Imagine yourself running northwards. Suddenly you change your mind and want to run in the opposite diection. For that you slow down a bit, come to a halt and then turn and start running southwards. Gradually you build up speed till u reach your desired speed of running.
The market behaves in a similar manner. Till now it was heading higher and higher. But the momentum was waning. There were many signs of the market getting tired. It has now started heading southwards.
Will it continue southwards? It has a high probability of heading southwards all the way down to 4000/3600. This could be the correction I have been anticipating because retail had turned bullish inally. But the market might change its mind and start heading upwards again.
Keep a stop loss and trade short. There could be a lot of money waiting for you in the days ahead.
Wednesday, October 28, 2009
Thursday, October 22, 2009
Losing Trades - Why we must Accept Them
No-one can make winning calls 100% of the time, no matter how good a trader they are.
Losing trades are part of the game. The key to success is to manage your losses by cutting them early and keeping them small, whilst either letting your winning trades run for as long as possible, or making sure they at least exceed your losing trades.
Let me give you a few scenarios to demonstrate this point:
Trader A is a short-term trader who looks for 20 Nifty points per trade and uses a stop loss of 120 points to give himself every chance of hitting these targets. His winning success ratio is an impressive 90% and he averages 10 trades per week.
Trader B is also a short-term trader but he is much more cautious. He looks for profits of 25 points and uses a stop loss of 10 points. His success ratio is just 50% and he also averages 10 trades per week.
Trader C is more of a position trader. He looks for profits of 150 points per trade and uses a stop loss of 25 points. His success ratio is just 20%, ie 80% of his trades are losing trades, and he too averages 10 trades per week.
Which trader is the most profitable?
Well let's work it out:
Trader A, who has the highest amount of winning trades (and probably the biggest ego), averages 60 points per week.
Trader B, who is only right 50% of the time, averages 75 points per week.
Trader C, who is only able to identify winning trades 20% of the time, averages 100 points per week.
The point I want to make is that you don't need to spend your time looking for trading methods that have very high success ratios. Losing trades are not necessarily a bad thing. As long as your winning trades more than compensate for your losing ones, you are always going to come out ahead, even with a relatively low success ratio.
Losing trades are part of the game. The key to success is to manage your losses by cutting them early and keeping them small, whilst either letting your winning trades run for as long as possible, or making sure they at least exceed your losing trades.
Let me give you a few scenarios to demonstrate this point:
Trader A is a short-term trader who looks for 20 Nifty points per trade and uses a stop loss of 120 points to give himself every chance of hitting these targets. His winning success ratio is an impressive 90% and he averages 10 trades per week.
Trader B is also a short-term trader but he is much more cautious. He looks for profits of 25 points and uses a stop loss of 10 points. His success ratio is just 50% and he also averages 10 trades per week.
Trader C is more of a position trader. He looks for profits of 150 points per trade and uses a stop loss of 25 points. His success ratio is just 20%, ie 80% of his trades are losing trades, and he too averages 10 trades per week.
Which trader is the most profitable?
Well let's work it out:
Trader A, who has the highest amount of winning trades (and probably the biggest ego), averages 60 points per week.
Trader B, who is only right 50% of the time, averages 75 points per week.
Trader C, who is only able to identify winning trades 20% of the time, averages 100 points per week.
The point I want to make is that you don't need to spend your time looking for trading methods that have very high success ratios. Losing trades are not necessarily a bad thing. As long as your winning trades more than compensate for your losing ones, you are always going to come out ahead, even with a relatively low success ratio.
Saturday, October 17, 2009
Happy Diwali!
May your happiness & prosperity rise like the Sensex, worries crash like the US Dollar, Health be as stable as Gold. Happy Diwali to All!
Friday, October 16, 2009
Diwali 2008 vs Diwali 2009
What a change in sentiment between Diwali 2008 and Diwali 2009.
Diwali 2008 everyone was morose and convinced the bear market is here to stay. It also coincided with the best time to enter the market and would have given 100% returns in 12 months
Diwali 2009 - everyone is happy and bullish. People's PMS and Mutual fund investments arecoming back to positive (basically 0% return over 4 years but people are still relived to have no losses). The last few bears are turning bullish.
Conclusion - be careful. We might be entering the last leg of the bull rally
When I say might it is because as a trader we have to be open to both possibilities. that is the beauty of stop losses.
Currently I am long in the Nifty and riding the rally. How do we know the market has turned bearish and time to go short? The market will tell us - and I will let you know. Just keep watching this space.
Diwali 2008 everyone was morose and convinced the bear market is here to stay. It also coincided with the best time to enter the market and would have given 100% returns in 12 months
Diwali 2009 - everyone is happy and bullish. People's PMS and Mutual fund investments arecoming back to positive (basically 0% return over 4 years but people are still relived to have no losses). The last few bears are turning bullish.
Conclusion - be careful. We might be entering the last leg of the bull rally
When I say might it is because as a trader we have to be open to both possibilities. that is the beauty of stop losses.
Currently I am long in the Nifty and riding the rally. How do we know the market has turned bearish and time to go short? The market will tell us - and I will let you know. Just keep watching this space.
Wednesday, October 7, 2009
Smart money vs Retail
The market is expected to TOP between 5300-6000 before the crash downwards to 3600 levels...but for the top to happen the insitutions need to offload the stocks to retail...so when a flurry of IPO starts & NFO starts....the crash should start...Ultimately the market is a very efficient mechanism of transferring money from retail to the hands of the big Institutions
Have you ever thought who was buying to drive the market up from 2200 to 5100? Ask 100 of your friends, relatives, local brokers etc...all were bearish...its the smart money which always makes money...
Retail will enter now as the social mood is bullish...once again observe the 100 people around you...all are running for the IPOs and NFOs...once again very close to the top...markets are the same today as they were 100 years ago and will be the same way 100 years from now...
Have you ever thought who was buying to drive the market up from 2200 to 5100? Ask 100 of your friends, relatives, local brokers etc...all were bearish...its the smart money which always makes money...
Retail will enter now as the social mood is bullish...once again observe the 100 people around you...all are running for the IPOs and NFOs...once again very close to the top...markets are the same today as they were 100 years ago and will be the same way 100 years from now...
Sunday, October 4, 2009
Jesse Livermore's Trading Rules
Here are the stock trading rules that made Jesse Livermore's one of the world's greatest fortunes. Many successful stock and commodity traders still base their methods on these rules.
Livermore constructed his rules over several years, while learning by trial and error what worked on the markets. He was guided by one of his favorite principles:
"There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."
Trading Rules
Buy rising stocks and sell falling stocks.
Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it's rising you should be long, if it's falling you should be short.
Co-ordinate your trading activity with pivot points.
Only enter a trade after the action of the market confirms your opinion and then enter promptly.
Continue with trades that show you a profit, end trades that show a loss.
End trades when it is clear that the trend you are profiting from is over.
In any sector, trade the leading stock - the one showing the strongest trend.
Never average losses by, for example, buying more of a stock that has fallen.
Never meet a margin call - get out of the trade.
Go long when stocks reach a new high. Sell short when they reach a new low.
Other Useful Trading Guidance
Don't become an involuntary investor by holding onto stocks whose price has fallen.
A stock is never too high to buy and never too low to short.
Markets are never wrong - opinions often are.
The highest profits are made in trades that show a profit right from the start.
No trading rules will deliver a profit 100 percent of the time.
Livermore constructed his rules over several years, while learning by trial and error what worked on the markets. He was guided by one of his favorite principles:
"There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."
Trading Rules
Buy rising stocks and sell falling stocks.
Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it's rising you should be long, if it's falling you should be short.
Co-ordinate your trading activity with pivot points.
Only enter a trade after the action of the market confirms your opinion and then enter promptly.
Continue with trades that show you a profit, end trades that show a loss.
End trades when it is clear that the trend you are profiting from is over.
In any sector, trade the leading stock - the one showing the strongest trend.
Never average losses by, for example, buying more of a stock that has fallen.
Never meet a margin call - get out of the trade.
Go long when stocks reach a new high. Sell short when they reach a new low.
Other Useful Trading Guidance
Don't become an involuntary investor by holding onto stocks whose price has fallen.
A stock is never too high to buy and never too low to short.
Markets are never wrong - opinions often are.
The highest profits are made in trades that show a profit right from the start.
No trading rules will deliver a profit 100 percent of the time.
Saturday, October 3, 2009
Let your profits run!
One of the biigest mistakes made by traders is to take profits early. Visualise this scenario...3 months of average losses and winners...2% loss, 3% gain, 2% loss, 2% loss etc...so basically nothing at the end of 3 months or maybe 10% down....a trade comes and you are 10% in-the money. 9 out of 10 people will book the profits before their system tells them to. And that trade is the trade of the year that gives them the 30% move they have been dreaming of.
They say you never get poor taking profits. True. But you never get rich too.
Follow your system. Cut your losses and let your profits run. In most cases you will exit lower than the peak...but those 2-3 big trades in a year will make your day and make trading so worthwhile and profitable.
They say you never get poor taking profits. True. But you never get rich too.
Follow your system. Cut your losses and let your profits run. In most cases you will exit lower than the peak...but those 2-3 big trades in a year will make your day and make trading so worthwhile and profitable.
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