Money Management

Van Tharp (Definition):
Money management is that portion of your trading system that tells you “how many” or “how much.” How many units of your investment should you put on at a given time? How much risk should you be willing to take? Aside from your personal psychological issues, this is the most critical concept you need to tackle as a trader or investor.

“Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half” - Bruce Kovner

“Never risk more than 1% of your total equity in any one trade. By risking 1 %, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. ”
- Lamy Hite

“You have to minimize your losses and tv to preserve capital for those very few instances where you can make a lot in a very short period of time. what you can’t afford to do is throw away your capital on suboptimal trades. ” - Richard Dennis

NOTES:
From the above quotes, we can see that one of the most important success factor in trading or investing is "Patience". Most of the time, we are just too eagle to make the money fast and forget to follow our predetermined strategy. We always thought that we have found a short-cut. It ended up that it was our throat that was being cut. Remember the prices cannot go up forever, it will at one time stop or reverse.

RISK MANAGEMENT METHODS
Professional gamblers can use Martingale or Anti-Martingale system to trade:

Martingale:
Double your trade each time you lose until you finally won. However, there are 2 problems:
1. Limited resources. 2. The house impose limits on bet size.

Anti-Martingale:
Increase your trade when you win. Bet more on the wining trades and reduce losing trades. This involves also varying trade size as the previous case but within the limits.

Stop-Loss: This is not exactly money management but it is a tool that helps to reduce the risk and sets limits to your maximum loss. Using this tool you can set your risk limit.

MONEY MANAGEMENT MODELS:

Units per Fixed Amount of Money
In this model, you will decide for example, you can do one trade per $20,000 of capital or equity.

Equal Units Model or Equal Leverage Model
In this model, you divide your total capital into x equal parts and use that to buy different investments or asset classes.

Percentage of Margin
Depending on the margins allowed for each asset class, use that to decide the amount of holding in that asset class.

Percentage Volatility
Using price volatility of the product in conjunction with the percentage of total equity to limit your purchases. For example, using 5-day moving average of true volatility of gold to decide how many contracts to purchase. Example, volatility is $300 per contract. Your equity is $50K and risk allow is $1000 (2% of $50K) per trade . You can trade 3 contracts. Also, it will be important to limit the total volatility (sum of all trades) against your total capital.

Trading psychology - be emotionless

Nicolas Narvas:

There was no doubt in my mind now that I could not make money by buying a stock and then trying to cheer it on. JONES & LAUGHLIN had convinced me of that. I could remember how I almost felt myself willing and pushing that stock upwards. It was a very human feeling, but it had no effect upon its market any more than spectators have on a horse race. If one horse is going to win, it will win, even if thousands of onlookers are cheering for another one.

It was the same now. I knew that if I bought a stock and turned out to be wrong, all the cheering and pushing in the world would not alter the price half a point. And there was no telling how far the market might fall. I did not like the trend, but I knew it was no use trying to fight it. The situation reminded me of George Bernard Shaw's remark at the opening night of one of his plays. After the curtain fell everyone cheered and clapped except one man who booed. G.B.S.
went up to him and said: "Don't you like my play?" The man replied, "No, I don't." Whereupon Shaw said: "Neither do I, but what can the two of us do against all that crowd?"

KepCorp - Short term trend

The short term trend of Kepcorp is down but today we witnessed a surge in price after correction lasted 2 days. However, it was not able to penetrate the upper bound of the downward trend line and it showed a pull-back. The 3 white candlestick showed that bearish reversal might be on the cards. Let's see how it plays out over the next few trading sessions. If it confirm push through upper trend line, then, higher highs might be possible.
Otherwise, falling back to the lower trend line will be the way to go.

Swing Trade - Kep Corp 20090623

Kep Corp Stop out on 23/06/2009 at 6.48. Counter closed at 6.45.

This is a test trade. It shows that using Candlestick is not a reliable swing trade tool. In any case, swing trading within 2-5 days time frame is not viable in SGX. (Refer to Getting Started in Swing Trading by Michael C Thomsett). It is extremely difficult to change small moves in SGX counter even with counters like Kep Corp which is a large cap stock with relatively high trading volumes. This is even more so for smaller cap stock with much less activity.

One key issue with index stock is the over market condition changes. Fund managers will sell down out of fear.

However, on the second day, the market shot up and KepCorp recover most of its loses and closed at 6.63 on 24/06/2009. Today, I am expecting KepCorp to go down slightly to around 6.58 - 6.60 range unless some positive news in the afternoon.

In general, short swing trades tends to be influenced by news and changes in overall market condition. This may not be a viable trading option for me because I don't want to spend too much time monitoring news and prices on screen. This is not practical.

The next method is to use Cyclical Trading Method. This is also doing Swing Trade but with a time horizon of 5 to 30 trading sessions. This method required bigger swing and will provide less trading opportunities. It means also taking bigger risk and expecting much larger profits. It may mean less than 5 trades per month on average. It also may mean following the overall market trend to trade. Some considered this as mid-term trading. For a start, I will use Stochastics combined with MACD for entry and exit signal.

Jack Schwager Trading Rules - Summary

JACK SCHWAGER TRADING GUIDE

The following notes have been taken when I read Jack D Schwager’s book: Getting started in Technical Analysis. Apart from the technical knowledge of identifying opportunities, Jack emphasized much on trading discipline so that even when your ability to spot a good trade is only 50% accurate, you can still turn up a winning position overall by using proper risk control. The idea is to be able to cut losses short and let the winner run. To start trading full-time, you must treat is like normal working so that you will cover all the activities need to ensure sustainable earning.

PREPARATION TO TRADE FULL-TIME

Step One: Define Trading Philosophy / Strategy
How do you plan to make trading decisions? (a) TA (b) FA (c) Both

Step Two: Choose Market / Product
You can trade in multiple markets. For a start, focus on one. Note the diversification and volatility.

Step Three: Establish Risk Control Plan
1. Maximum risk per trade (example $200 or $500)
2. Stop Lost Strategy (2-4 bids below support / trend line)
3. Losing period adjustment (when on a losing streak, time out? How much?)

Step Four: Planning Time Routine
1. When you will update trading system data / chart (morning or evening)
2. Planning new trades (nightly or early morning)
3. Update exit points or positions (change trailing stops, update support / resistance)
4. Research work (when and frequency)

Step Five: Maintain a Traders Note Book / Record
Trading Diary. Date of Entry / Exit, Long / Short, Quantity, Prices (Entry / Exit), Initial and Current Stop Prices, Cumulative Implied Risk (Initial and Current), Risk as Percentage of Equity (Initial and current), Objective (Initial and current), Net Profit / Loss, Reasons or entry and exit.

Step Six: Maintain Traders’ Diary
Keep details of activity (reasons of trade, outcomes of trade, lessons learned)

Step Seven: Analyze Personal Trade
Analyze to understand your own trading habits and style so that you can adjust your strategy to better suite you. Understand your psychology better through real trading. This will provide you with valuation experience that no one else can teach you. Through self analysis, you can improve your trade and improve your performance.
 
82 TRADING RULES AND MARKET OBSERVATION

ENTERING TRADES
1. Differentiate between major position trades and short-term trades
2. If you believe a major trading opportunity exists, don’t be greedy in trying to get a slightly better entry price
3. Entry into any major position should be planned and carefully thought through, never on intraday impulse
4. Find chart that says timing is right now, don’t initiate a trade without confirming patterns
5. Place orders determined by daily analysis. If market is not close to desired entry level, record the trade idea and review it each day
6. When looking for a major reversal in trend, it’s wiser to wait for some pattern that suggests that the timing is right rather than fading the trend at projected objectives and support/resistance points
7. If you have an immediate instinctive impression when looking at a chart, go with that feeling
8. Don’t let the fact that you missed the first major portion of a new trend keep you from trading with that trend
9. Don’t fade recent price failure patterns when implementing trades, even if there are many other reasons for the trade
10. Never fade the first gap of a price move. For example, if you are waiting to enter a trade on a correction, and the correction is then formed on a price gap, don’t enter the trade
11. In most cases, use market orders rather than limit orders
12. Never double up near the original trade entry point after having been ahead. Often the fact that the market has completely retracted is a negative sign for the trade

EXITING TRADES AND RISK CONTROL (MONEY MANAGEMENT)
1. Decide on a specific protective stop point at the time of trade entry
2. Exit any trades if newly developing patterns or market actions are contrary to trade, even if stop point have not been met
3. Always get out immediately once the original premise for a trade is violated
4. If you are dramatically wrong the first day a trade is on, abandon the trade immediately especially if the market gaps against you
5. In the event of major breakout, liquidate immediately or put a close stop
6. If suddenly trades are volatile in the opposite direction, liquidate
7. If selling into resistance or buying into support and the market consolidates instead of reversing, get out
8. If the gut feeling that your recent recommendation is wrong, reverse your opinion
9. If you are unable to watch the market, either liquidate all or have stop orders on all
10. Do not get complacent about an open position. Always know when you are getting out
11. Fight the desire to immediately get back into the market after a stopped out trade

OTHER RISK CONTROL (MONEY MANAGEMENT) RULES
1. When trade goes bad, reduce position size, use tight stop losses, or be slow in taking up new trades
2. When trading is going badly, reduce risk exposure by liquidating losing trades, not winning ones.
3. Be careful not to change trading patterns after making a profit
4. Treat small positions with the same common sense as large positions
5. Avoid holding very large positions during news releases and major reports
6. Futures trades; apply the same money management principles to spreads as to outright positions
7. Don’t buy options without planning at what outright price the trade is to be liquidated

HOLDING AND EXITING WINNING TRADES
1. Do not take small, quick profits in major position trades, In particular, if you are dramatically right on a trade, never never take profits on the first day
2. Don’t be too hasty to get out of a trade with a gap in your direction. Use the gap as initial stop, then bring in stop in trailing fashion
3. Try to use trailing stops, supplemented by developing market actions, instead of objectives as a means of getting out of profitable trades
4. If large portion of objective is achieved quickly, take partial profits
5. If objective is reached and you still like the trade, stay with it with a trailing stop
6. If everything is going right, scale up and use close trailing stops
7. If long term trade, have a game plan for re-entering positions. Inability to enter at a worse price can often lead to missing major portions of a large trends
8. When trading larger positions, avoid the emotional trap to be 100% right. Take partial profits

MISCELLANEOUS PRINCIPLES AND RULES
1. Always pay more attention to market action and evolving patterns than to objectives and support/resistance areas
2. When you feel action should e taken either entering or exiting a position, act, don’t procrastinate
3. Never go counter to your own opinion of the long-term trend of the market. In other words, don’t try to dance between the raindrops
4. Winning trades tend to be ahead right from the start
5. Correct timing of entry and exit can often keep a loss small even if the trade is dead wrong
6. Intraday decisions are almost always losers. Keep screen off intraday
7. Be sure to check markets before the close on Friday
8. Act on market dreams
9. You are never immune to bad trading habits. The best you can do is to keep them latent. As soon as you get lazy or sloppy, they will return

MARKET PATTERNS
1. If the market sets new historical highs and holds, the odds strongly favoring a move very far beyond the old highs. Selling a market at new record highs is probably one of the amateur trader’s worse mistakes
2. Narrow market consolidations near the upper end of broader trading ranges are bullish patterns. Reverse bearish.
3. Play the breakout from an extended narrow range with a stop against the other side of the range
4. Breakouts from trading ranges that hold for one to two weeks or longer are among the most reliable technical indicators of impending trends
5. Flags or pennants forming right above or below prior extended and broad trading ranges tend to be fairly reliable continuation patterns
6. Trade in the direction of wide gaps
7. Gaps out of congestion patterns, particularly 1-2 months trading ranges, are often excellent signals. (works especially well in bear market)
8. If a breakaway gap is not filled during the first week, it should be viewed as a particularly reliable signal
9. A breakout to new highs or lows followed within the next week or two by a gap (particularly a wide gap) back into the range is a particularly reliable form of a bull/bear trap
10. If the market breaks out to a new high or low and then pulls back to form a flag or pennant in the pre-breakout trading range, assume that a top or bottom is in place. A position can be taken using a protective stop beyond the flag or pennant consolidation
11. A breakout from a trading range followed by a pullback deep into the range (eg ¾ or more) is yet another significant bull or bear trap formation
12. If an apparent V bottom is followed by a nearby congestion pattern, it may represent a bottom pattern. Might be going for lower lows if consolidation is broken, set protective stops near top of consolidation
13. V tops/bottoms followed by multi-month consolidation that form in close proximity to the reversal point tend to be major top or bottom formations
14. Tight flag and pennant consolidation tend to be reliable continuation patterns and allow entry into existing trends with a reasonably close, yet meaningful, stop point
15. If a tight flag/pennant consolidation leads to a breakout in the wrong direction, expect the move to continue in the direction of the breakout
16. Curved consolidations tend to suggest an accelerated move in the direction of the curve
17. The breaking of a short term curved consolidation in the direction opposite of the curve pathway tends to be a good trend reversal signal
18. Wide ranging days with a close counter to the main trend usually tend to provide a reliable early signal of a trend change, particularly if they also trigger a reversal signal
19. Near-vertical, large price moves over a period of two to four days (coming of a relative high or low) tend to be extended in the following weeks
20. Spikes are good short term reversal signals. The extremes of the spike can e used as the stop point.
21. In spike situations, look a chart both ways, with or without charts. Eg, if the spike is removed and a flag is evident, a penetration of that flag is a meaningful signal
22. The filing in of a runaway gap can be viewed as possible evidence of a possible trend reversal
23. An island reversal followed shortly thereafter with a pullback into the most recent trading ranges or consolidation patterns represents a possible major top or bottom signal
24. The ability of a stock or future to hold relatively firm when other related markets are under significant pressure can be viewed as sign of intrinsic strength
25. If a market trades consistently higher for most of the daily trading session, anticipate a close in the same direction
26. Two successive flags with little separation can be viewed as a probable continuation pattern
27. View a cured bottom, followed by a shallower, same direction curved consolidation near the top of this pattern, as a bullish formation (cup and handle)
28. Extreme sentiment readings can often occur in the absence of major tops and bottoms, but major tops and bottoms rarely occur in the absence of extreme sentiment readings
29. A failed signal is more reliable than the original one. Go the other way, using the high/low before the failed signal as a stop
30. The failure of a market to follow through on significant bullish or bearish news is often a harbinger of an imminent trend reversal

ANALYSIS AND REVIEW
1. Review charts every day, especially if you are too busy
2. Periodically review long term charts
3. Religiously maintain trader’s diary, including a chart for each trade and noting intending stop and objective, follow up as to how the trade turned out; observations and lessons, net profit or loss
4. Maintain a patterns chart book
5. Review and update trading rules, trader’s diary and pattern chart book on a regular basis

42 OBSERVATIONS REGARDING SUCCESS IN TRADING
1. First things first, why is it that you really want to trade. Examine your motives
2. Match the trading method to your personality
3. It is absolutely necessary to have an edge & know what your edge is
4. Derive a method that has an edge.
5. Developing a method is hard work but it is necessary
6. Skill VS hard work (discipline, research, improvement)
7. Good trading should be effortless (just follow system)
8. Money management and risk control. Never risk >2% of your capital on a single trade. Predetermine your exit point. If you lose >10% of your capital, take a breather and analyze what went wrong. Must have one.
9. The trading plan. Must have one.
10. Discipline – Risk control. Apply your method.
11. Understanding that you are responsible
12. The need for independence
13. Confidence
14. Losing is part of the game
15. When lack of confidence must call time outs (trade only when confident)
16. When there is an urge to seek advice on that trade, abort the trade plan
17. The virtue of patience (trade only on good opportunities)
18. The importance of sitting tight (use trailing stops) Remember - Jesse Livermore
19. Developing a low-risk idea (patience & risk control)
20. The importance of varying bet size according to chance of winning
21. Scaling in and out of trades instead of getting in or out at once
22. Being right is more important than being a genius
23. Don’t worry about looking stupid – admit your mistakes & change immediately
24. Sometimes action is more important than prudence (quick action to test first)
25. Catching part of the move is just fine (win little better than losing)
26. Maximize gains, not the number of wins
27. Learn to be disloyal (to your position or counter)
28. Pull out partial profits (when perceived risk increases)
29. Hope is a 4 letter word (act fast and cut loss)
30. Don’t do the comfortable thing, do what is right (emotionless)
31. You can’t win if you have to win (scared money never wins)
32. Think twice when the market lets you off the hook easily (you may miss major opportunity)
33. A mind is a terrible thing to close
34. The markets are an exciting place to look for excitement (don’t get excited)
35. The calm state of a trader
36. Identify and eliminate stress
37. Pay attention to intuition
38. Life’s mission and love of the endeavour
39. The elements of achievement
40. Prices are non random = the market can be beaten
41. Keep trading in perspective (there is more to life than trading)

Randy Sei Trading Rules

1. Do not buy when prices are trading on high ranges. It is too volatile.
2. It is OK to sit out without trading for a period of time when there is no good opportunity.

Swing Trade Log - KepCorp 20090619

KepCorp - 20090629
Entry: 6.68
Stop: 6.50
Reason for entry:
1. Candlestick bullish sign
2. Hitting bottom of Bollinger Band
3. MACD histogram green
4. CCI sloping upwards from below

Premises: Possible bullish reversal after a series of correction.
Trade horizon: short term. (1-2 weeks)
Caution: This stock seems to establish a new mid term trend. The rally seems to have fizzle out of steam.
Need to monitor closely and exit trade whenever downside detected.