cleanup, etc. And all of these systems can easily be carried out by a manager who has a college degree and employees who might even be high school dropouts. In other words, a system is something that is repeatable, simple enough to be run by a 16 year old who might not be that bright, and works well enough to keep many people returning as customers.
Now, knowing that definition of a system, let’s look at how people in the four cash flow quadrants relate to systems.
The Employee: Employees are basically motivated by security. They have a job and they do their work to get money. Employees basically run the systems. They don’t necessarily know that they are running a system, but that is their function. For example, one employee at McDonald’s will greet customers and take their order. This employee is basically running the “customer-greeting” system.
Most employees do not understand systems. Instead, they just know what their job is. And this is typical of employees who become traders or employees who work as traders. They typically ask questions such as “What stocks should I buy?” “What is the market going to do?” Or “How do I go about doing this?” We see it all the time in the questions we get. For example, a gentleman just called into CNBC, as I’m writing this, and asked the guest, “What direction do you think the market may go with respect to 'the war' and how might one profit from it?” These are typically employee questions. And they amount to saying, “I don’t really understand anything, please tell me what to do!” The financial media thrives by answering the questions of the employee investor/trader.
The Self-Employed Person: The self-employed person is basically motivated by control and doing it right. Notice that I have often talked about how these motivations constitute some of the biases that most traders have—the need to be right and the need to control the markets. The self-employed person is the entire system. They are basically running on a treadmill only they don’t know it. And the more they work, the more tired they get.
Like the employee, the self-employed are working for money. However, they like it a little better, because they are in charge. They think working harder will make them more money—and to a certain extent it does. But mostly, working harder gets them tired. Nevertheless, they continue to plough forward thinking that they are the only ones who can do it right.
As I said earlier, the self-employed person basically is the system. And quite often they cannot see the system because they are so much a part of it. They are stuck in all the details. In addition, they have a strong tendency to want to “complexify” things. They are always looking for perfectionism and they believe that the perfect system must be complex. They are always asking, “What will make my system perfect?”
A lot of people come into trading from the self-employed mentality—doctors, dentists, and other professionals who had their own small business in which they were basically all of the systems in one. This is all they tend to know and they approach trading the same way. They keep adding complexity “until it works,” even though this strategy seldom works. The self-employed person would be likely to have a discretionary system that is constantly being changed.
The Business Owner: A good business owner should be able to walk away from the business for a year and come back to find it running better than before. While this is an ideal type of statement, it has some theoretical truth to it. This should occur because the job of the business owner is to design a group of systems to run the business so well that his employees can do the job by themselves (or at least with a manager in place). In other words, the business owner is someone who designs systems and these are usually simple systems.
The business owner usually does very well in the trading arena if they approach the process the same way that they’ve run a business before. And, of course, the business owner would usually hire someone to run their trading system, at a much lower wage.
When Tom Basso,1 who is interviewed in The New Market Wizards, did workshops with me, he always described himself as a businessman first and a trader second. Part of Tom’s perspective was to look for repetitive tasks that a human being in his organization has to repeat over and over again. When he found such tasks, his job was to develop a program to take that task out of human hands. Routine computer programs are great examples of simple systems.
The Investor: The last person on the quadrant is the investor. The investor is someone who invests in businesses and his/her most important criterion should be, “What is the rate of return of the business?” In other words, this person is continuing to ask, “If I put money in this investment, what kind of return will I get on it?” High return investments (e.g., high returns on equity) are typically good businesses in which to put your money.
Robert Kiyosaki describes this as the quadrant in which money is converted to wealth. Rich people, according to Kiyosaki, derive 70% of their income from investments and 30% or less of their income from wages.
Most traders are probably not investors by this definition. They buy low or sell high, trading stocks. As a result, there is something they must do to generate their money. Investors, in contrast, are people who typically look for places where they can put their money that generate rates of returns of 25% or higher without them doing anything. If you know how to get those types of returns, then you want to hold onto those investments as long as possible. Many high tech stocks were showing earnings growth rates of well over 25%, and when they did, the prices went up dramatically because this is what investors want. The problem with such investments is they are not guaranteed to continue forever. Many of you have probably discovered that in the last few years.
What is a Trading System?
What most people think of as a trading system, I would call a trading strategy. This would consist of eight parts:
a market filter
set up conditions
an entry signal
a worst-case stop loss
re-entry when it is appropriate
profit-taking exits
a position sizing algorithm, and
you might need multiple systems for different market conditions.
A market filter is a way of looking at the market to determine if the market is appropriate for your system. For example, we can have quiet trending markets, volatile trending markets, flat quiet markets, and flat volatile markets. And, of course, the trending markets can either be bullish or bearish. Your system might only work well in one of those market conditions. As a result, you need a filter to determine whether your system has a high probability of working. Should you trade your system or not?
The set up conditions amount to your screening criteria. For example, if you trade stocks, there are 7,000+ stocks that you might decide to invest in at any time. As a result, most people employ a series of screening criteria to reduce that number down to 50 stocks or less. Examples of screens might include William O’Neil’s CANSLIM criteria2 or a value screen for stocks with good PERs or a good PEG ratio or a fundamental screen having to do with management and its return on assets. You might also have a technical set up, just prior to entry such as watching the stock to go down for seven straight days.
The entry signal would be a unique signal that you’d use on stocks that meet your initial screen to determine when you might enter a position—either long or short. There are all sorts of signals one might use for entry, but it typically involves some sort of move in your direction that occurs after a particular set-up occurs.
The next component of your trading system is your protective stop. This is the worst-case loss that you would want to experience and it defined 1R (or your initial risk) for you. Your stop might be some value that will keep you in the stock for a long time (e.g., a 25% drop in the price of the stock) or something that will get you out quickly if the market turns against you (e.g., a 25 cent drop). Protective stops are absolutely essential. Markets don’t go up forever and they don’t go down forever. You need stops to protect yourself. As I said in Trade Your Way To Financial Freedom, entering the market without a protective stop is like driving through town ignoring red lights. You might get to your destination eventually, but your chances of doing so successfully and safely are very slim.
The fifth component of a trading system is your re-entry strategy. Quite often when you get stopped out of a position, the stock will turn around in the direction that favors your old position. When this happens, you might have a perfect chance for profits that is not covered by your original set-up and entry conditions. As a result, you also need to think about re-entry criteria. When might you want to get back into a closed out position? Under what conditions would this be feasible and what criteria would trigger your re-entry?
The sixth component of a trading system is your exit strategy. The exit strategy could be very simple. For example, it might simply be a 25% trailing stop where you adjust the stop to 75% of the closing price whenever a stock makes a new high. The stop is always adjusted up, never down.
However, you may have many possible exits in addition to a trailing stop. For example, a large volatility move (e.g., 1.5 times the average daily volatility) against you in a single day is a good exit. Crossing a significant moving average (e.g., the 50 day) might be a great exit. Technical signals are good exits (e.g., breaking a significant trend line.)
Exits are one of the more critical parts of your system. It is one factor in your trading of which you have total control. And it is your exits that control whether or not you make money in the market or have small losses. You should spend a great deal of time and thought on your exit strategies.
The seventh component of your system is your position sizing algorithm. Position sizing is that part of your system that controls how much you trade. It determines how many shares of stock should you buy. A general recommendation would be to continually risk 1% of your portfolio. Thus, if you have a $25,000 portfolio, you wouldn’t want to risk more than $250.
Let’s say you wanted to buy a stock at $10. You decided to keep a 25% trailing stop, meaning if the stock dropped 25% to $7.50 you would exit your position. Since your stop is your risk per share, you would divide that $2.50 risk into $250 to determine the number of shares to purchase. Since $2.50 goes into $250 100 times, you would purchase 100 shares of stock. Notice that you would be buying $1,000 worth of stock (100 shares @ $10.00 each) or four times your risk of $250. This makes sense since your stop is 25% of the purchase price. Thus, your risk would be 25% of your total investment. If you want to know more about position sizing, I’d suggest that you read review Trade Your Way to Financial Freedom, and my Money Management Report, or reivew my Position Sizing DVDs.
Finally, depending upon how robust your trading system is, you might need multiple trading systems for each type of market. At minimum, you might need one system for trending markets and another system for flat markets.
The Entire Trading System: Your Business Plan for Trading3
Remember that I said that what most people consider a trading system, is simply a trading strategy that should be part of an overall business plan. Without the overall business plan, many people would still lose money. Let’s look at the overall context in which a trading strategy should be made—your business plan. I have written extensively on this subject, therefore for the purposes of this article, the following is just a brief overview.
Here is a summary of what we consider to be essential for a good trading plan:
1) The Executive Summary. This is usually the last section written. It reviews all of the material of the plan and presents it in summary form. It should describe in detail the objective of the plan and then briefly describe, without a lot of detail, how the objectives will be achieved.
2) A Business Description. The business description should include the mission of the business, an overview of the business and its history, the products and services you provide (which is growth of capital and risk control as a trader), your operations, operational considerations such as equipment needed and site location, and your organization and management of employees (if any). All of these topics are fairly self-explanatory, but you should take the time to write them out as part of your plan.
3) An Industry Overview and Competition. In the industry overview you need to look at the factors influencing the market. For example, Ed Yardeni in his web site lists ten major factors influencing the market. These include a globally competitive economy, a revolution in innovation, wireless access to the Internet, low tech companies having access to high tech tools and changing their businesses as a result, the need to outsource to increase productivity, and many other themes. See www.yardeni.com for more information. In addition, you also need to know who/what your competition is. Who are you trading against? What are their beliefs? What advantages do they have that you don’t? What advantages do you have that they don’t?
4) Self-Knowledge Section: You need to know your strengths and your weaknesses and list them in this section. You need to know how to capitalize on your strengths and avoid (or overcome) your weaknesses.
5) Your Trading Plan Itself. The tactical trading plan should be a part of your trading plan, but it should also include (a) your trading beliefs that form the basis of your plan, (b) any strategic alliances you may have, and (c) what you plan to do in terms of education and coaching.
6) Your Trading Edges: I believe your trading plan should also include a listing of all of the trading edges that you have in the market. When you list your edges, you can review them often and be sure that you capitalize upon them. For example, your edges might include a) the fact that you don’t have to trade, b) your understanding of R-multiples and position sizing (which give people a huge edge over those who have no idea about these concepts), c) your ability to read a level II screen to get excellent stock trades, d) your sources of information, e) your ability to plan well in advance so that you have a game plan each day, f) your skill in following the ten tasks of trading, g) your knowledge of yourself and your strengths and weaknesses. This is just a sample of the possible edges that you might have over the average trader/investor.
7) Financial Information. This section should include three parts. The first part is your budget. How much money do you have? What will the trading process cost you? The second part will be your cash flow statement. Does your plan make sense in terms of cash flow? And finally, the third part will include profit and loss statements. If you have no trading record, you need to make estimates based on historical testing and based on paper trading.
8) Worst Case Contingency Planning. Things always happen that you have not accounted for or planned for in your trading plan. How will you deal with these elements? What will you do if any of these things come up? How will you make decisions when these elements come up?
If you want more information, I have Market Mastery newsletters that were devoted to business planning.
Developing a System
I am revisiting an interview I did with LTC Ken Long, a systems expert with the U.S. Army. Here’s what Ken said about developing a system:
Define Who You Are: “Before you conduct any planning or system design, you must have a thorough understanding of who you are and what your objectives are. Individual investors, private hedge fund managers, public mutual fund managers, and trust managers will have different dynamics, time frames, and risk profiles. This relates to system design in that the final product must fit the circumstances and dynamics of the group or individual. If you jump into system design without considering these basics, you will sow the seeds of future problems.”
Objectives: “In trading system design, the problem is to define what you want the system to accomplish. With as many ideas, events, circumstances and adjustments that occur in system development, you have to have your objectives crystal clear in your mind. If you don’t know where you are going, then any old road will do.”
“Objectives give you the basis for making choices and prioritizing actions. This is not to say that objectives are static. In fact, they can change as you discover either unexpected limitations or advantages in your system as it matures. But before you start you must have an initial set of goals and objectives to guide you.”
Calibration: “After the system is deployed and operational, part of the process of calibrating the system is checking to see if the objectives still fit the person or organization that you have become. That’s a very exciting part of system design. I can’t tell you how often I’ve been part of a design team that started with a limited set of objectives and discovered in the “imagineering” phase that by adjusting our sights we were able to accomplish far more for much less. But, you have to start somewhere. If you don’t start with objectives, you are spinning your wheels.”
I posed this question to Ken: “This section is critical. How will you know if your system is working or not? What are your performance benchmarks? What are your criteria for knowing that your system is not working? How will you make decisions when these criteria are met? Will you scrap everything or just make position sizing adjustments?" All of these questions are critical to developing and operating a good trading system.
How to Make Decisions Within the System
Here’s what Ken said about this critical topic:
“If you don’t work out how you will make decisions ahead of time, then you will certainly have to sort it out at the time of the first difficult decision. If you make decisions on the spot, with no guidelines, you have two problems: 1) figuring out what to do and 2) how to do it. And these problems must be faced under great stress and limited time. It’s better to calmly sort out the decision making process ahead of time so that the decision mechanism is agreed to before hand.”
“In the Army, no plan usually survives the first contact with the enemy, and so our goal in planning is to develop a range of alternatives that can apply to a number of scenarios. Through rehearsal and analysis, we know which strategy works best for a given set of conditions. The goal of strategy development is to provide the decision maker with a menu of choices that are robust enough to cover a wide range of contingencies.”
“In general system development then, we look for robust, simple plans that can cover a wide range of conditions. When you preplan like this, you don’t try to force the world to adapt to your plan. If you fall in love with a strategy and become emotionally invested in making it work no matter what the market or the world says, you lose the ability to adapt and learn.”
“A real world example for a trading system might be a trader who decides to check his actual trading performance every month against the calculated system expectancy, and determine the statistical significance of the variation. He might decide that any result greater than one or two standard deviations is a signal to stop trading and recalibrate the system or reconfirm the validity of the trading model and its underlying assumptions. If the actual expectancy is close to the predicted expectancy, then the trader knows he’s on target. In modern manufacturing systems this concept is called “Statistical Process Control.”
“It lets the system controller know when the production machines are drifting out of tolerance and degrading the quality of the output to the point where the line is stopped and the machines are retooled.”
I asked Ken about how his advice applies in view of the fact that many trading systems are automated. Here’s how he responded:
“It’s a general problem of the information age, which provides us with a wide range of automated decision support systems that can compile massive amounts of data, analyze and process it, and present us with decision packages for action based on criteria that we can specify. I use a lot of these. However, the key to making them work is to make sure that you understand the underlying business model and system logic. When you do things automatically by computer, you need to understand what the computer is calculating and filtering. I won’t use power tools until I know how they work and I have mastered their use in simulations.”
“If you have done all the preparation work that you outlined in your system design workshop,4 and you have chosen indicators that provide you the right signals for making your trading decisions, then the right thing to do is to rely on the signals to make your decisions. Periodic calibration of the system, however, is still necessary to confirm that you have chosen the correct signals and that your actions are correct. If you have not done that work though, it may be the case that you simply picked up the latest hot indicator and are using it regardless of how appropriate it may be for your trading system. If it fails to work as advertised, you are likely to dump it for the next hot idea that comes along. Then you’re not a system’s trader, you are only reacting to advertising.”
Notes
1. We have two newsletter back issues in which we interviewed Tom Basso for those of you who would like to know more. Call 919-466-0043 for more information.
2. William O’Neil, How to Make Money In Stocks. New York : McGraw-Hill, 1987.
3. We have an audio program on business planning for traders that takes you through the development of a business plan.
4. The workshop Ken is referring to is the, How to Develop a Winning Trading System That Fits You workshop, which we offer once or twice each year.
About the Author: Trading Coach Dr. Van K Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Freedom and his classic Peak Performance Home Study Course for traders and investors. Visit him at www.iitm.com for a FREE trading game or to sign up for his FREE weekly newsletter.
Sunday, June 27, 2010
Exit Plan - En Khalid
EXITS: BEFORE TAKING ANY TRADE, KNOW THE TWO EXIT DOORS
ENTRY is important but EXITS are far more important. EXIT determines the outcome of our trade.. Surprisingly most newbies and the oldies alike have difficulties handling EXITS - ini kes tau masuk tak tau keluar - and some not paying enough attention to or couldnt be bothered about EXIT strategies/rules at all. - and eventually have to pay huge price for that.
- turning small losses to bigger losses
- turning profitable trades to losing trade
- turning huge profit to much smaller profit
hey! you are not alone..thinking I hv done all that, its so amusing-ooops! sound like Frank Sinatra's my Way
There are many types of exit rules but generally they fall under two categories: TARGETs and TRAILLING STOPs (raising the stop position as the price advances). A simplified ones are as stated below. My ninja master …ehem..ehem..said " before entering a a battle (trade) , we need to know the two EXIT DOORS, upfront. EXIT DOOR No 1. Is when the market is against us , and EXIT DOOR No2 is when the market is moving in our favour. Of course larr Ninja kalau kalah terus harakiri... and most of us unconciously doing that by continue holding losing positions until no more money left ... ooooop! am I talking about me or you here ?????
so, KNOW THE TWO EXIT DOORS BEFORE ENTERING A TRADE....period.. in trading better be a coward ninja...RUNNNNNN, no need to be a HERO by committing harakiri larrr... ok... there is always another round of battle.
EXIT DOOR NO. 1: when the market is against us and we are in losing position, when other people is taking away our money... hell! stop it! it is our money on the table being taken away by other people , apply STOP LOSS. Oh ya STOP that LOSSES….CUT…CUT ….CUT fast ha ha ha… cut that losses with a big laugh and reward ourselves if we are able to do it as planned… do it often.. try that until we feel cutting losses jadi macam potong sayor…. Zap zap zap… no questions asked…
There are many ways to define the stop loss positions, and the popular ones are as follows;
1.A fixed % below Entry level , normally around 5-12% below entry level
2.Placing a stop loss position at a few ticks below PIVOT or SUPPORT (below pivot or turning point)/DYNAMIC SUPPORT line (below trendline or Moving Avg line). Normally around 3-7 ticks below the support/dynamic support lines. It has to be deep enough to avoid noises
see this video on the right way to place a stoploss position
http://www.yourtradingcoach.com/Videos-Risk-Management/Tight-Stops.html
an example of stop loss placement when you are trading breakouts
http://www.youtube.com/YourTradingCoach#p/u/11/6YZ4ORz-UJ0
THE STOP LOSS SHOULD BE PLACED IN A POSITION WHICH INVALIDATES THE SET UP
http://www.yourtradingcoach.com/Articles-Risk-Management/Tight-Stops.html
NB: need to be cautious as market maker are fully aware of our stop loss positions and may test our nerves via ‘shaking out activities’ before embarking on mark up activities.
EXIT DOOR NO. 2: when the market is moving in our favour - we are in profit and happily riding OPM (other people money), oh ya … OPM.. because when we raised our trailing stop above the entry level…we are practically removing our money from the table- no more risk - we are just riding the profit - riding OPM ha ha ha…. Ride it until we reach our predefined EXIT doors as listed below.
1. FIXED TARGETS: at a Predetermined Price or reaching a predetermined ‘resistance’ line or upper channel line or fixed % gain . The popular fixed % gain are < 10% for a short term player (normally 3-5 days move) and > 20% for mid- term players (normally > 1 week move, sometime have to wait up to 6 months), but ok lorrrr it is worth waiting for, 20% in six month means 40% gain on annualised basis, - for people like me, a gain of 20% pa is good enough larrr.
2. CANDLE REVERSALS PATTERNS: normaly applied to a FAST UPTREND MOVES, (3 days to 2 weeks move where the price moved in parabolic shaped or price move >20% above moving avg line or the trend angle > 60%). Candle reversal patterns include: bearish engulfing, dark cloud cover, shooting star and even hanging man, dogi and tweezer at top of an uptrend. Some using CANDLE TRAILLING STOPS like the breaking of yesterday low or 2 candles low.
3. TRAILLING STOPS: fixed % retracement from recent high, normally around 5% from recent high.
4. TRAILLING STOPS: Most popular ones are violation of TRENDLINE, Moving Avg or Exponential Avg lines (DEAD CROSS) and even violation of Bollinger Band mid line. The classic trailling stop used by professional are the volatility trailling stop like ATR (avg true range ) used on either weekly or daily bars. The comman parameters used to define the trailling stop is between 2 to 4 x ATR.
5. BEARISH REVERSAL PATTERNS:Longer term traders will likely use chart patterns to exit. These include;break of Double/Triple top neck line, lower high 1-2-3 formation, break of head&shoulder neck line, breakdown of ascending wedge, xxxxx days (normally 10 to 20 days) channel or rounded top breakdown.
Huh huh huh I saw my bedroom Door opens ….its Time for bed…lighst off Happy trading
KNOW HOW TO ENTER AND HOW TO EXIT BEFORE TAKING A TRADE.....hey I said 'taking a trade'...not anything else...you dirty mind... ha ha ha....ooops! wanna hear a story on similarity between trading and sex ? wait for the next episode...he he he.
watch this video for better understanding on the importance of EXITS, and the various EXIT strategies
http://www.yourtradingcoach.com/Videos-Risk-Management/The-Importance-of-Exit-Strategy-Vid-1.html
ENTRY is important but EXITS are far more important. EXIT determines the outcome of our trade.. Surprisingly most newbies and the oldies alike have difficulties handling EXITS - ini kes tau masuk tak tau keluar - and some not paying enough attention to or couldnt be bothered about EXIT strategies/rules at all. - and eventually have to pay huge price for that.
- turning small losses to bigger losses
- turning profitable trades to losing trade
- turning huge profit to much smaller profit
hey! you are not alone..thinking I hv done all that, its so amusing-ooops! sound like Frank Sinatra's my Way
There are many types of exit rules but generally they fall under two categories: TARGETs and TRAILLING STOPs (raising the stop position as the price advances). A simplified ones are as stated below. My ninja master …ehem..ehem..said " before entering a a battle (trade) , we need to know the two EXIT DOORS, upfront. EXIT DOOR No 1. Is when the market is against us , and EXIT DOOR No2 is when the market is moving in our favour. Of course larr Ninja kalau kalah terus harakiri... and most of us unconciously doing that by continue holding losing positions until no more money left ... ooooop! am I talking about me or you here ?????
so, KNOW THE TWO EXIT DOORS BEFORE ENTERING A TRADE....period.. in trading better be a coward ninja...RUNNNNNN, no need to be a HERO by committing harakiri larrr... ok... there is always another round of battle.
EXIT DOOR NO. 1: when the market is against us and we are in losing position, when other people is taking away our money... hell! stop it! it is our money on the table being taken away by other people , apply STOP LOSS. Oh ya STOP that LOSSES….CUT…CUT ….CUT fast ha ha ha… cut that losses with a big laugh and reward ourselves if we are able to do it as planned… do it often.. try that until we feel cutting losses jadi macam potong sayor…. Zap zap zap… no questions asked…
There are many ways to define the stop loss positions, and the popular ones are as follows;
1.A fixed % below Entry level , normally around 5-12% below entry level
2.Placing a stop loss position at a few ticks below PIVOT or SUPPORT (below pivot or turning point)/DYNAMIC SUPPORT line (below trendline or Moving Avg line). Normally around 3-7 ticks below the support/dynamic support lines. It has to be deep enough to avoid noises
see this video on the right way to place a stoploss position
http://www.yourtradingcoach.com/Videos-Risk-Management/Tight-Stops.html
an example of stop loss placement when you are trading breakouts
http://www.youtube.com/YourTradingCoach#p/u/11/6YZ4ORz-UJ0
THE STOP LOSS SHOULD BE PLACED IN A POSITION WHICH INVALIDATES THE SET UP
http://www.yourtradingcoach.com/Articles-Risk-Management/Tight-Stops.html
NB: need to be cautious as market maker are fully aware of our stop loss positions and may test our nerves via ‘shaking out activities’ before embarking on mark up activities.
EXIT DOOR NO. 2: when the market is moving in our favour - we are in profit and happily riding OPM (other people money), oh ya … OPM.. because when we raised our trailing stop above the entry level…we are practically removing our money from the table- no more risk - we are just riding the profit - riding OPM ha ha ha…. Ride it until we reach our predefined EXIT doors as listed below.
1. FIXED TARGETS: at a Predetermined Price or reaching a predetermined ‘resistance’ line or upper channel line or fixed % gain . The popular fixed % gain are < 10% for a short term player (normally 3-5 days move) and > 20% for mid- term players (normally > 1 week move, sometime have to wait up to 6 months), but ok lorrrr it is worth waiting for, 20% in six month means 40% gain on annualised basis, - for people like me, a gain of 20% pa is good enough larrr.
2. CANDLE REVERSALS PATTERNS: normaly applied to a FAST UPTREND MOVES, (3 days to 2 weeks move where the price moved in parabolic shaped or price move >20% above moving avg line or the trend angle > 60%). Candle reversal patterns include: bearish engulfing, dark cloud cover, shooting star and even hanging man, dogi and tweezer at top of an uptrend. Some using CANDLE TRAILLING STOPS like the breaking of yesterday low or 2 candles low.
3. TRAILLING STOPS: fixed % retracement from recent high, normally around 5% from recent high.
4. TRAILLING STOPS: Most popular ones are violation of TRENDLINE, Moving Avg or Exponential Avg lines (DEAD CROSS) and even violation of Bollinger Band mid line. The classic trailling stop used by professional are the volatility trailling stop like ATR (avg true range ) used on either weekly or daily bars. The comman parameters used to define the trailling stop is between 2 to 4 x ATR.
5. BEARISH REVERSAL PATTERNS:Longer term traders will likely use chart patterns to exit. These include;break of Double/Triple top neck line, lower high 1-2-3 formation, break of head&shoulder neck line, breakdown of ascending wedge, xxxxx days (normally 10 to 20 days) channel or rounded top breakdown.
Huh huh huh I saw my bedroom Door opens ….its Time for bed…lighst off Happy trading
KNOW HOW TO ENTER AND HOW TO EXIT BEFORE TAKING A TRADE.....hey I said 'taking a trade'...not anything else...you dirty mind... ha ha ha....ooops! wanna hear a story on similarity between trading and sex ? wait for the next episode...he he he.
watch this video for better understanding on the importance of EXITS, and the various EXIT strategies
http://www.yourtradingcoach.com/Videos-Risk-Management/The-Importance-of-Exit-Strategy-Vid-1.html
Trading Plan - En Khalid
TRADING PLAN adalah seperti berikut
- WHY kita pilih stock tu untuk dirus niagakan:biasanya berdasarkan FA info. kena cari basic info mengenai company tu, its earning, directors die, latest news etc
- WHY nak masuk waktu ni: yg ni kena rujuk ENTRY set up seperti presence of ZC atau STZC
- RISK REWARD ASSESSMENT: kena tau Entry - Stop Loss position (biasanya bawah pivot atau support) - Target. saya akan take the trade jika risk reward rationya > 1:2. contohnya macam KNM. Entry di 49 sementara stoploss di 47 dan target 55. Jadi disini RISK saya (excluding brokerage) = 2 sen, sementara expected reward = 6 sen. jadi RISK REWARD RATIO utk trade ni = 1:3. so utk saya it is worthy to take the position
-POSITION SIZING: saya catatkan jumlah yg saya nak beli. Jumlahnya berkait rapat dengan RISK TOLERENCE saya. Biasanya saya hanya RISK 3% modal. Misalnya Modal 10k, jadi utk setiap trade, saya hanya risk 3% atau RM300 bagi setiap trade. Jadi utk maintain RISK tersebut, jumlah max saham yg saya beli utk trade ni = RM300/RM 0.02=15,000 shares atau 150 lots. kena buat reality check samada modal cukup ke tidak untuk membeli saham sebanyak itu. Guna jumlah kurang dari 15k shares bermakna kita mengambil lower risk i.e < 3% modal. Dalam mana2 investment/biz pun kita kena quantify RISK yg kita ambil dan kena kira potensi REWARD atau RETURN dari risk yg kita amik
- EXIT (conditions untuk exit) disini biasanya saya catatkan the scenarios dan rules utk saya EXIT. Kena catatkan beberapa conditins yg mana apabila ianya berlaku kita akan EXIT trade tersebut. Contohnya 'bila berlaku ZC dead cross on daily chart'.
- EMOSI: catatkan juga emosi kita masa nak beli saham tu: ceria?, berkobar?2, berdebar2?, confidence?, masih ragu2 dsb.
saya panggil ni konsep W R P E (bunyi nya wrap)....
selamat mencuba.....
- WHY kita pilih stock tu untuk dirus niagakan:biasanya berdasarkan FA info. kena cari basic info mengenai company tu, its earning, directors die, latest news etc
- WHY nak masuk waktu ni: yg ni kena rujuk ENTRY set up seperti presence of ZC atau STZC
- RISK REWARD ASSESSMENT: kena tau Entry - Stop Loss position (biasanya bawah pivot atau support) - Target. saya akan take the trade jika risk reward rationya > 1:2. contohnya macam KNM. Entry di 49 sementara stoploss di 47 dan target 55. Jadi disini RISK saya (excluding brokerage) = 2 sen, sementara expected reward = 6 sen. jadi RISK REWARD RATIO utk trade ni = 1:3. so utk saya it is worthy to take the position
-POSITION SIZING: saya catatkan jumlah yg saya nak beli. Jumlahnya berkait rapat dengan RISK TOLERENCE saya. Biasanya saya hanya RISK 3% modal. Misalnya Modal 10k, jadi utk setiap trade, saya hanya risk 3% atau RM300 bagi setiap trade. Jadi utk maintain RISK tersebut, jumlah max saham yg saya beli utk trade ni = RM300/RM 0.02=15,000 shares atau 150 lots. kena buat reality check samada modal cukup ke tidak untuk membeli saham sebanyak itu. Guna jumlah kurang dari 15k shares bermakna kita mengambil lower risk i.e < 3% modal. Dalam mana2 investment/biz pun kita kena quantify RISK yg kita ambil dan kena kira potensi REWARD atau RETURN dari risk yg kita amik
- EXIT (conditions untuk exit) disini biasanya saya catatkan the scenarios dan rules utk saya EXIT. Kena catatkan beberapa conditins yg mana apabila ianya berlaku kita akan EXIT trade tersebut. Contohnya 'bila berlaku ZC dead cross on daily chart'.
- EMOSI: catatkan juga emosi kita masa nak beli saham tu: ceria?, berkobar?2, berdebar2?, confidence?, masih ragu2 dsb.
saya panggil ni konsep W R P E (bunyi nya wrap)....
selamat mencuba.....
Saturday, June 26, 2010
Understanding_chart_patterns
Identifying chart patterns is simply a system for predicting stock market trends and turns! Hundreds of years of price charts have shown that prices tend to move in trends. (I'm sure we've all heard the saying, 'the trend is your friend'.) Well, a trend is merely an indicator of an imbalance in the supply and demand. These changes can usually be seen by market action through changes in price. These price changes often form meaningful chart patterns that can act as signals in trying to determine possible future trend developments. Research has proven that some patterns have high forecasting probabilities. These patterns include: The Cup & Handle, Flat Base, Ascending and Descending Triangles, Parabolic Curves, Symmetrical Triangles, Wedges, Flags and Pennants, Channels and the Head and Shoulders Patterns. In my opinion, these are some of the best patterns to trade.
This section is designed to introduce you to some of these chart patterns, as well as teach you to identify repetitions in the market qualities, to make timely and more accurate decisions when predicting market trends.
The Cup & Handle Pattern
The Cup & Handle is the corrective action after a powerful stock advance. Generally a stock will have a powerful move of some 2 to 4 months, then go through a market correction. The stock will sell off into the correction in a downward fashion for maybe 20 to 35 percent off the old high point. The time factor is generally anywhere from 8 to 12 weeks depending on the overall market condition.
As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price drift in a sideways fashion with a bias to the downside for about 4 days to 3 weeks. 
The handle is generally about 5% below the old high point. A handle that is any lower is generally a defective stock and contains higher risk for failure.
The time to buy the stock, is as it emerges into new highs at the top of the handle and not the old high point set some 8 to 12 weeks ago.
I have found some of the biggest stock market winners have this very powerful formation. It is one of the best and most reliable formations to look for. However, it is important to note that the best stocks with this formation are found at the beginning of a market move after a good market correction, and not during, or at the end of a major market advance.
HERE IS A SAMPLE CHART WITH A CUP AND HANDLE FORMATION
The Flat Base Pattern
The Flat Base is a stock pattern that goes horizontal for any length of time. Very powerful advances can be had from this formation. What we look for is volume drying up as the stock stays at or about the same level going horizontally.
Draw a trend line across the top of this formation. As the stock proceeds through the trend line, the stock is bought as it breaks the trend line and volume increases.
HERE IS A SAMPLE CHART WITH A FLAT BASE PATTERN
The Ascending Triangle Pattern
The Ascending Triangle is a variation of the symmetrical triangle. Ascending triangles are generally considered bullish and are most reliable when found in an up-trend. The top part of the triangle appears flat, while the bottom part of the triangle has an upward slant. Here is a Typical Ascending Triangle Pattern
- In ascending triangles, the stock becomes overbought and prices are turned back.
- Buying then re-enters the market and prices soon reach their old highs, where they are once again turned back.
- Buying then resurfaces, although at a higher level than before.
- Prices eventually break through the old highs and are propelled even higher as new buying comes in.
As in the case of the symmetrical triangle, the breakout is generally accompanied by a marked increase in volume.
The Parabolic Curve Pattern
The Parabolic Curve is probably one of the most highly prized and sought after pattern. This pattern can yield you the biggest and quickest return in the shortest possible time. Generally you will find a few of these patterns at or near the end of a major market advance. The pattern is the end result of multiple base formation breaks.
10_golden_rules.html
1. Make sure the stock has a well formed base or pattern such as one described on this web site and can be found on the tab "Understanding Chart Patterns" on the home page, before considering purchase. Dan highlights stocks with these patterns in his newsletter.
2. Buy the stock as it moves over the trend line of that base or pattern and make sure that volume is above recent trend shortly after this "breakout" occurs. Never pay up by more than 5% above the trend line. You should also get to know your stock's thirty day moving average volume, which you can find on most stock quote pages such as eSignal's quote page.
3. Be very quick to sell your stock should it return back under the trend line or breakout point. Usually stops should be set about $1 below the breakout point. The more expensive the stock, the more leeway you can give it, but never have more than a $2 stop loss. Some people employ a 5% stop loss rule. This may mean selling a stock that just tried to breakout and fails in 20 minutes or 3 hours from the time it just broke out above your purchase price.
4. Sell 20 to 30% of your position as the stock moves up 15 to 20% from its breakout point.
5. Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. Remember stocks are only good when they are moving up.
6. Identify and follow strong groups of stocks and try to keep your selections in the these groups
7. After the market has moved for a substantial period of time, your stocks will become vulnerable to a sell off, which can happen so fast and hard you won't believe it. Learn to set new higher trend lines and learn reversal patterns to help your exit of stocks. Some of you may benefit from reading a book on Candlesticks or reading Encyclopedia of Chart Patterns, by Bulkowski.
8. Remember it takes volume to move stocks, so start getting to know your stock's volume behavior and the how it reacts to spikes in volume. You can see these spikes on any chart. Volume is the key to your stock's movement and success or failure.
9. Many stocks are mentioned in the newsletter with buy points. However just because it's mentioned with a buy point does not mean it's an outright buy when a buy point is touched. One must first see the action in the stock and combine it with its volume for the day at the time that buy point is hit and take keen notice of the overall market environment before considering purchases.
10. Never go on margin until you have mastered the market, charts and your emotions. Margin can wipe you out.
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