You Will Win When You Know This One Thing!
Submitted: 04 Oct 11 15:41
 

I would like to shed light about understanding the concept of “Probability” in this newsletter.

The common impression of a trader is someone who makes decisions to take positions in the market with the aim to gain profit from the price movement. There is often something mystical about this winning trader that he somehow is able to see what others cannot.

The trader’s job scope is to execute a tested strategy whenever the trading signal appears. Simple isn’t it? 

Trading is simple. But it is not easy. The weakest link in the whole process is always the executor himself. Many new traders just cannot do what they are supposed to do when the chart tells them to enter a trade. Why so? 

Let’s look at the diagram below.

W

W

L

L

L

L

L

W

W

W

W

W

W

W

W

L

W

W

W

W

W

L

W

L

W

W

W

W

L

L

W

W

W

W

W

W

W

W

W

W

L

W

W

W

L

L

L

W

L

W

W

L

W

W

W

W

W

W

L

W

W

W

W

W

L

W

W

W

W

W

L

W

W

W

W

W

W

W

L

W

W

W

W

W

W

W

W

W

W

L

W

L

W

L

W

L

W

L

W

W

 

The above shows the winner/loser “Probability” distribution of a 75% accurate trading strategy. The trade outcomes goes from the top row, left to right. What this trader will encounter is 2 winners followed by 5 straight losers. I can say for certain most new traders will not be able to follow through with the rest of the trades as the string of losses will make him second guess the strategy. If you look further, a string of winners (in green) awaits and he will be a very happy winner if he had continued doing what he was supposed to do. 

It is no wonder why most traders are able to make a lot of money when they are doing simulate trading. With no money at stake, they are able to carry out each trade without any psychological baggage. And once they move to LIVE trading, they usually cannot replicate the same performance. Once he encounter losses, he starts to get defensive and will cherry pick trades and tries to justify for his inconsistent actions. In trading, the more afraid you are to losses, the more losses you attract.

Even the most profitable trader has to face losses. But how he interprets the losses is the key to success and failure. Good traders look at profits in long term and do not let a few losses affect their composure, nor shake their trusts to their trading systems. They know that they tested it, they know that the strategy has served them well, and they stand firm.

Trading is about execution more than the ability to spot winners. So, trade well by fully understanding “Probability” and following a mechanical system of set rules and profit will definitely follow.

 

 

 
The Importance of Price Reading
Submitted: 28 Jun 11 16:51
 

It is amazing how traders make their trading decisions based on news that is published on either news or journals. The fact is that news is never new. It is also peculiar that a trader should make his trade based on the assessment or projections of market analysts, only to find that with every analyst that says market is going up, you can always find another that says the opposite. The problem is that actually none of them will be wrong, as very often, they will not put a time horizon for their projections, and thus at some point in time, they will always be right.


To look at the ebb and flow of the market, there is no better way than to see a simple price chart. You do not even need an indicator. Every market participants’ decision is reflected on the chart and it makes no sense that a trader should look everywhere, study every indicator, and not put what the chart is actually doing as the topmost priority in his decision making process. Every resistance, every support level tells a story.


Trading can be simple. A price that is oscillating upwards continuously means you should stay on the long side until subsequent peaks starts to taper off, and the converse is true. If price is going side way in a congested channel simply means no majority of the traders are agreeing on the price and you should wait until price breaks out of the range. By using simple price patterns, and investing enough screen time to identify various patterns that is able to repeat itself with some level of consistency, it is more than adequate to equip yourself with the tools to trade successfully.

 

 

 
Probability and Risk / Reward Ratio in Trading
Submitted: 21 Jun 11 17:31
 

A trading system very often is based on long standing observations of market behaviour. Market participants changes but crowd behaviour never. That is the reason various market patterns can repeat itself with high reliability. If a trader observed/noticed a certain market pattern, he may then place his trade based on the pre-cursors/sign of that pattern. Then as the market moves, there will be a good chance it will be moving in the trader’s favour.

There will never be a system which is 100% accurate. A system with a >70% accuracy is considered a very good system. The trader will be profitable as long as he follow the system. In this example, it is assumed the system has a reasonable risk to reward ratio. (Risk to reward ratio is the amount you are risking for a gain. 1:1 means you are risking a dollar to get a dollar).

On the other hand, a 30% accuracy may not be a bad system either, say if the risk to reward ratio is 1:5. So out of every trade, you expect to get $500 for every $100 wagered. So in a distribution of ten trades, you will lose 7 trades and win 3. But you still ended up positive (3 X 500 – 7 x 100 = 800 profit).

Do not be fooled if one claim to achieve a 90% accuracy when you need to risk 500 to get 100.

Yes, trading can be compared to gambling. But a good trader plays the house, the unprepared trader plays the player.

 

 

 
Trading : Think Probability
Submitted: 16 Mar 11 14:05
Last Updated: 16 Mar 11 14:06
 

Very often people like to compare trading and gambling. So what is the difference?

If you trade based on gut feel, you are gambling. But the outcome will be much worse. When you are trading, there isn’t a clearly defined end to your game. In the event that you are losing, the game can only end in a few ways:

1.       You bust your loss limit and the system takes you out due to insufficient fund to meet the margin requirement.

2.       The loss rolls to a stage that it is too painful for you to take, and you exit the trade.

3.       You have a pre determined loss level, and you get out as the loss hit your stop loss.

If that is gambling, then what is trading? Trading is:

1.       Your entry is based on a tested and rational decision.

2.       Your exit is pre-determined before you even get into the trade.

3.       You have an edge in the market. Meaning probability is on your side. (In a casino, the operator enjoys house advantage. A 3% advantage means they expect to win 53 out of every 100 games.)

 

 

 
Vital Trait Of A Successful Trader : Detachment
Submitted: 18 Feb 11 17:54
Last Updated: 18 Feb 11 17:56
 

You have done your research, you have tested your strategies and you have seen how your strategies worked during the 3 months of simulated trading. Now you are ready to put real money on the line to make some money for all the work you have put in.

You sit before you computer, the signal comes and you are supposed to execute the trade. But you didn’t. The next thing you know, you see the price moves exactly in the way it is supposed to based on your strategy. Many new traders have this experience. They behave differently when they are doing simulation trading and doing Live trading. In simulation, they are able to execute the trades without fear but once it is Live trading, they suffer from trading paralysis.

There are mainly 2 key reasons why the trader failed to take action.

1.       The reluctance to be ‘wrong’.

2.       The reluctance to lose money.

After months of hard work, the trader do not want to be wrong (by having a losing trade).  He began to cherry pick trades to sieve out trades that ‘does not look good’ and justify with many reasons why he shouldn’t be taking the trade as the signal comes. The other trader did not take the trade because he is thinking in terms of how much money he possibly can lose IF the trade turns out bad. He even think of what he could had bought with that money. In both cases, their months of hard work has just gone down the drain.

The crucial step that the traders must take is to become detached from:

 1.       Result. The testing has been completed, and he had seen the strategies work. He must accept the fact that a single loser does not affect the long term outcome of his trading career.

2.       Money. Money is a by-product of good trading. If one is to focus on the money he is going to lose, it is almost for sure that he will attract what he fears the most.

If a trader can learn to be detached, he is able to execute his trades as signals appears, and let the probability works in his favour. With that, success is guaranteed.

 

 

 
How Many Strategies Do I Need?
Submitted: 24 Jan 11 14:08
Last Updated: 24 Jan 11 14:15
 

A day trader’s advantage is the speed of market movement, and the frequency of repetition of market behavior. More strategies do not mean it is better. Traders that always feel the need to have more and more strategies imply that they are very afraid of losing out, and this flaw will easily manifest itself into other trading sins easily.

1 or 2 strategies with good probability of success, and that a trader find easy to spot is all it takes. The key here is the frequency of repetition. Within a 2 hour session, if the strategy can appears 2-4 times, it is considered optimum as that means it is not too quick, and that allows the trader to be in a more relaxed state. Day trading can be intense and if the trader takes too many different strategies and the strategies itself is too rapid, he will be burnt our very quickly and open himself up for mistakes.

After the strategies have been identified, the crucial step is for the trader to execute the trade flawlessly. This means taking the trade without resistance and doubt. This can only be achieved by:

1. Observing the strategy setup multiple times.

2. Taking the trade based on the setup in a simulated environment WITH HIGH   REPETITION OF SUCCESS.

3. Taking the trade based on the setup in a LIVE trading environment WITH HIGH     REPETITION OF SUCCESS.

Once the cycles of trade taking and success repeats itself enough, the trader will learn to trust his system and HIMSELF and he secures his way to trading success.

 

 

 
What Do I Need To Start Trading?
Submitted: 14 Jan 11 18:32
 

Trading is all about assessing information presented to you and taking decisions to buy or sell the instrument you are trading.

If you like to trade based on financial reports, analysts reports, then having access to CNN Money or MSN Money will suffice (Fundamental Analysis). They also provide subscribed services which provide more in-depth analysis and additional market information.

If you are trading based on price charts (Technical Analysis), you will need a Charting software and Datafeed. Charting software helps to plot the price into a chart so the price movements take a very visual approach. Datafeed is the price information that is fed into your charting software. They can be provided free by your broker, or subscribed from Market Datafeed Providers. If the datafeed provided by your broker is free, it is still best to use them as it reduces your trading costs drastically.

All traders will need a broker to carry out the trades for them. Do look around for brokers that charge a reasonable commission but be wary of brokers that claim too low or no commission. Nothing is free, and the money will need to come from somewhere. Always find out more before committing. A good broker is crucial to your success in your trading business, so choose wisely.

The final thing is time and effort. Invest them in your venture, formulate strategies to help you make trading calls and not leave anything to chance. Trading is a probability game, not a gamble.