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Money Management!

Discussion in 'Educational videos and material' started by T0rm3nted, Apr 19, 2016.

  1. T0rm3nted

    T0rm3nted Moderator
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    (Originally posted by Chan on the HotStockMarket forums)

    Money Management, back testing, and application - it is a very lengthy subject and I will share some ways to become a successful trader and establish a winning system and individual trading pattern that may fit your personality.

    One of the most difficult qualities of being a successful trader is learning good money management. It’s completely possible - and actually pretty common - to see people turn out to be right on a high percentage of their trades and still lose money. How is that possible? If you don’t use good money management by locking in profits, taking small losses on the picks you’re wrong about, and controlling your use of margin, eventually you’ll lose it all, no matter how good a trader you are.

    Once you've decided your trading objective, and what market you'll focus on, you’ll need to develop a stock trading system. Hundreds of different stock trading systems already exist, and you can certainly learn about or you can develop your own. What’s important is that you can objectively evaluate the stock trading system to ensure it meets your needs and that it performs well.

    If you treat trading like a business it will pay you like one. if you don't know anything about the business, All traders should find themselves a coach, or a mentor. Someone who can help them spot the errors in their system that they might not have noticed. An outside point of view can help you avoid other costly mistakes, and greatly increase your profits. I would like to point out how serious I take this business, in comparison, if you wanted to learn how to fly a plane you would not buy a book and read it over the weekend and expect to fly a plane on Monday would you? Well the same goes for the Stock Market.
     
  2. T0rm3nted

    T0rm3nted Moderator
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    Thoughts and Definitions:

    · Creating and sticking to a strategy can enhance your trading results.

    · Money Management is the process of determining how much money to invest per trade, how often to trade and what your total portfolio or equity growth rate should be.

    · Back testing is the process of analyzing how a system would have responded in the past.

    · Application is the process of implementing your system.

    · The risk/reward ratio represents the profit you can expect from winning trades and the losses you can expect from losing trades within a system.

    · The win/loss ratio represents the number of successful trades you can expect within a trading system.

    · The expectancy ratio represents the profit you can expect per trade within a trading system.
     
  3. T0rm3nted

    T0rm3nted Moderator
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    Money management is the system by which you determine how much to invest in any given trade. The reason most new traders fail does not usually relate to their lack of understanding of technical indicators, it is mostly due to lack of poor money management. You can make a mistake in your analysis and the market could be fairly forgiving, but you can't make mistakes in money management and expect to survive.

    New Investors tend to participate in seesaw money management. New traders find a strategy or technique to trade, and they begin small. After a few wins, the trader invests a larger portion of their portfolio in the subsequent trade and lose. Because the trader invested much more money in the loser than in the previous winners, the loss out paces the winners and the trader panics. The amount of money placed in the subsequent trade is much less because the trader is spooked and does not want to lose again. After a few winning trades the trader repeats the process and invests more to once again lose. You don't have to repeat that scenario very many times before you have lost a significant part of your portfolio.

    The problem of seesaw money management is obvious. A trader does not have a system telling them how much money they should invest. They inevitably invest more money when they are due for a loser and invest less money when they are due for a winner.

    Even aggressive traders won't put more than 50% of their available balance in the market at one time. The rest may be reserved for fixed income, such as annuities, real estate, or other investments. Trading can be quite the roller coaster ride, and having a reserve outside the market helps smooth the emotional bumps of the ride.

    You should look for low risk investments to offset your high risk investments. Choose what you are most comfortable with, such as risk - free investments (government bonds). You should regularly reevaluate your trading account to adjust the balance between aggressive and conservative positions as your trading account grows. Twice a year will do.
     
  4. T0rm3nted

    T0rm3nted Moderator
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    Decide beforehand how much you are willing to risk in a single trade. A successful trader will define risk as the maximum amount of money they are willing to lose in a bad trade. If you are willing to lose a $1 in a trade, then your maximum risk is a dollar. Although your maximum risk is only a dollar, the stock itself may actually cost much more. If you bought a $25 stock and you set your stop loss at $23, your risk is $2, not $25. Your maximum risk is not actually the place you will exit the trade - that is the safety net you have in place in case things go wrong.

    How much risk you are willing to take is useful when deciding how much of your total portfolio you are willing to invest in a trade. Most traders use a simple formula of risking no more than 1% - 2% of the total portfolio in any trade.

    Let’s say you have $100,000, if you apply the 2% formula, you would be willing to risk up to $2000 in a single trade. How many $20 shares can you buy without risking more than $2,000? New Traders would assume that they could only buy 100 shares $20 X 100 = $2000. What you may forget as a new trader is that the number of shares you buy is a function of how much they are willing to risk, not how much they are willing to invest. Imagine you have set a stop loss at $18 on this trade. That means you are really risking $2 per share. Knowing this, you can know calculate how many shares you can purchase by dividing $2000 by $2 per share. Using this formula you could buy 1000 shares of stock (2000 - divided by $2 = 1000). This formula helps eliminate the guess work associated with trying to determine what you are willing to invest from your total portfolio in a single trade.

    Assume you are willing to risk 2.5% of your $100,000 portfolio or $2,500. Also assume you are evaluating stock worth $4 and you set your stop loss at $37 (a difference of $3). Now divide $2,500 by $3.00 which gives you 833 shares. Once you have determined the number of shares (833), multiply that number by the cost per share, which gives you $33,320 (833 x $40 = $33,320). Now you can see you know exactly how much of your total portfolio to invest if you want to risk $2,500.That is a major investment of more than 33K, if that is not comfortable, lower the amount you are willing to risk to 1% or less. Whatever the amount, keep it low and consistent.

    I'll give you a quick run out on option trading. Assume you are buying a $50 at-the-money option for $4.00 a share or per contract. You decide to set a 50% stop loss (maximum!) 30% is my personal rule. We will use the 50% in this example: $2.00 per share, or $200.00 a contract. Now divide 2,500 by 200 which gives you 12.5 contracts (you have to use whole numbers so we will take the lesser value which is 12).Once you have determined the number of contracts (12) multiply that number by the cost of the contract ($400) which gives you $4800.00

    You will notice that this system of managing risk automatically accounts for higher-risk investments. The more you are willing to lose in a worst case scenario, the less of your portfolio you will be able to invest. This self-adjustment forces a level of discipline on you and your trading system. If you fail to establish a money management system, your allocation could become detrimental to your account.

    It is important to note that most traders will have very small gains or no gains at all if they are always investing the same dollar amount in each trade. Typically a trader will go on a run of winners and then a run of losses. The winners are not evenly distributed, and this grouping can be difficult to deal with if you are always investing the same dollar amount. Investing a constant percentage of your account is much more effective than investing a constant dollar amount. Investing on a percentage means that if you are on a losing streak, you will be investing less and less with each trade, which will reduce your losses for each subsequent trade. If you are on a winning streak, you will be investing more and more with each trade, which will increase the gains each subsequent trade. These streaks will happen, but will allow you to get all the value you can out of them.
     
  5. T0rm3nted

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    Stop Loss Orders

    Today is the day you are going to trade your first stock. You’ve gone to a stock investment seminar, studied the books and trading materials and you have even been practicing paper trading. You’re ready! At least that’s what you keep telling yourself; after all, the seminar speaker was just a kid and if he can do it, so can I! As soon as you find that winning stock, the one that’s going to pay off your mortgage, you gather up your courage and call your broker to enter the trade. Now what do you do? Do you just sit around and wait for the stock to go up and count the profits? What happens if the stock falls apart and quickly changes direction, are you ready for a big loss? Entering into the trade is the easy part, learning how to protect and manage your trade is the challenge. That’s where the stop-loss order helps; using a stop-loss order assures you that your first trade won’t be your last trade.

    The first rule of successful trading is, “Cut your losses short.” Losses are inevitable; no one is immune to losses. A stop-loss order should be placed with every trade you enter, whether you trade long or short. A stop-loss order gives you insurance that a little loss won’t turn into a bigger loss, and that you’re trading capital won’t be tied up in a losing stock. So you don’t have to worry about missing that, “can’t lose sure fire trade” that you always find when you don’t have the funds available to trade it.

    Stop orders are used to initiate trades, lock in profits and limit losses on open trades. Stop-loss orders can be used to manage the risk on your trades. Every trader should use a protective stop; they are a necessary part of trading. A stop-loss order is placed at a price level that you want to exit a trade. When you call your broker and place a stop-loss order, you are informing your broker if the market trades at a predetermined price, then the stop order is to become activated and the order is to be executed at the current market price.

    If you are long a stock, a sell stop order is positioned below the current market price. If the stock’s price declines and reaches the price level of the stop order, the order is triggered and sold as a market order. For example: If you buy 100 shares XYZ stock at the current market price of $32 and place a “sell stop order” at $31.25 (below the current market price), should the price of the stock drop to $31.25 a market order is then triggered to sell the stock. Remember with a market order, you may not be filled at the price you expected; your sell order is activated at $31.25, but your actual fill price could be much lower resulting in slippage. Slippage is the price you had hoped to be filled at verses the actual price you received.

    If you are short a stock, a buy stop order is positioned above the current market price. If the stock’s price rallies and reaches the price level of the stop order, the order becomes active and a buy market order is generated. Using stops in this manner will help limit your losses or lock in your profits.

    Stop-loss orders offer you an insurance policy against catastrophic losses and help preserve your trading capital. Sometimes stop-loss orders may seem like a waste of money because you may be exiting trades prematurely, and that may be maddening. The regular use of stop-loss orders can guarantee that no single trade will ever wipe you out and end your trading permanently.

    It is very important to grasp that using a stop-loss is the best thing a trader can do. Too many times, a mental stop-loss never gets carried through; the trade turns and the trader is faced with crippling losses. By placing actual stops, you are declaring to the market and yourself that if you are wrong, you’re going to cut your losses and run. A well-placed stop-loss can be a lifesaver; it guarantees you’ll survive to trade another day!

    Never use a "STOP LIMIT" ORDER, it has to hit that exact price and could ultimately skip over it. But more important, regular stop orders are not seen buy the market because they are really market orders. "Stop Limit" orders are on the board for everyone to see! They may go after it.

    The Obvious Secret:
    It's really not a secret but I will reveal some things here that will make you a better trader when it comes to stop losses.Yes the "PROS"do know where these stops are based on simple rules.

    Each stock has its own 52-week high and its own 52-week low, these are important closely watch levels. If the stock approaches one of these significant levels, it catches the attention of sharp traders because they know that there will be buy stop-loss orders above the 52-week high and sell stop-loss orders below the 52-week low.

    Also recent major highs and recent major lows of the last several months are a preferred level for traders to place stop-loss orders.

    The weekly high and low points are a great place to find stop-loss orders. Many traders will enter or exit a stock as a weekly high or low point is violated. Again, you’ll find buy stop-loss orders above the weekly high and sell stop-loss orders below the weekly low.

    The previous day’s price consists of a high, low and closing price, and it is a very popular place to put a stop-loss order. These prices are important because they are often used to calculate the next day’s value area, pivot points and trading range. Once a stock breaks out of its value area, it is likely to continue its trend; stop-loss orders are a good way to protect your trade should one of these points be penetrated. There will be buy stop-loss orders above the previous day's high and sell stop-loss orders below the previous days low. In regards to the previous day’s closing price, buy stop-loss orders will be placed above and sell stop-loss order will be placed below this area.

    Often a stock’s trading range is determined during the first 30-minutes of the open. A new high and low are established, and trading signals are generated once one of these areas is penetrated. So, there will be buy stop-loss orders above the high of the first 30-minutes and sell stop-loss orders below the low of the first 30-minutes.

    I have mentioned only a few places stop-loss orders are found; there are other methods and variations of stop-loss placement. But what it really comes down to is how much risk you are willing to take with each trade. Never risk more than you can afford to lose; the smaller your trading account, the tighter your stops should be. Now that you know what the professional traders know, where the common areas for stop-loss orders are, you should be able to avoid some frustrations and meaningless losses in your trading account.
     
  6. T0rm3nted

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    Orders Glossary

    Market orders should only be used in particular situations; you should stay away from market orders whenever you can. A market order is not likely to be filled at the price you are expecting. Usually a market order will cost you money by giving you a fill on your order one, two, or more ticks above what you hoped for. If you use a market order on both sides of your trade, it many cost you even more.
    Using a market order at the wrong time may result in bad fills costing you a lot more then you had in mind.

    I am not saying that market orders should never be used; at times they are a necessity. Not executing a market order at the right time may stop you from getting into a profitable trade, and sometimes not using a market order will keep you from exiting a losing position. Use a market order only when you have no other options. For example: A trade you recently made has become profitable but prices quickly reverse eating into your profits; if you are not able to exit with a limit order then a market order will get you out quickly, hopefully before all your gains have vanished.

    The advantage of a market order is that it guarantees execution which is good for fast moving stocks. The disadvantage of a market order is that you don’t know the exact price that you will be filled, resulting in slippage.

    MOC
    Market-on-close orders are filled at the end of the trading day, and like a market order they should be avoided if possible since during the last minute of trading you can be filled at any price.

    A day order is an order that is good only for one trading day. It expires at the end of the trading day if it is not executed and can be any type of buy or sell order.

    A limit order is an order to buy or sell stock at the price you indicate or better, unless the market is willing to meet your terms your order will not be filled. Using a limit order keeps you from overpaying when buying a stock and it keeps you from giving away your profits when selling a stock. One problem with a limit order is the possibility of missing a great rally; if a limit order won’t get you in, then a market order will. Another problem with a limit order is if the order isn’t filled in a fast moving market then you must immediately cancel the order. You don’t want the limit order to be filled as prices quickly change direction and fall back down through your specified price.

    If you’re not sure as to the direction of the market, limit orders allow you to test how strong the market is. For example: You place a small limit order at the current asking price and your not filled as prices quickly rally away from your specified price. It indicates that the market is strong and likely to continue its rally; in this case a market order may be the best way to enter this trade. Let’s say you expect the market may be weak, what can you do? Place a small limit order at the current bid price, if you are quickly filled it means that the current market is weak and that there are ample sellers. Once you determine the market’s direction you can add to your position or get out quickly with minimal damage.

    FOK
    A fill-or-kill order is given at a specific price with the understanding that if it is not filled at the requested price then the order will immediately be “killed” or canceled. This type of order will allow you to promptly see if your order has been filled on a quick moving stock. The good thing about using this type of order is that if you are not filled the order is immediately canceled. If the price you wanted is missed then your order is canceled, this is important because you never want to be filled on an order as price suddenly reverse direction.

    Stop orders are placed either above or below the current market price. Stop orders are instructions to the broker to execute the trade "at the market" if the stock trades at or through the specified price level of the order. The broker is expected to fill the order at the best available price, but no guarantee or price limit comes with the order. A sell stop order is placed under the market price; a buy stop order is place above the market price. This type of order is good if you need to exit a position when the market goes against you and it is useful in entering a market on a breakout. Once a specified price is reached, stop orders become market orders and often don’t give you the best price in a fast moving or thinly traded market. Stop orders are useful in protecting your profits or limiting your losses.

    Often slippage occurs for stop orders as prices move past the stop price before the order can be filled. Slippage is the difference between estimated transaction costs and actual transaction costs. The specialist or market maker is often guilty of “gunning” the stops, they know where stops are likely to be placed, as stop orders will often be clustered together. Slippage may occur when "gunning" the stops, during which prices are driven down to where sell stop orders are presumed to exist. Stop orders then become market orders, adding liquidity to a thin market and giving the specialist or market maker a chance to profit.

    A stop limit order is a stop order with a fix price limit that usually results in you obtaining a better fill then you could get with a stop order. For example: If you place a buy stop limit order at 53.00 with a limit of 53.30, then you can expect to be filled somewhere in between these specified limits. This type of order would be use if a trader were waiting for a stock to make a new high before entering a long position. A downside to a stop limit order, when using it as a protective stop, is that if the market gaps beyond your specified limit your stop won’t be hit as the market trades against you.

    GTC
    A good-till-canceled order remains open until it is canceled or filled. Normally this type of open order remains active for 60 days (sometimes longer). If it is not filled within this time period it will expire worthless. You can then place another GTC if you wish to. If you are going to enter a trade with a GTC order you must make sure to monitor the stock’s price, if you think that prices will fall below your order then you must cancel the order and re-evaluate your position.

    OCO
    One cancels the other, this type of order allows you to have two orders entered at the same time, and if one of the orders is filled the other will be cancelled. You would use this type of order if you were expecting the market to result in two different conclusions. Not all brokers will take an OCO order, but if your does you may want to consider using these.
     
  7. T0rm3nted

    T0rm3nted Moderator
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    Round Numbers

    Round numbers, what are they? Round numbers are numbers like 30, 31 and 32. They are numbers that traders have fixed in their mind that once a stock's price reaches this number they are going to take some kind of action; that is, either to buy or to sell a stock. To break it down even further, some traders will also use numbers like 30.25, 30.50 and 30.75 as triggers to act.

    As traders, it is important for us to recognize the psychology involved once stock prices reach these magic numbers. Have you ever watched stock prices come alive when they reach round numbers and wonder why? What happens to a stock's price when it reaches these round numbers? The answer is simple, traders like to buy or sell at round numbers and stops are often placed very close to round numbers.

    Because traders like to place buy and sell orders and/or position stops at these levels, round numbers often act as support and resistance areas.

    Support occurs when increased demand for a stock builds a floor under prices. A support level appears when buyers miss purchasing a stock and vow to buy it should prices decline to the same, or nearly the same, level. Resistance occurs when selling pressure stops a price rise. A resistance level is similar in that traders buy the stock just before it tumbles and they vow to sell if prices reach their purchase price.

    Round number support and resistance is just what it sounds like. Prices pause at common buy or sell prices. Most traders place buy or sell orders at even intervals like 10, they wouldn't even think about buying a stock at 10.24 or selling if prices reach 9.84.

    Recognize that you are working not with one price, but with a zone of prices as you place buy or sell orders at round numbers - your orders might not be hit. That's worth knowing if you want to place a stop-loss order. Don't place it at 30. Everyone else is going to place it there, and if you want to beat the crowd, put it slightly above so you aren't caught in what's referred to as stop-running or stop-gunning. That's when a series of stop-loss orders are executed and prices tumble, setting off more stops in a cascade.

    Stops often collect at price levels that are whole numbers. When the market seems to lack a sense of direction, floor traders will try to push the market into these stop levels to create a temporary influx of price activity. Because these moves are the result of noise and not market fundamentals, the market tends to fall back into the normal zone of trading. Fortunately, this does not happen frequently enough to be a problem. If you place your stops wisely, you can prevent yourself from getting caught in this activity. It is frustrating when you enter a trade, only to be stopped out; it seems as if the market moved exactly to your stop, only to reverse and move in your anticipated direction.

    Target prices are often strongly clustered right at the round numbers, which could explain why prices tend to react when they hit round numbers. Say prices climb up to a round number. Just when it reaches the number, the profit taking orders are executed, driving the price back down below the round number.

    Lesson to be learned here is try to avoid buying or selling a stock at round number prices. Staying away from these areas may just render the difference of making a profit verses losing your trading capital.
     
    #7 T0rm3nted, Apr 19, 2016
    Last edited: Apr 19, 2016
  8. T0rm3nted

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    Trailing Stops

    Use them all the time, once the stock moves in my predicted direction I may cancel the "stop order" and replace it with a "trailing Stop" to lock in profits. This will eliminate the guess work associated with, when to exit a stock trade even though it has hit your predicted level. This way you can let it run.

    A trailing stop is very much like the standard stop-loss: It is designed to get you out of a trade when the market changes direction and moves against you. Yet, unlike the regular stop-loss order, which typically remains fixed the whole time, a trailing stop is continually altered as the trade develops. Trailing stops are used in an effort to secure any profits that may have accumulated as the market trades in your favor and then reverses. Trailing stops, just like the common stop, are started at some preliminary value, but then moved higher (in a long trade) or lower (in a short trade) as the market moves in the desired direction.

    A trailing stop is very much like the standard stop-loss: It is designed to get you out of a trade when the market changes direction and moves against you. Yet, unlike the regular stop-loss order, which typically remains fixed the whole time, a trailing stop is continually altered as the trade develops. Trailing stops are used in an effort to secure any profits that may have accumulated as the market trades in your favor and then reverses. Trailing stops, just like the common stop, are started at some preliminary value, but then moved higher (in a long trade) or lower (in a short trade) as the market moves in the desired direction.
     
  9. T0rm3nted

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    Rules of stops

    The one key difference between a successful and unsuccessful trader is how they stop out of losing positions. Let’s talk a bit about the rules of stops.

    Do you use stops on all your trades? Trading without stops is a trader wanting to never admit that a trade was a mistake. So what's the solution? Let the market take you out. This takes your ego out of the decision - the decision on what stop level to exit should be calculated before entering the trade. Again you want to prevent your mind playing tricks by rationalizing a new reason to hold on to a losing trade.

    You should define an initial stop point for your trade, before you enter the trade. This determines the risk you are willing to take. The whole purpose of a stop is to define the point at which the trend is invalidated. That can be a support level, a trendline, a moving average, or a combination of all of these. Make your stop a ‘reflex’ action, something that is just naturally part of your trading plans.

    What about the trades that are going very well? When do you get out of a trade that is profitable? There are two main ways to accomplish this. The first is a target price that you automatically sell at. The second method is known as a trailing stop. A trailing stop is set at some point below the current price and then moved up on a regular basis as the profit of the trade increases. In a good uptrend, a moving average can be a very effective trailing stop. For a short-term trade, consider either a 10- or 20-day moving average for this stop. For a long-term position that you want to stay with only as long as the general uptrend is in place, a 50- or even 200-day moving average would be appropriate.

    One other thought on stops. I’ve heard many comments over the years from people who were taken out of a trade in the middle of the trading day and then the stock moved right back into the trend that they were making profits on. One way to cancel out this scenario is to only stop out of trades on closing, or near-closing, prices. This means that your stops are not entered into a broker’s computer to automatically happen, but are manual trades that you place at the time that the trade is at your stop price. That takes more work and more time, which some of you might not have for your trading, but it does eliminate the very unpleasant mid-day stop outs that can so discourage any trader.

    Stops are critical to the short-term trader. I suggest that you review every trade, good and bad, with an eye toward learning the very best techniques on closing your trades, profitable and unprofitable.
     
  10. T0rm3nted

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    Planning and trading

    Trading involves planning and discipline. Eliminating emotion and staying focused in your trading are two keys to attaining and maintaining success in your trading.

    1. Create a trading plan. Everyone will agree that creating a trading plan is a smart thing to do, just as everyone will agree that writing down one’s goals is a good idea. However, how many of us will actually take the time and the energy to follow through with this notion? Unfortunately, not many! I believe this to be one of the main reasons trader’s fail in their attempt to succeed at consistently making a profit in the markets. A trading plan should be written out, focusing on the trader’s specific monetary goals and money management. In it you should specify how you will handle winning trades and, most importantly, losing trades. Once your trading plan is written out in detail, religiously implement and follow through with the trading plan, making adjustments to it as you learn of your trading strengths and weaknesses. Trading is a business, treat it at such.

    2. Develop a mental picture of chart patterns your trading strategies work best with. Once you understand the strategies that work best for you, you’ll need to focus your mental picture on the chart patterns that fit your trading style. This will allow you to scan many charts and pull only the ones whose chart patterns you feel comfortable trading. Forget about wasting your time looking at charts, trying to find a possible play, that don’t meet your mental trading picture. Don’t try to make something out of nothing. Disregard the names of the stocks you are scanning; only look for chart patterns that will lend themselves to a good quality trade. Names don’t make you money, chart patterns do.

    3. Compare the relative strength or weakness of the stock to its industry, sector and the S&P 500. Now that you have found that perfect chart pattern that matches your trading plan, you’ll need to next determine the direction and timing of your trade. By first comparing your stock to its industry, sector and some benchmark index like the S&P 500, you’ll be able to determine a stock’s strength. This will allow you to determine your trading direction; if the stock is strong you’ll trade long or if the stock is weak you’ll trade short. I like using the S&P 500 Index. With 500 diversified companies; the S&P 500 is one of the best overall benchmarks of market performance. Because the S&P is a popular indicator of market strength, many mutual fund managers strive to outperform this market.

    Now that you have determined the direction of our trade, you need to wait for the right entry point. If the stock you have chosen has a weak relative strength and the markets are trading higher but the stock just sits there, should we initiate a short trade? No, it would be prudent to wait for the markets to reverse direction first. Once the markets start trading lower, our stock should follow, thus signaling our entry point.

    4. Each trade requires you to determine the proper share size. Trading entails rewards as well as risks. Don’t let anyone lead you to believe otherwise. The secret to a trader’s longevity is in how they control risk. Even when everything is going to plan, meaning you have more winning trades than losing trades, you may still have bad trading results. If you don’t control your losses or determine the proper size of your trades according to risk, you may have a short trading career. Most traders fail due to their lack of disciple in taking stop-losses or becoming greedy and loading up on a “can’t lose” trade, only later to find out that it wasn’t as much of a sure thing as they had envisioned. Once again, we have to go back to our written trading plan in determining how much risk is acceptable and how often we trade. Trading just to be trading, is more like gambling, you must have a specific reason to take on a trade and have detailed stop-losses in place.

    You must determine the maximum risk you are willing to take on each trade, that risk could be a standardize dollar amount or a percentage of your total trading capital. Once your stop is hit your out, no second guessing and no delaying!

    5. Manage your trade. Follow your trading plan and let the stock hit your target price or your stop-loss. Many new traders have the tendency to over manage their trades, making decisions based on fear rather than proper reason. There are however, reasons for a trader to exit a trade. Firstly, if a news event develops that may influence the price direction of the market you are trading. Secondly, the market has changed its original direction and is now jeopardizing your trade. Thirdly, consider exiting a trade if after a certain amount of time the stock fails to perform to expectations.

    6. Analyze your trades, what you did right and what you did wrong. Have you followed the previous five steps correctly for each trade? You may want to print price charts and review each trade. This should help you eliminate problem areas and help you refine your trading plan into one that works best for you. This could also include any paper trades you may have been practicing with. Most traders will try and forget their bad trades, when they should study them and learn from their mistakes. When you first start trading, you will make mistakes and many will be small stupid mistakes. Your goal in analyzing your errors is so that you don’t repeat the same ones over-and-over again.
     
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  11. T0rm3nted

    T0rm3nted Moderator
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    Questions to consider

    Money management is probably the most overlooked area in trading and investing. Here are a few questions to answer as you determine the most effective money management plan:

    How much money will you need to invest in short-term trading to be effective? In today's markets, you should probably have at least $10,000, and preferably $20,000 or more in risk capital to trade. If you try to trade with less capital, the economies of scale diminish. For example if you traded once per day at $20 round trip in commissions, that's $5,000 in 250 trading days, or one year; so right away a $10,000 account needs to make 50% to cover these fees, while a $100,000 account needs to make just 5% to cover these commission costs. You should also factor in any other costs you incur to trade, such as quote vendors, trading software and computers, if dedicated. You can see that the more you invest on the front end, the bigger your account should be to make back these costs more easily.

    What percentage of your trading capital will you invest in each trade? I know traders who commit anywhere from 5% of their account per trade to 20% of their account per trade. But the bottom line is what you are truly willing to RISK of the amount you invest. If you invest 5% of my capital into a trade, I only want to take a 20% loss as I seek not to risk more than 2% of my total trading account on any losing positions. This is why stops are so important to a small account.

    How many positions will you focus on at one time? It is best to trade only a handful of stocks at any one time. If my trading portfolio is too big (probably more than 10 stocks), then you are likely to lose focus and invariably miss an exit on a trade that you should have exited. Staying focused on a small number of stocks will help you in the long run.
     
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  12. T0rm3nted

    T0rm3nted Moderator
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    Misconceptions

    I guess this is waaaaaay overdue, I have sat here and watched traders on the board get frustrated and continue to sustain loss. That word is not acceptable. I will tell you why we have to go back to the beginning, lets quickly start with those ugly stop loss orders. Most try them and get stopped out. And mentally, emotionally, what ever - they feel instantly they lost control of the trade. Their mind says things like "oh if I was watching I would still be in the trade," "I know it is a bounce," "I'll never do that again," "I can monitor my own trades," "I have mental stops I can use," the list goes on.

    That isnot logical thinking that isemotional. That is the weakness of the trade.

    Somewhere in the beginning I referenced finding a mentor, or somebody to learn from. I know some follow, or try to guess or even worse think that I am a holder or player of a stock I mention. That is not always true, I am bringing good stocks out in front of you to analyze. I always have a plan in place for every trade, even if it is a day trade. Yes even quick trades I have a note what my expectations are.
    For some who may or may not follow riding the coat tails of me or others on this board leads me to refresh this thread.

    Stop-loss is the hardest thing to understand. I reviewed previous statements I made about percentages. They still stand but need clarity, When I referred to stop loss 2,5,10% below price I'm referring to a trade that is in play, those percentages are for trailing stops. But the key is which percentage? Well you must take the true price range the stock can travel in. Look back and see what is the most a stock can move comfortably in a trading period (daily).Once you know this you have you number.

    You don't place trailing stops unless your trade is heading in your predicted direction. That is the most important rule about trailing stops if you place one on the open of the trade, more than likely you will be stopped out.

    In the beginning you place that stop (using those percentages)below current support
    That is the rule, now I know and you should know that I have said this earlier, they also know where those stops are, and they can easily go down there and collect! Yes that does happen, so you can add a comfort zone to that percentage. Where they may not find your trade, but that my friends also comes back to what are you willing to risk in that trade.
    These answers must be In place before you enter any trade, because what if they are not collecting and you have a stock that continues descending? You have won the game. You live to trade another day.

    All this logic may take practice, but back testing stocks is where you have an advantage. Every stock has a history!
     
    #12 T0rm3nted, Apr 19, 2016
    Last edited: Apr 19, 2016
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  13. T0rm3nted

    T0rm3nted Moderator
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    Affirmations/Journals/Reviews/Results

    Affirmations, is a declaration about something believed to be true.

    You can take declarations and make up your own or use somebody else's. But what is important is that you can visually see the ones that may be your weakness. Find one that fits and print it out in large letters and put it on the walls around your trading room. You need to be reminded of the declarations during time of duress.

    I'll try to break them down but let me throw a few out:

    Trade what you see not what you think or feel
    Plan your trade and trade your plan
    Be patient, don't force trades
    Never add to a losing trade
    Cut your losses short

    You can make up your own there are quite a few out there if you have a trading plan use the rules of the plan. This must be in front of your face, it must be repeated and read every single day!

    Your plan, this would include what most view as a timely intrusion on your trading world. This is key,A TRADING JOURNAL

    I believe it is the one most important element missing from most traders plan. In fact most do not have plans to even start with.I want to ask you a question, with all the information overload on a daily basis, how many really remember the reason why they entered a trade? When a trade goes bad, you need to know this.

    You must review every trade when it is complete - win or lose. Don't ignore the winners especially, you will quickly know why you lost, you'll see it immediately. Reviewing is a process that will lead to perfect execution of future trades. Looking at why you won is as important, because the process is repeatable. Benefit from previous information acquired!

    When I look at possible trades, which can be in the hundreds during a week, it can be overwhelming sometimes. I could imagine as a new trader the info overload some may experience. In my experience I can identify possible trades quickly and scan through these stocks very quickly to find some that may or may not be possible trades. Once I make a list of possible trades I will take that list which is now broken down to a few stocks could be in a hot sector or could be one in rotation. I have a checklist I run down quickly, past performance, sector performance, I will develop cross checks past 4 quarters, rank in industry, etc. I try not to listen to the "noise" (TV, analyst, company releases) a lot of this information causes bad decisions. I won't tell you that when I post a news release, I look for some confirmation to that release. So I don't want to sound contradicting.

    During your trading week, day etc. the TV should be off. Especially during trading hours, you won't outsmart the market based on what is being said, it will be you processing that information and trying to make trades go in a direction believed by you, to be the way it is going to happen.

    OK, I went off track there. Establish somemutual support, that can be done on the message board, you toss out why you think a trade might be good or bad, you may not see something somebody else sees or vise- versa.

    Now that you have gathered enough information , you start to determine your trade. It must be clear right from the start what you expect, and where you are going, (where it is going to end). Identify possible treats to the trade, (earnings releases, dividends, past news releases, law suits etc.) I think you get the picture. Go to company web sites see what they are doing, look at who is running the company, how much interest they own (stock) etc. Once you believe your plan is flawless it is time to place the trade. Make your final notes, and execute. Buy the stock, possible option trades, whatever your strategy.

    You must monitor any trade for the unexpected development of bad news and things that may happen out of your control and be able to respond to that quickly (stop loss).

    KEEP IT SIMPLE! When going through your searches and planning, don't get over saturated with information, for a checklist you can follow for every possible search. Don't clutter charts with useless information. Multiple indicators etc.

    Find what works for that particular stock. These multiple indicators don't make the trade easier to determine direction, they create doubt.

    Keep it Simple!

    Now that you are clear and in motion, try to be flexible, nothing can always go as expected. Don't beat yourself up if you were wrong. This is where you can review what may have gone wrong or right.

    Was it something internal or external that caused the trade to go with you or against you? If your trade went bad or went as planned share that information, just don't say I lost or got hammered" or on the win side "made money, thumbs up! No, share why it happened, share why you won and how you executed that plan. And if you lose share why you lost and what outside or inside influence caused that to happen.
    This is simply lessons learned. If you transfer that information you will accelerate experience and improve future execution. Success and failure can only be gaged by disciplined trading and planing process. You can only win if you have planned carefully.

    I can tell you month by month my win/loss ratio. When it falls beneath a certain level, I know I have become complacent about something.

    Even with all my experience, I make mistakes, this is an ever changing environment. Once you forget, you will lose.

    I want to say that practice makes perfect. Do you know I still paper trade to this day? Yes and I love it. And I train with it. Take any athlete. Do you think just because he knows how to play a particular game they don't practice? Don't kid yourself.

    My win ratio for September, on paper, was100%. That my friends is flawless execution. I had loss ratio in real time, but was able to see threats and remedy them or just close the trade. I was still in the 90% range. The loss was due to speculation, a risky maneuver, that I as willing to take. In the paper account, I never speculate. Sounds funny? No that is the process of planning.

    If I sustain any loss it is usually due to a news release (unexpected threat) or speculation. I have money set aside just for speculation.

    For new traders that is not an option.Do not speculate, because if you win on speculation, it will give you a false belief you know what the market is doing and you will not trade your plan.

    When I speculate I am will to face the fact i may never see that money again. With new and young traders that is not an option, period.

    One last thing if you treat this as a hobby and not a business, you should find a new hobby. That is how serious you should take trading. This is not, and never will be for hobbies.
     
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  14. Ciao (Sheppy)

    Ciao (Sheppy) Well-Known Member

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    wow Torm3ntor for a virtual trader you give a lot good advice ;):)
    Money Management for me is most important together with psychology
     
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  15. Tiptopptrader

    Tiptopptrader Well-Known Member

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    Regarding Stop's and in the words of Kenny Rogers:
    You've got to know when to hold 'em
    Know when to fold 'em
    Know when to walk away


    I have to agree with Kenny more whether it be poker, stocks, or a girlfriend/wife (just joking ladies)
     
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  16. David Bradley

    David Bradley New Member

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    Thank you, that's a good read and lot to digest
     
  17. T0rm3nted

    T0rm3nted Moderator
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    And the most important message you can learn about investing! Without good money management, even the best investors will go broke.
     
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  18. Epicram

    Epicram Member

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    Explanation on Money Management is truly very great, i am glad to read this strategies and tactics to manage money!
     

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