Are you gazing at the crystal ball too often?

Wednesday, 4th March 2009
Lessons

Sitting in front of the computer, why is the Futures up, what could be the news that is driving it up?? Should i take profit or stop loss my puts?? What if i get fake out?? Should i wait for market to open then decide on what i should do??

Does this sound like you? Are you worrying too much to make the correct decisions? If this is happening to you step back and take a breather. Is this how you would like to live your life as a full time trader? Worrying every bit when the market is not going in your way? I decided not to as its affecting not just my social life but also my mental health.

I cannot emphasize the importance of this as you would need to walk through this path yourself to feel relieve of the burden of predicting the market. You can predict the market once or maybe even twice or three times but can you do it all the time? I guess not. This is why massive trading and auto-trade works hand in hand. First of all massive trading delivers you your edge right at your doorstep and auto-trade gives you that needed breather you need. What if the market turns and goes against me in all my 10 positions you asked. Well its possible but what’s the probability like? 100%? 80%? 60%? Nobody knows. All i can say is it does not hurt to take profit along the way and keep it safe and warm in your pocket.

Anyway if the market turns shouldn’t you just go with the flow and perhaps put in an order that goes to the other direction?

Below are the steps to how i approach my trading and hope this helps:
  1. Ascertain Where we are now? Macrotrend? All time low? All time high?
  2. What are the counters that would give me minimal loss entry and exit. Remember Minimal and Precise exit is key here. If the exit door is nearby please do use it.
  3. Set in your orders before market opens
Thats it, that simple. Some may ask how about profit taking. Thats simpler
  1. Ascertain Where we are now? Macrotrend? All time low? All time high?
  2. Prioritize my profit taking stocks for example those with great percentage gain ill focus on that first. As it might be be time for it to go the other way. Just take it at a level you comfortable with and place an order with minimal loss for the other direction.
  3. The rest of the stocks with small percentage gain i would consider the same strategy and use the high or lows to help you take your profits not stop loss!!
  4. Once you have key in your take profit level, step back and look at the counters again to see if there’s a possibility for you to go with the flow for the other direction, there’s a possibility that you will be in the flow!
Let me know how you think this is helping you in your growth or any topics that you would like me to touch on through the comment box.

Happy trading week!




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One Comment

  1. Ken Lau says:
    March 16, 2009 at 9:32 am

    The Biggest Lesson I Learnt
    I have gazed into the crystal ball much too often in the past. However, it has not improved me one bit. If trades have gone in my favour, I feel happy. Else, I would feel dejected. These endless cycles of happiness mixed in with dejection can destroy your confidence faster than a speeding bullet. Once a person’s confidence hits a low, he will most probably look for another trading method and go through the same happiness / dejection mode again.

    I have recently discovered one fundamental concept of trading and would like to share, but the explanation is a little long …

    1. Value vs. Price
    The value of a share is determined by fundamentals of the company, while the share price is the price people are willing to pay for that counter. So while the value of the counter remains relatively unchanged over a short period of time, the price movement reflects the sentiment of buyers and sellers for that counter at a given time.
    If the group of buyers and sellers feel a little frightened or pessimistic for any reason; the price of the company’s share will fall regardless how the company is doing at that time. Similarly, if that same group suddenly feels exceptionally happy or optimistic, the price will shoot through the roof.
    So, we can conclude the movement of the price of a counter reflects the sentiment of a group of people who is interested in buying or selling shares of a company.

    2. How can we accurately predict the price of a stock?
    To further elaborate point 1, price is an indication of buyer and seller sentiment.
    Since there is no way on earth we can reliably predict the emotion of this group, tomorrow’s price is a unique and random event. This is because we can never exactly predict the sentiment of a crowd we have never met.
    There is DIFINITELY no sure-win method we can use to predict the market. Buffet is not perfect; neither is Soros, or Jim Rogers – that is why their net worth dropped during this crisis. If these icons of investment are not perfect, how can we be?

    3. What should anyone do?
    Technical analysis helps determine the whether the price (and the sentiment) goes up or down. However, it is not absolute. It determines where the price is headed with a greater probability than random choice. We call it our edge.
    With any game of probability, the edge can be realized only if the number of events is large enough. Likewise in trading, our edge will appear if the number of trades increases.
    However, to maximise the returns, we should keep losses small and let any gains run their course. Take a typical trading day of 10 orders as shown below. If the loss allowed per counter is restricted to 5%: and profits are allowed to ride. It is easy to see that of 10 counters, with 3 correct positions out of 10 would result in profits. Now think what would happen if 5 positions are correct …

    Outcome Profits / losses
    Trade 1 Triggered -5%
    Trade 2 Triggered -5%
    Trade 3 Triggered -5%
    Trade 4 Triggered -5%
    Trade 5 Not Triggered —
    Trade 6 Not Triggered —
    Trade 7 Not Triggered —
    Trade 8 Triggered +5%
    Trade 9 Triggered +10%
    Trade 10 Triggered +15%

    Most importantly, is each event is a random event and there is no way to exactly predict price movement, there is no need to be distressed if counters do not go your way AND no need to be happy if it does.
    Just follow the blog and trade accordingly.

    Good trading.

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