Thursday, February 25, 2016

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Cramer's rules for investing

Jim Cramer is one of America's most recognized and respected investment pros and media personalities. Following are some rules which he has given in his blog post for investing.

Rule 1: Bulls, Bears Make Money, Pigs Get Slaughtered
It's essential for all traders to know when to take some off the table.
Rule 3: Don't Buy All at Once
To maximize your profits, stage your buys, work your orders and try to get the best price over time.
Rule 5: Diversify to Control Risk
If you control the downside and diversify your holdings, the upside will take care of itself.
Rule 6: Do Your Stock Homework
Before you buy any stock, it's important to research all aspects of the company.
Rule 9: Defend Some Stocks, Not All
When trading gets tough, pick your favourite stocks and defend only those.
Rule 11: Don't Own Too Many Names
It can be constraining, but it's better to have a few positions you know well and like.
Rule 13: No Woulda, Shoulda, Couldas
This damaging emotion is destructive to the positive mind-set needed to make investment decisions.
Rule 17: Check Hope at the Door
Hope is emotion, pure and simple, and trading is not a game of emotion.
Rule 18: Be Flexible
Recognize and be open to the unexpected shifts in the market because business, by nature, is dynamic, not static.
Rule 24: Explain Your Picks
Buying stocks is a solitary event, too solitary in fact, so always make sure you can articulate your reasoning to someone else.
Rule 25: There's Always a Bull Market
It's OK if you have to work hard to find it, just don't default to what's in bear mode because you are time-constrained or intellectually lazy. 

To read his full post click here

Monday, February 22, 2016

How do you know you have a trading edge?

In my previous post, I briefly explained what a trading edge is. It is a set of trading principles which enable you to keep your profits higher than your losses.

But, traders must surely wonder: How do I know if I have a trading edge?

This posts tries to answer the question posed above.

1. Your trading edge should be confirmed by statistical analysis.
This way is the easiest to apply and the most difficult to create. If you have a statistical analysis of your trades then you know for sure if you have an edge. Suppose you have recorded the details of actual trades taken over a period of three years. There are five hundred trades and you have the reasons for taking each trade, together with the the gain or loss  per trade. Putting this data into Excel can give you a complete statistical analysis of your performance. If you are making more money than you lose, with a reasonable upward sloping equity curve, then you have an edge.
But that was the easy part. The difficult part is to have actually kept a record of your trades. Suppose you did not keep a record. Then what do you do? Then we come to the other methods.

2. Back-Testing a mechanical trading system. 
You may be trading with a mechanical trading system - a method that has a set of rules and these rules have been tested on past data. If your trading rules can be tested over previous / past data, then do so. The results of the back test with give you some idea if you have an edge or not. If the performance over the data period is satisfactory then at least you have an edge in the past.

3. Be consistent.
if you are not using a clear set of rules which can be back tested, then this one is for you. You should be consistent with your trading method. Follow the same set of rules for all your trades. Chances are that your consistency will ensure that you have an edge.

Saturday, February 20, 2016

What is a trading edge?

A trading edge is defined as a set of conditions which result in a net gain when used over a large number of trades.

Let us think of a casino. The gambler can win once , or can win many times. But, if he gambles for a long period of time, he is going to lose money because the Casino receives Rs 100 and pays out Rs 97. The Casino has an edge. In the long run, the edge will show itself resulting in a guaranteed loss for the gambler.

In trading, nothing is guaranteed. Yet, traders must have some idea that the trading strategies they use will have more gains than losses over a long period of time. That is the trading edge.

No single trade will provide you with information on your edge. A series of trades may be profitable or losing purely by chance. When you take a statistically significant number of trades then the trading edge should come in play.

If you have made just five trades in the  Nifty and all of them were profitable then that is probably by chance - a random event.

Suppose you trade a 100 times in the Nifty futures over one year. Now, 100 is a significant number of trades. If you make money after an year, then you probably have an edge.

All trading should start with an edge.

In the next post, we will examine how we can determine if we have an edge in trading.