Importance of Staying Engaged in the Market

Whether you are an investor or a trader in the stock market, the most important thing you must do is to stay engaged in the market through thick and thin. Let me elaborate. What I meant to say is that you must keep monitoring the market regardless of bull or bear markets, regardless of whether you are invested or sidelined.

One of the biggest lesson I learned in 2009 was how I missed the market bull run by staying away for too long. I quit the market in 2007 and avoided the major crash. I was engaged in a few major projects where I work full time on them. I was not monitoring closely the market during the period. I came back in mid 2010. I missed the major run. What a shame! Investing and trading is actually a long term engagement. Even if you are staying at the sideline, you must at least check on the market on the weekly basis. That will give you an idea of where the market is going and provide you with some minimum alertness when opportunity comes.

I had decided not to miss any such opportunities. I am watching the market on constant basis. I believe the reward will come when the time comes. Patience is part of the game.

Risk Management in Trading & Investing

Everybody talks about the importance of Risk Management. So, what exactly is RISK? To start with, I have very faint idea of how to define RISK at the moment within my trading context. I can only group my RISK into 2 categories: 1) Known Risk. 2) Unknown Risk.

For the Known Risk, there are different ways to handle it and each will depends on the situation. For the Unknown Risk, there is no specific ways to handle it as it is unknown. For me, unknown risk will be group under one item and handle it as one unexpected event based on worst case scenario. In trading, the worst case scenario is to lose everything I have in my account. And my advice to all traders is to always be prepared to lose everything. If you are trading under that pretext, you will not have to worry about any unexpected events.

The rest of the risks which are already known will have a solution to handle it. Each will not be of any worry too. We cannot assume our strategy or theory will always work or even always be able to have an edge. It may turn out that we are having lower probability than 50% chance. The way to handle is to always monitor them.

Some possible events:
1. Complete market crash suddenly
2. Computer Failure
3. Your Broker gone bust
4. Political event
5. Natural disaster
6. War

Either of the event could mean that we cannot take out our money.

Forex Trading Results 2010-07-30

This week, a new strategy was introduced. This strategy uses daily chart or 4 hour chart to take positions on currency pairs that has potential to move in certain direction. Holding period can last up to a week if required. Only 3 trades were taken resulting in one winning and 2 losing. However, this strategy requires reward/risk ration of at least 2 times before taking trade. That means, I will have less trades taken. Only 3 trades were done within a week resulting in 2 loses and 1 win. However, the winning is much larger than losing trades.



The results is net wining of about 2750. The winning trade is GBPUSD having seen the setup along the major trend and entry was made upon breaking out along with the major trend. The trade lasted more than one day but was taken off after a gain of 140 pips. That was a mistake because it eventually moved further to over 250 pips. I was expecting it to pull back but it lasted longer than expected. The lesson is to listen to the market rather than trying to anticipate based on your own idea.



At the end of the day, rules of trading is important. This is a classic case of not having clearly defined rules of trading or not following rules and let fear overcome oneself.

Important lessons - Timing, stop loss, support and resistance

There were a few mistakes made during the last few trades that cost me some money instead of making a few thousands. These are important lessons that I need to remember:

Keppel Corp
CityDev
Ascendas India Trust
Parkway Holdings

All the above counters suffered from having stop loss point to close to the entry and above or just below support where the counters penetrated support and rebound back to close much higher following the overall market bullishness. Even though I know that the short to mid term trend is to go up, I had stubbornly put the stop loss too close. In the case of Parkway and Ascendas India Trust, I lose patience with them and decided to get rid of them out of frustration.

As a good investor or trader, one needs to be very patient and calm. One must not be agitated easily and must not succumb to unfounded fear. Fear of losing is always the cause of loses. Balancing greed and fear is very important in succeeding in trading or investing.

I must adjust my stop loss and must not sell out of frustration. Since I still have more than 75% of my capital standing by, I must not be worried about my capital being tied down not earning anything. The correct way is to use up my additional capital for new opportunities and keep my existing investment intact unless there is compelling reason to sell.

Golden Agri - 2009-07-16 and 2009-07-27

Golden Agri was sold off at 0.335 on 16th July for a quick profit after a friend told of the potential sell down in the market.

Again, this is another poor decision. This is selling out of fear and there is no solid reason. The counter did not show any sign of weakness. It did not hit stop loss point. The counter still show bullish signs technically. Fear of losing overrides fear of not winning more.

After realizing the mistake, the counter was bought back again at the same price on 17th July.

Important Rule: Trading is a lone game (Jesse Livermore, Turtle Traders). Do not discuss your trade with other people.

2009-07-17: AscendasIndiaTrust, Healthway, Parkway - update

Sold off Ascendas India Trust at 0.68. I was getting impatient over this counter. Within the next 3 trading sessions, it went up to 0.71. The biggest problem with this trade was that I was looking too closely at the intra-day fluctuation and lose sight of my own trading rules. The second problem was to set the stop loss point too near to short term support where it is very often break. Allowing 3 bids below support would have prevented pre-mature sell off.

Healthway was sold at 0.10 and it closed at 0.105 on 17th July. There is not need to sell off if the counter has not breach the stop loss point. The fear of losing money has overcome me in this trade and prompted me to sell off prematurely.

Parkway was sold off at 1.69 on 17th July. The reason for selling was that on 16th July, it opened at 1.72 and was sold down to 1.68 during a super bull day. This caused me to get impatient over it since it kept showing sell down while other stocks are push ahead. Looks like it is going to go down. However, at the end of the day, it turn out that it was closed at 1.71. Now the counter looks a little bullish. Again, the same mistake as the above 2 counters.

The conclusion that I had drawn from these and many other trades that I'd made is that I must stick to using oscillator to monitor the stock and disregard the intra-day fluctuations. I should only focus on closing prices of each day and stop from playing intra-day fluctuations.

Playing intra-day fluctuations sounded like very cool and professional. In the end, the reward was not attractive and it is very much prone to manipulations of the bigger players. There is no point to get sucked into the fights between buyers and sellers. It would be wiser to sit aside and watch the outcomes of their fight before taking sides. In this way, we can know more clearly which is the winning side.

This is a very important lesson and it must be adhere strictly. As for now, using the combination of Stochastic and MACD and Moving Averages to trade seems to be able to make more winning trade than any other tools.

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?"

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.