Teach A Man To Fish And.........

[Saint]

A great post by Traderji on Trading the Plan.............do read and assimilate the wisdom in the article below.

Fortunately, none of us serious trader types ever really gamble. We all take our trading very seriously, like a serious business person should.

Many people have asked me over the years what it takes to be a successful trader. The answer is not clear but here are a few thoughts to ponder and apply.

First, successful traders have a complete commitment to trading and do it full-time. If it is a hobby or a secondary pass-time, I know how the bottom line will be - a big minus. Trading must be addressed as a profession because if you do not treat it as such, let me assure you, those who do treat it this way will separate you from your money very quickly.

Secondly, successful traders fit their trading habits to their individual personality. If you are an impulsive individual, your style will reflect more trading than a calculating individual who waits for all the indicators to fall into place. The personality factor more than any other factor I know of, will determine success or failure. If you are an emotional person, admit that you are and structure your trading habits to make emotions a positive influence, not a negative one. If you are either greedy or fearful, that will affect your decision making on a position and without recognizing the governing emotion, your decisions will tend to be wrong. Whenever I am the most fearful of the market, that emotion helps make me decide to go long and buy. I know that my emotions tend to make me fearful most of the time. Whenever my fears become overwhelming, my discipline tells me to buy and discipline must win out or you are doomed to failure.

The work ethic can never be overstated. I watch the market all day long from the opening bell to the closing bell. I have kept diaries on every day in the market for the last seven years, sometimes having over 40 entries in my diary per day. If I do not do my work my profit suffers. There is no short cut in trading, the market will quickly find if you are lazy.

Planning is the objective part of trading. Start with the worst case scenario and work from there. You will never be more objective than before you execute a trade. Once you are in a trade, emotions take over so the plan must be in place before the activity takes place. Determine a plan that tells you when you are wrong and admit it. Get out, retreat, live to fight another day; these are cowardly approaches but it will keep you from the traders obituary. Remember each rehabilitation takes a long time, but death is final.
__________________
Best Wishes!

Traderji

All the best!
Saint

 

[Saint]

Another gem from Traderji........

How to exit a successful trade!

Do you stay with your profitable trades as long as possible because the trend is likely to continue and make your profits even larger?

This is easy to understand but not so easy to do when real money is involved. The difficulty is that although your profit may become much larger if you stay with a trade, it may also decrease and even disappear. Human nature is such that it values a sure profit much more highly than the probability of a much higher profit. Thus, traders are inclined to take their profits too soon. This can be fatal to long-term success because big profits are necessary to overcome the inevitable collection of small losses.

There is a good way to let profits run while still guarding against the possibility that prices will turn around and take away much of your accumulated profits before the trend actually reverses. It is called a trailing stop. You include in your plan a method for moving an exit point along some distance behind your trade. As long as the trend keeps moving in your favor, you stay in the trade. If the market reverses direction by the amount of your trailing stop, you exit the trade at that point. You would also offset your trade and reverse position if the trend reversed.

One way to set a trailing stop is to protect a certain percentage of the accumulated profit. That will always insure that you keep some profit on a good trade.
__________________
Best Wishes!

Traderji

All the best!
Saint

 

[Saint]

And another great one by Traderji.....

The key components of a successful trading plan are an edge, discipline, risk control, and money management.

Controlling your risk

Successful speculation is all about managing risk. A winning trader always knows how much they will lose, but rarely know how much they will make. The key is to never let a single trade or single event (that may impact on multiple positions) have a major negative impact on the trading account.

"Never, ever, trade without a stop-loss order. If you don't know what a stop-loss is, you should not be trading."

Money management

A basic investment tenet states there is a direct relationship between risk and return. Trading is no different - the greater the account value risked on a single trade idea, the more volatile the total returns from the trading strategy will be.

A simple strategy is to never risk more than 2% of your trading account on a trade. Most professional money managers will risk a fraction of 1% on a single trade.

"There are many bold traders, but there are very few old, bold traders".

The Difference between the professionals and the novices.

The "Professionals" fit the following profile:

they trade completely objectively using mathematical models to arrive at trading decisions, there is no emotion involved;

their ideas are well researched to ensure their strategy has a definable edge;

they follow trends in prices, by controlling their risk and allowing profits to accumulate;

they realise the market is not predictable, so employ techniques that will profit by recognising trends, rather than anticipating them.

The "novices" fit the following profile:

their trade strategies are usually based on esoteric analytical techniques that are highly subjective, making it difficult (if not impossible) to determine the provision of an edge;

they have a pre-occupation with forecasting prices or dates on which trends in the markets will reverse (ie a belief that the markets are predictable);

by design, their subjective strategies make a disciplined trading approach difficult as it is too easy to "bend the rules";

they pay little attention to risk control and money management.

One final quote:

"Winners hold their winning trades, losers hold their losing trades"
__________________
Best Wishes!

Traderji

All the best!
Saint

 

[Saint]

Now,as discussed before,a stop is a predetermined point.Another issue,a fault by many and is a crime punishable by the guillotine................a stop once placed has to be respected,once that point is reached,one cannot push back that stop.Part of the trading discipline,part of the plan of attack,.....

Below an article,by Traderji, where he talks abt Trailing Stops and the various methods.....I personally use the Chart Patterns and the Channel Breakout methods.Different people have their different choices,and therefore their different methods,but whatever the method,the stop is never pushed back,the stop is always adhered to,the stop is trailed upwards in systematic fashion....

Exiting a trade

How not to loose too much of your trading capital.

Upon entering the trade, if you place a sell stop below the market if you're long (buy stop if you're short), you know right away how much money you will lose in any given trade. You should never trade without employing stops. Thus, you should never be in a trade and have a losing position and not know where your exit point is going to be.

How to lock in larger than normal PROFITS in a winning trade.

You should always stay with your profitable trades as long as possible because the trend is likely to continue and make your profits even larger.

This is easy to understand but not so easy to do when real money is involved. The difficulty is that although your profit may become much larger if you stay with a trade, it may also decrease and even disappear. Human nature is such that it values a sure profit much more highly than the probability of a much higher profit. Thus, traders are inclined to take their profits too soon which can be fatal to long-term success because big profits are necessary to overcome the inevitable collection of small losses.

There is a good way to let profits run while still guarding against the possibility that prices will turn around and take away much of your accumulated profits before the trend actually reverses. It is called a trailing stop. You include in your plan a method for moving an exit point along some distance behind your trade. As long as the trend keeps moving in your favor, you stay in the trade. If the market reverses direction by the amount of your trailing stop, you exit the trade at that point.

A trailing stop moves to lock in profits as the trade moves in the traders favour, it should never be moved backwards. There are many different ways to calculate a trailing stop:

Volatility - the stop is calculated as a percentage of the average true range of x periods.

Rupee Amount - A set amount determined before the trade is entered.

Channel breakout - exit a long position at the low of the last x bars.

Chart patterns - ie move the trailing stop behind each consolidation as it forms.
__________________
Best Wishes!

Traderji

All the best!
Saint

 

[marcus]

yipppppeeeee your back Saint ...... Disciple was right it wasn't possible to wait any more ..........

 

[Saint]

Fine,we now know the importance of having a stop,the types of stops,let us get into where we should place our stops...............as Traderji's post states,there are a few ways of going about it.I basically use the Chart patterns way and the Channel Breakout way.

As said yesterday,it's up to your comfort levels........there are things that one can learn from books,and then there are things that can't.One can learn about the various methods,the type that you are most comfortable with,you got to choose.......

Below is an example of a position trade .......basically Reliance Inds was in a sideways territory trading within an ascending triangle.We got a clean breakout around the end of June,and then a pullback to support in July.We therefore enter that trade with a stop loss at the previous pivot low.This becomes our INITIAL STOP.If Rel Inds had dumped the moment we bought it and hit our Initial Stop,that's it,we are out.We look elsewhere or if Rel Inds gives us a signal for a reentry.

In this case,that entry was great.The resistance that the roof of the asc triangle provided became support...........Right,now we take out the previous pivot high of 520 as Rel Inds moves upwards.The moment we get a new high,raise the stop to the previous pivot low which was 469.That move up made a new high of 585 and then pulled back to 526.Where is our stop now through all this activity,same place of 469.Now we get another move up.The moment we make newer highs above 585,we get to do what we enjoy most........yep,now raise stops to 526.

So on so forth.........the moment we take out a previous pivot high,raise the stops to its former pivot low.We therefore use pivots as our stop areas........especially in position trading,this also allows us to stay in the trade as long as possible.We are basically allowing the chart to do its thing,we stand aside and go with the flow of the uptrend.

Now throughout RIL has been using that dark green trendline as its support......but around March2006,another development happens.We started going vertical,a new trendline is drawn ,the blue line,and then even more vertical,the orange line.

That break of the orange line was an area to get out of half the position.Meanwhile through the entire move from March,we apply the Channel Breakout method(I usually apply the stop to the low of 2bars ago on the weekly,and 3 bars ago if I am trading the daily charts.)In this case,RIL first broke through the trendline,and we are out half,then followed by taking out the low of 2 weekly bars ago in the week with May 11th.

That's it,we are out,this position trade is over..........in this case,RIL continued its fall,and we can all feel good about ourselves,but there are times,when we get out and RIL goes on to make new highs.Not a problem,part of trading.

At this point a question would be asked,at what place would you take profits?I don't.I travel the whole distance at full position and keep raising stops till out.We would not get out at the top,but we would take an important chunk out the trend.........In this case of RIL,merely playing the raising stops methods would have given you a run from 480 to 1100(that's abt 129% gain).

So basically I use the pivot method of trailing stops,if things get vertical then I employ the Trendline break stop,and the low of the last 2 week bars method.......

Charts attached,shall post more examples the next few posts.

All the best!
Happy Trading!
Saint

 

[rahulg77]

Beautifully explained saint. Really amazing. Keep Going

Regards

Rahul

 

[anoop_hegde]

Great information..easy to understand...keep going..

 

[Saint]

Thanx Rahul,Anoop and Marcus......

Saint

 

[Saint]

Right,let us take another chart.Attached below is a chart of ABB.

Same here,ABB breaking out of a triangle on the weekly charts in Feb 2003,followed by a pullback in March 2003,to an area of support,giving us a great entry point for an intermediate trade.

Once again,we have our Initial Stop in place,the moment ABB takes off,and makes a new high over the previous pivot high,the stop is raised to the immediate previous pivot low.......so on so forth,the stops are trailed upwards.The beauty of the trail stop is that we know that our entry point to where our current trail stop is,...is money in our pocket.Every decline in an uptrend forming a higher pivot low is looked on with excitement instead of viewing it as money lost............excitement because we get to raise our stop losses,and that means more money in our pocket.We realise that there is no need to take out profits from the market at all.........the trail stops protect our profits.

Aug 03-Apr 04 :Yet again,ABB starts to make steeper trendlines........we now start to raise our stop loss to the low of 2 bars ago,all the while keeping a close watch on the trendline.Our intention is to take out half on the break of the trendline and another half once the low of 2 bars ago is taken out.

May 14th week in 2004:That bar breaks both the trendlines and the low of the bar of 2weeks ago........we are out of the trade.

Oct 2004:We get a chance for a reentry after months of sideways movement,with ABB making a higher pivot low on the weekly.Again we get our initial stops in place.Once again,the same process as above.And stops are raised with each new high to a higher pivot low.

Jan 06 :From here ABB starts making steeper trendlines again......once again we are looking at the trendline carefully.We are looking at the low of 2 bars ago.

May 2006:We are stopped out of the trade,with both trendline break and the break below the low of 2 bars ago.

Now we wait for an opportunity to reenter,and profit from yet another new intermediate uptrend.

All the best!!

Saint