Trading Rules

It is not easy to be discipline. I had fallen into the trap many times. The latest was Renewable Energy. I suffer a loss of 26% which is way above my usual cut loss point of 12%. Another counter was Mun Siong. Also suffer losses of 18%. I finally decided to sell them off and focus my effort on more promising counters. These were the highest losses I took for this year. My short term trade usually has a cut off point of a few ticks below the support or 3-4 consecutive black bars and down trend.
Even though I expected the price will recover soon, I still take losses. For example, CapitaMallAsia (CMA), I decided to sell away at 10% losses even though I thought it will re-bounce soon.

The Importance of Discipline and Confidence in Trading

This week (2010-08-02 to 2010-08-06) is marked by many trading mistakes. There are a few lessons to learn from the trading. Even though the result showed net gain for the week, the major win was an over flow from last week's trade.



To summarize, here are some pointers to remember during trading:

• There were still too many times where I was looking at the 5-minute chart after placing a Swing Trade. This has to be stopped.
• Need to ensure entry point is correct for any trade. If missed the point, wait for it to come back or forgo the trade.
• Differentiate between Momentum Scalping vs Swing Trade.
• Trade along MAJOR TREND.
• Ensure CLEAR & GOOD Setup before entering trade. DO NOT Take HALF CHANCES.
• DO NOT OVER TRADE!!!
• WATCH YOUR GOAL AND STOP OR GO SLOW WHEN REACH YOUR GOAL!

The above lists summarizes the mistakes that was made during the week. Many of them were made within one single trade.

Key Trading Component / Concept - Leverage

We trade Forex using leverage. Using of leverage allows us to have exceptional gains when the market moves in our favor. On the other hand, if it moves against us, it will crash us badly. Because of leveraging, we must have stop loss so that we will not be wiped out by just one wrong trade. Not only that, it may end us up in trouble. Fortunately, almost all brokers have internal control where they will close out your position when you fund dries up. This is important in 2 sense. One, it protect the broker itself from unnecessary credit problem. Two, it protects the customer from over committing. This is win-win situation.

The concept of LEVERAGE is very important in trading particularly in Forex. The reason that a good trade can make lots of money fast because of leveraging. Without which, it would not have been possible unless someone has huge capital. The use of leveraging also means the proportional increase of risk.

When you are trading using leverage, you cannot take long term position. The simple reason is that even though you are CORRECT in your LONG TERM view of the market, you may be STOPPED OUT of your position when you are using LEVERAGE. The fluctuations in the market will be amplified by your leverage and you may end up with margin call even though you know that in the long run, the market will move towards your favor.

Because of leveraging, FOREX traders will take short term position up to a few days only. Because of that, it also caused the fluctuations to be rather high. That itself provides ample opportunity for short term traders like day-traders to make very profitable trades (or make huge losses).

In essence, at the end of the day, Profit = Reward - (Risk + Transaction Cost). In order to make a profit, the Reward must exceed Risk by bigger amount. Assuming Transaction Cost is 1% then:

Reward / Risk > 0.51

in order to be profitable.

Sticking to the rules

There was a sudden sell down at 2PM yesterday that resulted many people who took profit or cut loss. I was conned into selling Capitaland at a small profit and subsequently saw it bounce back. I almost sold of GoldenAgri but managed to convince myself to stick to my trading rules and not succumbing to emotions.

My decision to stick to rules proved to be correct and the market bounce back and close only slightly lower.

Today, he market rally back again.

I added Cosco back after twice I sold off too early resulting in small profits each time. However, based on the chart and indicator, this counter still have not realised its potential and there are still a lot of room to move. Again, I failed to follow the rules and resulted in missing the big portion of profits.

After selling down yesterday, my portfolio is now at about 7.2% positive. This is down by almost 3%.