Friday, August 24, 2012

Brandt on why novice traders lose money

In his Post dated August 16, Peter Brandt gives reasons why novice traders lose money. This is what he says:

There are many reasons why 80% to 90% of novice traders end up losing money. Among the reasons include:
  • Being under capitalized
  • Taking way too much risk (expressed as a % of capital per trade)
  • Attempting to pick tops and bottoms
  • Chasing markets
  • Becoming obsessed by a scenario (e.g., Silver MUST go up)
  • Trading with trading range
  • Being compelled to become a day trader
I believe the above reasons, in composite, account for 80% of the failure among pedestrian traders.
When I talk about “trading with trading ranges,” my specific reference is to the habit of buying on bulges and selling on dips or buying at the top end of the ranges and selling at the bottom end of ranges. The mentality of the novice trader in this regard goes like this … “The market is really strong, it is going to breakout out this time … I want to get in before it breaks out.”

My Notes:

Peter avoids all trading inside a trading range, buying only after a break out, selling  after a breakdown.

Wednesday, August 22, 2012

A Profitable Trader


Who is a profitable Trader? This is a most basic question. From my point of view, A profitable trader is who making more money than loss; means being profitable. 

Making profit is different according to the stage of trading. Beginner’s trader should not expect to have immediate and ultimate success in trading. They should look for the maintaining there capital and not to lose more money. In the early stage of trading they should look for gaining knowledge and experience. Achieving and maintaining trading success requires continual progress. 

Traders who truly enjoy the “progress” and process of trading do have a significant trading edge over those who do not enjoy learning and gaining experience.

Saturday, August 18, 2012

The Market is a Friend

Quite often, we traders get frustrated at what the market is doing. We believe that somehow, the market has decided to destroy our trading career. Often, there is a lot of frustration at Market behavior, which leads to irritation and annoyance with ourselves as well as with trading.

But, truly speaking, the market is a friend. It gives us money, so it is a benevolent friend - on who showers benefits and gifts on us.

If the market is a friend, what is the reason for unusual market movements which often result in whipsaws?

The answer to this question is: What we perceive as unusual is in reality normal market behavior.  Markets are a collection of thousands of traders and investors, each with different views. Sometimes, the views re similar leading to trend. often, the views are different, leading to choppy markets. That is the nature of the market.

Then, we have to adapt ourselves to the market behavior. We can control our trading decisions, therefore we have the tools to adjust to what the market is doing.

Example:

I have been long in the Nifty. Yesterday (Friday, Aug 17), it appeared that the Nifty will finally make a strong up move. Then, the CAG report was presented in Parliament leading to a sharp sudden decline. I cannot blame the market for letting me down. It is for me to adjust to changing market conditions. After the initial reaction, the Nifty stabilized around 5375, when I reduced my positions and also shifted my deep in the money calls, to a little less deep.

My point is: we have to do what we believe is the correct response to changing market behavior. It is our responsibility.

Thursday, August 16, 2012

Greetings to fellow traders in Japan

The Japanese Technical Analysis Association asked me for a message of good wishes for their members. They have posted the message as an Adobe document on their web site.

Here is the Link: http://www.ntaa.or.jp/

Fears in Trading

I received an email in which the trader expressed his problems in executing trades. He was overcome by fear just before he planned to trade.

Here is my reply, which I am sharing with readers.

Quote:

 I have received today, your email regarding difficulties in executing trades.

I wish to share some of my ideas with you.

1. Trading is never certain. We trade on probabilities. based on our charts and analysis, we feel that Bharti Airtel share price should come down. So, we take a trade on the short side.

Remember, we can never guarantee that price will fall. No chart pattern can give such an assurance.

What we are doing is this: we take a position based on our analysis. If it works out we make money. But, it may not work out. Then, we have to be prepared to lose money.

As Traders, our job is to earn Rs 100  and Lose - not more than Rs 80. then, we will make a net profit of Rs 20.

Understand this. Losses will come. They are part of trading.

So, why do we get worried when we want to trade?  Two reasons.

First, we do not like to take a loss. It hurts our ego.

Second, the loss may be more than our capital can afford.

The solutions are easy and simple.

First, accept that losses are inevitable. Enjoy the process of trading. If there is a loss, that is what the market wanted.

Second, manage your volumes. if the loss is worrying you becasue you feel you cannot afford it, then you are trading too large. Reduce your volumes immediately.

UnQuote

Sunday, August 12, 2012

Book Review: The Inner Voice of Trading - 1

The Inner Voice of Trading by Michael Martin


For me, this is an excellent book, with a five star rating. I am reading it for the second time. Ever since Amazon introduced the Kindle, I have been buying ebooks, rather than the printed version. This review is for the ebook, although I assume there is no difference between the digital and the printed book.


The Kindle edition comes at US$ 12.15, a bargain for the contents of the book.


Ed Seykota, well known technical trader, in his foreward to the book says "Traders know the essential principles of trading: ride your winners; cut your losers; manage your risk; use stops; stick to your system and ingore the news. These principles work well in trading and in life in general- when you follow them consistently. Many people, however, find that following rules is not always a whole lot of fun"


The Author explains the book's objective - "The heart and soul of this book examines trading decisions from an emotional standpoint and helps you gain insight into your behavior."


The underlying message is to manage your risk - keep losses small. Exit a position if it goes against you. But, as traders we start thinking - suppose the position comes back then what do we do? The answer is simple - You can always get back in if you exit too soon.


Readers should think about this one.


As I trader, I have one clear principle which I follow - go with the market flow. Michael tells traders to 'Surrender and accept market movements' which is roughly equivalent to going with the market flow.


Traders are faced with whipsaws and losing trades almost every day. Accept these whipsaws, and, explore your feelings about frustration and despondency. "By allowing yourself to feel frustration, you eliminate the feeling of despondency for the rest of your life. That's a great trade.

Wednesday, August 8, 2012

Mapping the trend

Some time, we find all the right signs for a  trade but we get stopped out. Why? The answer can lie in the use of higher time frames. Just increase your time frame. If you are trading in 60 min chart then have a look at the EOD (daily) chart.

If a stock is trading in a range in EOD chart then it will become more difficult to maintain a consistent trend in 60 min time frame.

Study long-term charts. Analyze weekly and daily charts. A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult the intra-day charts.

A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer term trends.