Professional Approach to Trading

Stock Market Bullets December 29, 2011

2011-12-29T11:55:00.000-08:00

Stock market highlights for the day:

Concern over Europe again! Sovereign debt crisis fear.
Last trading day of the year tomorrow
10 year Italian bond yields at dangerous levels (7%)
Pending sales of existing US homes at 1.5 yr high
Factory activity grows in US midwest
Banks and commodity sectors gain
Initial claims for jobless benefits more than expected
December payrolls report coming next week
Amazon falls and affects Nasdaq index.

Stock Market Bullets

2011-12-28T01:25:00.000-08:00

Bullets for December 28 2011.

Asian markets fall in thin trading.
Mixed economic news in US and Japan
Oil 101 p/barrel
Japan industrial output drops, regrowth expected in manufacturing the next two months
US consumer confidence at a eight month high, home prices fall
India anti-graft bill passed in the lower house

Trading expected to be lacklustre

2011-12-27T01:57:00.000-08:00

Trading on the various exchanges is expected to be low due to the holiday season. Asian stocks traded dull during the day. What may turn the tide is the data that is expected to flow from the US, which may show encouraging signs of a recovery.

Sales numbers are expected to rise. to around $ 470 Billion and the jobless benefit claims are at a recent record low. The house price index and the consumer confidence numbers too are expected to show good numbers.

On the Technical side, the S&P 500 Index has broken through the 200 day moving average after the recent rally.

Dow ends almost flat

2011-12-02T13:49:00.000-08:00

The Dow Jones index almost ended flat but there was hope since it was the best week in 3 years on Wall Street.

There was some positive from an important economic indicator - unemployment rate dropped to a 2.5 year low. The street is still wary of the Europe situation though. The S&P 500 is now very near to the 200 day moving average, a technical indicator, that hints at good times to come if breached from the bottom.

Sensex 20000, Nifty 6000 what next?

2010-09-22T05:29:00.000-07:00

M Jagadish
Many investors have been left scrambling to get into the markets this time. The market consolidated around 5200 to 5500 for a long time before shooting up without any pause. What could be the real reason?

As we've emphasized many times, we are in a multi-year 3rd wave bull run. Even a couple of thousand point corrections cannot stop the markets. Part of the reason is that overseas investors need to park their money into growth. Secondly, 6000 Nifty is no Mount Everest. When Nifty reaches 40000, 6000 will seem like nothing. Its happened in many markets world-wide, it could happen here. The developed world has seen it happen most recently (the last 50-60 years) even in the US, Japan and others. In any case, the amount of money coming in is in billions, it is still peanuts compared to what money is waiting to be invested.

Rupee Symbol in Color

2010-07-16T05:32:00.000-07:00

M Jagadish
The Rupee Symbol, which will officially stand for the Indian Currency Symbol has been launched. Here it is in colour. Spread the word, spread the cheer! Tell your friends and relatives.

Editor, BestOptimizer (mjagadishster@gmail.com)
+919822091862
Contact for Investment/Trading Advice

Bad Start to Trading

2010-01-18T02:11:00.000-08:00

M Jagadish
If you are a day trader and have a bad start (assuming you are not an opening gap specialist,) what do you do when you have a bad start? Suppose you keep $2000 as your worst case loss for the day and for some reason you violated something and ended up -$1800 in quick time, what should you do?

--> Take a break, have some coffee.
--> Breathe deep and analyze the real reason why this happened. Do not justify anything.
--> Promise yourself you will not violate anything for the day and hopefully from this point on.
--> Make sure you keep in mind that you have just $ 200 to go. Do NOT take another $2000 risk.
--> The most important thing. Cut down the trading size drastically. If you were trading 500 shares, try 100 for the rest of the day.

Overleveraging

2010-01-15T03:26:00.000-08:00

M Jagadish
What do you do if you saddled yourself with more shares/contracts that your money management formula allows and you are stuck at the wrong levels?

OK, here's what I really mean. Just for example, you are a day trader (this applies even to swing, position or other traders as well). Your money management formula says that at this particular time, you are allowed to go long 1000 shares of ACME. As usual, you saw a "golden" chance and banged out 1000 shares immediately. The stock moves up a wee bit. After a few minutes, the stock starts sliding down. Sounds familiar? OK, now even though your first doubts creep in, you look at your buying criteria (could be gap, indicators, price, tick, anything) and then you feel you are still right and you add another 1000. The stock slides another few ticks. Ouch! Now what?

Here's a simple analysis:
--> There is nothing called a "golden" chance really. Or, at least, a trader should not allow onself to believe there ever can be one
--> Don't violate Money Management
--> Never average! If you do want to average, average towards your direction, which means for buying, buy higher, not lower. This just means that the stock is moving in the general direction of your bet.

The first thing you need to do to correct is to immediately liquidate the extra shares that exceed your Money Management formula for the moment. So, in this case, sell the extra 1000. If by the time you do this, the stock is down to your first stop loss, follow your risk management criteria and remove whatever quantity should be removed at that point (say for example, 500). Keep the remaining 500 and again apply Risk management if the stock slides to your next stop loss level.
-->

Are you in a Trading Slump?

2010-01-14T02:10:00.000-08:00

You are now an experienced trader and your results are not that volatile, you are disciplined but you still don't understand why you are experiencing a slow and irritating draw down.

Relax, Trading is clearly a state of mind apart from all the other things that it already is!
I have some interesting observations about this. I play Chess on a leading Chess server that has a range of players that I can play against. I usually choose players at my own strength or slightly above (for that extra challenge). I am always surprised at how the charts of my performance behave as if they are price charts. Forget the patterns (its even more bewildering,) even just the price movement mirrors the state of mind. Many rising waves last a good amount of time, and similarly slumps last an extended period sometimes.

What this explains to me is that the human mind moves in patterns and trends and it takes a while for one to end and the other to start. So make sure you preserve capital while you are in a slump, try different things and you will be on track again after a while and then the whole profitable should hopefully last for good time.

Increasing Quantity in Trading

2009-12-22T02:13:00.000-08:00

You must take extra care while increasing trading quantity. More often than not, novice traders, recklessly increase trading size and lose the small amounts gained in a few lucky trade. The reasons for taking cautions are mani-fold:

* - Psychological pressure of potential, bigger losses and hence not keeping enough stop loss.
* - Cost of slippage is usually higher
* - Blotter looks ugly when in drawdowns

Suggested Remedies:
Make sure you increase quantity gradually.
Measure performance by comparing with a set benchmark, even against smaller size trade results.

Strategy during Falls in the Market

2009-11-30T00:28:00.000-08:00

One Strategy you should seriously consider adopting in falling markets is to buy into defensive stocks - FMCG (Fast Moving Consumer Goods) and Pharmaceuticals. They usually tend to move up and worst case, outperform the Index significantly.

Traditionally, FMCG and Pharma provide a buffer to the markets in falls. In any case, FMCG should form a part of your portfolio, but a bit more in falls. If you notice, even Warren Buffet has good holdings in this sector.

Never Question why the Market Moves in a Certain Way

2009-11-05T03:15:00.000-08:00

It is never wise to speculate too much on the market movement and why it will move in a certain direction violently or otherwise. On the contrary, listen to the market and do what it is saying. If you catch a good wave, just concentrate on riding it with risk and money management.

In the short term, markets move under the influences of demand and supply. You do not need to be an expert of Fed Rate cuts, Dollar Movement or any other external factors. I have observed that novices spend endless amounts of time trying to dissect economic, technical, and many other sources of information. What is baffling to them is that they still get in at the wrong time leading to losses.

Relentless Slide

2009-11-04T04:22:00.000-08:00

Why does the market relentlessly slide sometimes? What to do if you are caught on the wrong side in one such slide?

The market moves in one direction, is hammered (in a fall) constantly, and keeps making new lows. This is typical in what is called a 3rd wave fall. In Elliot wave theory, the 3rd wave is the most persistent and longest lasting among the 5 waves in the major direction. You do not have to be an expert to escape or catch a 3rd wave, but you can definitely avoid wrong moves or make use of such opportunities.

As you probably experienced by now, averaging down (for a buy side strategy) is not such a good idea. Most buy side funds get caught in the 3rd wave down after buying into the 2nd wave thinking that a new high will be made. The simplest clue that the market gives before a 3rd wave fall is a lower top or a double top. This is usually a hint at an impending fall. Look for this. If the fall is of the a-b-c type, the lower top will never be close to the absolute recent top. This means that the "a" wave is sharply down and the "b" (upward wave) is nowhere close to the top. Look for this formation to avoid getting caught in a 3rd wave fall or to make use of a 3rd wave up to invest.

Trading in tough times

2008-09-26T05:02:00.000-07:00

Let's pause for a while and think about the events happening right now. The only words you hear these days are bankruptcy, take over, rescue package, jobless claims, and so on. Lehman goes bust, Washington Mutual taken over by J P Morgan, AIG almost going bust if not rescued, Merril Lynch gone, Investment Bankers become house cats.

What can a trader do at such times? Well, the answer is definitely not in black or white. Never keep an open position without a stop loss. Do not expose yourself to a huge loss. At the same time, volatile times are best for making profits once you set a good stop loss order. Make money but at the same time, play safe. It is definitely possible.

Stochastics

2008-09-18T02:33:00.002-07:00

The Stochastic oscillator compares where a security’s price has closed relative to its price range over a specifically identified period of time. This is a predictive indicator in that it gives advance signals for buying and selling.

The indicator has been developed from the basic observation that prices tend to close near their high in an upward trending market and near their lows in a downward trending market. Further, as an upward trend matures, price tends to close further away from its high; and as a downward trend matures, price tends to close away from its low.

How is Stochastics Used ?

This indicator is often used to predict trend reversal. The indicator tries to determine when prices start to cluster around their low of the day for an up trending market, and when they tend to cluster around their high in a down trending market. Lane's theory is these are the conditions, which indicate a trend reversal is beginning to occur.

The stochastic indicator is plotted as two lines. They are the %D line and the %K line. The %D line is more important than the %K line.

Ranges

The stochastic is plotted on a chart with values ranging from 0 to 100. The value can never fall below 0 or above 100. Readings above 80 are strong and indicate that price is closing near its high. Readings below 20 are strong and indicate that price is closing near its low.

A very powerful move is underway when the indicator reaches its extremes around 0 and 100. Following a pullback in price, if the indicator retests these extremes, a good entry point is indicated.

Reversal

Ordinarily, the %K line will change direction before the %D line. However, when the %D line changes direction prior to the %K line, a slow and steady reversal is usually indicated.

When both %K and %D lines change direction, and the faster %K line subsequently changes direction to retest a crossing of the %D line, but doesn't cross it, this is a good confirmation of the stability of the prior reversal.

Many times, when the %K or %D lines begin to flatten out, this is an indication that the trend will reverse during the next trading range.
These are just some of the important and popular oscillators and indicators. There are many more. You need to study and pick the one that best suits your personality, apply the indicator and specialize to maximize profits.

Relative Strength Index (RSI)

2008-09-18T02:33:00.001-07:00

RSI, unlike what the name may suggest, is an indicator of a security’s strength to itself. It does not compare a security with an Index or a security with another security. The formula for RSI is:

here, U - Average of upward price change
D - Average of downward price change

How is Relative Strength Index Used ?

RSI is an indicator that follows price and ranges between 0 and 100.
The most popularly used Relative Strength Index is the 14-day RSI. Other regularly used ones are 9-day and 25-day RSIs. The lower the number of days used for calculation, the shorter the time frame it can be used for. It also tends to be more volatile. The practical application of RSI needs some experience as it cannot be applied directly.

Trading Range

The RSI usually ranges between 30 and 70 in an ideal market. The tops and bottoms are usually formed before the underlying price. In a bull market, this range may be 40 to 80. Similarly, in a bear market, it may range from 20-60.

Chart-type Patterns

RSI very often displays chart-like pattern such as double top, inverted head and shoulders and so on even though they may not show on the actual price charts. One can identify such patterns to trade successfully.

Failure Swings

This is where the Relative Strength Index surpasses a previous high (peak) or falls below a recent low (trough).

Support and Resistance

Supports and Resistances are sometimes more clearly on the RSI chart than on the price charts.

Divergences

When the price makes a new high but the RSI does not do so, it is called a divergence on the RSI chart. Eventually, prices correct and move in the direction of the RSI. Thus, divergences are indications of impending reversal. When the RSI turns and falls below its most recent trough, a confirmation of the reversal is obtained and a “failure swing” is said to have occurred.

Moving Average Convergence Divergence (MACD)

2008-09-18T02:33:00.000-07:00

MACD is a lag momentum indicator that shows the relationship between moving averages of prices. It is the difference between a 26-day and a 12-day exponential moving average. On top of this, a 9-day exponential moving average is plotted. This 9-day EMA is called the signal or the trigger line and is used to spot buying or selling opportunities.

How is MACD Used ?

MACD is best used in markets that are prone to wide swings in a trading sense. The three best methods of using MACD effectively are:

Crossovers

The primary use of this indicator for trading is to buy when the MACD rises above the signal line and to sell when the MACD falls below its signal line. Another use is to buy when MACD goes above zero and sell when MACD goes below zero.

Overbought/Oversold

MACD can be put to use as an overbought/oversold indicator too. When the shorter MA pulls away too much from the longer MA, it means that the security/Index is over-extended and that it is likely to return to realistic levels soon. This of course, depends on the nature of the movement of the security or Index that is being analyzed.

Divergences

The divergence of MACD from the price may indicate that an end to the current trend is at hand. A bearish divergence happens when the MACD is making new lows but the prices do not. Similarly, a bullish divergence occurs when MACD is making new highs but the prices do not make new highs. Divergences are more important when they occur at the overbought/oversold levels.

Bollinger Bands

2008-09-16T12:37:00.000-07:00

First proposed by John Bollinger, Bollinger Bands are one of the most popular overlays. This indicator gives you an idea of how the volatility for a security is related to the price levels over a specific period of time. An integral part of the Bollinger Bands is Standard Deviation. Standard deviation ensures that volatility is immediately factored in. The bands can expand or contract based on the volatility.

Bollinger Bands are actually made up of 3 distinct bands. The attempt is to capture a majority of a security's price movement within the bands. A simple moving is at the core of the band and is at the middle. The upper one is the SMA + 2 standard deviations and the lower one is the SMA -2 standard deviations. An example is 20 SMA with 20 SMA + 2 standard deviations and SMA – 2 standard deviations.
The SMA and the number of deviations can be adjusted to suit the personality of the security that is being analyzed.

Parabolic SAR

2008-09-13T07:04:00.000-07:00

The Parabolic SAR indicator was proposed and developed by W. Wilder, who also discovered the more famous RSI and DMI indicators. Parabolic SAR displays the suggested trailing stop losses in visual terms. I'm leaving out information on the formula because its very complex and may distract the user. We'll focus more on the behavior of the indicator and how to make the best use of it.

The indicator also helps you in taking a position by displaying the indicator and the price on the same chart. The buy and sell signals are generated when the upper or lower SAR cross the price line.

The main variables that make up the Parabolic SAR are Step and Maxmum Step. Wilder suggests keeping the values at 0.02 and 0.20. Parabolic SAR performs best in trending markets

The higher the value of the step, higher is the sensitivity of the indicator with respect to price change, but that does not mean that a very high step is desirable. When it is too high, the indicator is too volatile and this limits its usefulness. The Maximum Step is used for adjusting the SAR as price moves. The lower the Maximum Step, the higher the distance to the trailing stop from the price.

Technical Analysis Indicators and Overlays

2008-09-07T07:32:00.000-07:00

Indicators and Overlays

Indicators are the lines formed out of calculations based on the price, volume, time, or another related parameter.
Indicators that are derived and plotted over the price chart use the same scale as the price and are known as Overlays.
Some of the popular Indicators are the following:

Moving Average Convergence Divergence (MACD)
Relative Strength Index (RSI)
Stochastics
Williams %R

Some popular Overlays are the following:

Moving Averages
Moving Average Envelopes
Parabolic SAR
Bollinger Bands

Advanced Technical Analysis - A Series

2008-09-03T10:37:00.001-07:00

In this series, I'll cover advanced Technical Analysis topics. It is assumed that you know the basics of Technical Analysis and have some experience actually trading real money. If you do not have experience, you can easily find study material by googling around. As for trading experience, start a paper trading account if you do not have a trading account already. Do not experiment with real money if you haven't done that already.
It is well known that Technical Analysis is useless without the proper combination of Risk and Management. I'll add Mind Management to this list.
My personal choice of indicators are the following:

MACD
Stochastics
RSI
Williams% R

In this series, we'll focus more on the behavior and the use of indicators, understanding what they are trying to say and not restrict our focus to the math angle.

The most important element also is the study of waves. Study need not be to the depth of an Elliot or O'Nealy, but enough to give practical chances in the market. The aim is always to ride a good position as far as possible and to cut out a bad one early.

Trading and Capital preservation

2008-08-31T08:49:00.000-07:00

Capital Preservation

Very simple. If you don’t have money, you cannot trade. This means protecting your money is your prime concern when you trade frequently. Profits will come eventually. The best way to minimize risk is not to trade when conditions are not to your liking. Also, trading in a sideways market is not healthy for a professional trader. Volatility is alright as long as you know how to manage risk. Use leverage only if you can trade responsibly, not recklessly. Leverage is a curse for those who do not trade responsibly.It is famously said that you should trade money that you can lose. For most of us, that amount is very difficult to define. You should spend a lot of time to think what it is for you. There are established money management calculations to help in doing this. Before starting to trade, you should indulge in judicious planning. When you have started active trading, never forget to keep the concepts of Money Management in you mind all the time.

Trading is Boring

The popular myth that draws most people to the stock markets is because they think that trading is easy and exciting. This is as far as it can get from the thruth. Trading is boring to professionals when executed well. There is Buying and Selling. But the most time should be spent in Waiting. Waiting for the right opportunity to surface, waiting while holding good positions. If you seek thrill, try the roller-coaster ride, your kids too can enjoy !

2008-08-31T08:43:00.000-07:00

OK, today lets look at the kind of approach that gets the pros the kind of money they earn.
Five Steps that Pros follow to Make the Most of their Trades

Do analysis take a position
Keep a smart stop loss. Stop loss triggered ? You're out of the position. The position goes in the direction you predicted ? Move to step 3
The market is communicating that you are right, in that case, add to the position.
Trail the position with smart stop losses.
Out of the position only when your stop gets you out.

Trading quotes

2008-08-31T08:41:00.001-07:00

Efficient market hypothesis

2008-08-31T08:40:00.001-07:00

“I'd be a bum on the street with a tin cup if the markets were always efficient."
"Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn't do any good to look at the cards."
"It has been helpful to me to have tens of thousands (of students) turned out of business schools taught that it didn't do any good to think.”

~ Warren Buffet on Efficient Market Hypothesis

Directional call

2008-08-31T08:39:00.001-07:00

Having a view on the market or taking a call is the flawed approach of a noob. One should move from such an approach as soon as possible. Taking a view is important and tools such as Technical Analysis help. However, once you take a view throw it in the waste basket. The difference between a noob and a pro is that the pro now focuses on riding the position as far as possible or getting out with the correct stop. You must remember to concentrate on making the most of the trade. Endless thoughts on making a fortune have to stop.
Keep smart trailing stop losses. Kick out the loser smartly.

Breathing and virtues

2008-08-31T08:37:00.000-07:00

Breathing

Patterns in Day TradingWatch your breath when you take a position in day trading. It will definitely not be normal. My observation is that more brittle the emotional make-up of the individual, more hurried is the breathing. In any case do emotional traders really survive eventually ? Maybe if they learn to channelize it into useful energy. But that is a hard and long story. We will deal with that some other time.

Humility

Being Humble is not just a heavenly virtue heard in churches. The mature trader is always humble, after being battered time and again in the markets. So why not start it a bit earlier ? Believe me, it pays to be humble, otherwise one goes to the market every day with confidence only to be smashed time and again. This is very common among traders early in their career.

Trading Direction Bias

2008-08-31T08:35:00.000-07:00

It is natural to have a tendency to be comfortable either on the Buy side or Sell side. That is, going long or short.
There is a danger here that if it becomes a habit it can lead to losses.
You make money if you are right with your directional call. It is observed that many traders make losses on days that the market goes in the direction that they are not comfortable with.
If your system is solid and you are following the correct risk management and money management technqiues and still noting that you are making losses, more often than not, the culprit is market direction.
Simply stop trading for a while. Wait for the trend to reverse (if it does happen) and only then start again.

Smart Trailing Stops

2008-08-31T08:32:00.000-07:00

In the figure, suppose you have bought 100 shares of the stock at the point shown in the diagram and add to it after the next pull back. You will see that hypothetically, you can keep riding the profits. The first stop loss is SL 1 when the stock is at level MP 1. Note that the stop loss is slightly below the last wave low. The stop loss is SL 2 when the stock is at level MP 2, SL 3 at MP 3 and so on.
In situations where the prices move up violently such as the point SL 7, shown in the figure, stop loss may be kept by following other methods such as mid points of large-bodied candlesticks, gaps and so on.

Technical Analysis is one thing, but if you correctly trail the position with smart stop losses, you will see that you will be able to ride the profits since the stock continues to make higher highs and higher lows. Similarly in the case of a position where you are short and the stock or futures product makes lower highs and lower lows, you can keep moving your stop loss lower and lower (but higher than the last wave’s top.)

Trailing stop loss is an art that can take a life time for many to master.
I take a position and keep a smart stop. Now I want to trail. There is a scare early that probably makes a peep at marked to market loss. If I'm right (which is not that big a deal for any self-respecting analyst) then I should be well on my way to break even and profits. This is natural.
Now how do you know when to exit ? This is a tricky question for many, especially for those who do ultra-short term trading, scalping, jobbing, whatever the name.

Do I book my profit a couple of points after my "target profit?" No, say experts, trail till your last breath :). The best way to deal with, in my experience is, once you have reached a level of good profits, (that can come handy in loss making up for loss making trades) start tightening the stop. But never loosen your grip. If your stop is reached, make an exit. If there is a jump and your stop loss level is exceeded, exit at whatever best price you get. I for one, never keep a stop loss. Its always mental (Warning: This is only for experienced traders, beginners must always keep real system stop losses.)

But there is some skill required when you keep a mental stop loss, because the mind starts playing games. So observe your behavior carefully. Note down every step, discuss with an expert and then come to a conclusion on what works best for you.

Trading process and evolution

2008-08-31T08:27:00.000-07:00

Trading a minimum system ? Sounds strange ? Not really, I guess to those in the trading game for some time. Let me explain.

You decided to trade
Did the homework
You went after other's systems and it didn't work. Sounds familiar ?

This should be done:

You decided to trade
Did the homework
Trading is very personal. One person's indicator is another person's misdirection. Or something to that effect. Get the message ?
Get the system checked by an "expert" (a very rare species, let me warn you.)
This is a system that you will go by for the time being. It works for you. You will know soon enough anyways. The market is a ruthless teacher, isn't it ?
If this system is true to your personality, you will grow with it. By growth, I mean you will only have to make nudges and pushes to the system, not overhauls.
One key clue that can be noted from your performance is that you know instinctively that you have committed a mistake when you really do. This is the verification that indeed the system you have chosen is consistent with your psychological make-up

World Markets

2008-08-31T08:24:00.000-07:00

Lets look at some interesting markets of the world.

US

The US (United States of America) markets are so far the model and in every way a huge giant. Very deserving for someone who has laid the foundation of capitalism and enterprise, encourging the best talent in the world to themselves. The stocks here are very liquid and you have an entire universe of big and small stocks in different markets. NYSE (New York Stock Exchange) and Nasdaq are the premium stock exchanges. CME at Chicago (Chicago Mercantile Exchange) and CBOT (Chicago Board of Trade) are leading derivatives exchange with an awesome array of products on offer for trading. One wonders if the basic idea of derivatives is being served purposefully or is it excessive trading behavior that Warren Buffet at Berkshire Hathaway says will go ka phut. I love futures and I hope some one will really prove that the excess is required :)

Asia

Japan is by far the biggie in Asia. Hong Kong too does premium, cool business. Nikkei still stands tall even though it saw a mountain and a valley.
Singapore, China, India are other markets of note. Thailand, Indonesia, Malaysia too have their own niches catering to regional demands.

Europe

Europe is another story altogether. These guys somehow manage to do things efficiently. Neat and tidy. London is one global hub. Other than that there are giants in Germany, The Netherlands. France and Italy lag a bit behind the leaders.
Canada, Russia, some south American markets like Brazil, Argentina and so on have their own places. Now, it will be interesting to see how things shape up in the future. Imagine a situation where terrorism drives people indoors. It will be a different world with the new trading pits being the bunkers, basements, underground haunts. The networked world will pose interesting changes. Lets see.

Legends of the Trading World

2008-08-31T08:19:00.000-07:00

Legendary traders like Jesse Livermore, Ed Seykota, Richard Dennis, Bill Dunn, George Soros, William O’Neal and so on, who have given astounding returns in a short period are evidence to the fact that it is certainly possible to outperform the markets even in very short time frames. Each one of them had their own tools and techniques of the trade, not necessarily pure technical analysis, but what was definitely common is their risk appetite, fire-in-the-belly attitude, discipline and tremendous strength of will to succeed in the shark infested waters of the securities markets.

Jesse Livermore

The wall-street legend who made and lost millions in a career spanning three decades. He was most famously blamed for the biggest crash in the history of humanity, the 1929 “Great Depression Crash”. He wrote many classics and also gave the trading world gems like “Fear your losses and let your profits run” and “Markets are never wrong, opinions are”.

Ed Seykota

A classic exponent of Trend Following®, he reportedly traded a model account for a period of 12 years and turned $ 5,000 into $ 15,000,000 ! He was mostly self-taught and trained many successful traders into profit making machines. He is special in the sense that he continually tries to make improvements in systems despite being hugely successful and rich.Richard DennisMost famous for training the legendary “Turtles”. He placed an advertisement and selected random people including gamblers, accountants and teachers. He took a challenge by betting with a friend that traders can be made and are not born with the natural instinct. He succeeded and many of his former pupils now manage multi-million dollars. Before he even took this challenge, he had made his millions with his prodigal talent.

Bill Dunn

Bill Dunn, the Founder and Chairman of the very successful DUNN Capital Management, Inc and is known for his futures-based portfolio management and the extraordinary returns that they have managed to deliver to their clients. He is also a pioneer in introducing computer technology in managing portfolios. One very famous episode was how they made money in the sharply rising and falling Yen in 1995, which was unprecedented since most traders are known to have biases either towards the long or the short side.

George Soros

The Hungarian Soros, co-founded Quantum Fund with Jim Rogers. The fund reportedly returned 3,365 % in the next decade, making him a billionaire. He was dubbed the “Man who broke the Bank of England”, when in 1992, he sold $ 10 Billion worth of Pounds and made $ 1.1 Billion in the bargain.William O’Neal
Follows a mix of quantitative and qualitative methods to pick stocks and is a medium term investor. He is known to have turned $ 5,000 into $ 200,000 within a year early in his career. He is also famous for following a strict stop loss criteria for his holdings.

Improving at Day Trading Continuously

2008-08-31T08:17:00.000-07:00

Preparing for the day as usual. I may be a bit late to office, which usually means that I am not fully prepared. I feel prepared if I am at least 45 minutes before the open and have a look at the daily and hourly charts. This, despite the fact that I may have seen it on Saturday. A lot depends on the global markets these days. So one eye is always on those markets and the markets in Asia opening earlier than ours. There is great risk in keeping overnight positions if one does not have a respectable stop loss. Intra day swing trades are far safer in some ways provided trading expenses are at a minimum (for example, US commission rates)

Rewards from the market

2008-08-31T08:13:00.000-07:00

The market (especially the futures) always reward you more than you should normally be if you are right with your directional call.
Listen to the market. It talks to you. If you are right, there is a subtle message it gives
In the futures market, the risk takers have already loaded up and they show their approval by moving the market in your direction.
If you are wrong better be out with your normal stop.

Impulse Trading and Early entry

2008-08-31T08:10:00.000-07:00

Impulse Trading

Impulse trading almost always never goes unpunished. Never take a position just because you feel the market is reversing. You MUST allow your condition to be met before you take a position. This is especially true in case of day trading.
The reason is very simple. When you don't make enough money trading your Edge, how can you hope to do so with something that you are unsure. If you are in it for the long run, abandon such behaviour. You may be lucky a couple times, but the law of averages will hunt you down easily.

Timing Entries

One problem most day traders face is the timing of the entries. They say you can't time the markets. Wrong ! For intra-day trading there is no option but to time it well. Catching pullbacks after your condition is satisfied is a very good way of trying to beat the markets.
Example: Suppose you use a simple Stochastics buy signal to enter. If you scalp based on 1 min chart, allow the Stochastics to give a clean buy. In case of futures trading you always get a pullback to enter safely. The key of course, is how well you ride the trade when you are right and cut out the loser early.
Almost always, check the higher level time period chart. It helps if you are in the direction of the larger trend.

Full Concentration - No Compromise

2008-08-31T08:08:00.000-07:00

Anything less than full concentration is destined for failure on the average. How many of us carry our personal worries to the trading room ? Avoid completely !Its simple, the trading mind requires as much computing power as possible, nothing less.OK, I do concentrate, now what ? Now, don't relax ! Keeping going at the same level of concentration. The only trap here is that you tire. So regular breaks are a must. One very important point you must note: after taking a break the performance may not be as good. Scalpers will generally make this observation.

Impulse Trades

2008-08-31T08:06:00.000-07:00

Three things to know about Impulse trades for scalpers:

Impulse Trades are a strict No-No
If you do take it by mistake, don't do it again if you want to be a serious profit-making trader
Ok, you did take an impulse trade ? Do the following:
Watch it more carefully than you would do with a normal trade that follows your system.
Keep a stop loss or limit in mind immediately and no matter what, GET OUT at that level. If it moves in your direction, trail it with the same rigourous discipline.

Psychology vs Tools

2008-08-31T08:04:00.000-07:00

More important than the tools, equipments, news is one's psychological or personality make-up. In the long run, the most experienced traders realize the battle is only against onself. The more you polish yourself, the more profits pour.One of the first excercises i teach my trading students is just to toss a coin every day and take paper trades: heads you Buy and Tails you sell. After that is the important part. How you hold on to winners well and cut out the losers early. Adding to winners is an art that comes much later.But this in itself is a perfect profitable package.

Waves and their Importance in Day Trading

2008-08-31T08:03:00.000-07:00

It has been proved beyond doubt that Elliot waves work from a longer term perspective. But for those who study Elliot in depth, it is a challenge to try and decipher the short term or intra-day movement at least of indices.It is surely possible but requires a lot of hard study. The key point here is that the risk management is very important. One can get carried away thinking that a certain wave is ready to unfold and a bet is taken but pain follows when it is discovered that it didn't happen exactly as planned or didn't happen at all. The best way to try and take advantage of waves is to try and catch the 3rd wave of Elliot's 5 waves. This is not only profitable but does not require the kind of research that other waves (especially the correctives) require. The biggest risk of this strategy is that if the 3rd wave does not work out, another bottom (in case of expected upmove) or top (in case of a downward move) is observed that can easily take away stop losses.

Fear and greed

2008-08-31T07:59:00.000-07:00

These aspects are slightly different from the fear and greed to be dealt with say, in position trading or investing. The reason is that a new trader will learn soon enough (with painful losses) that it is smarter to live and trade without having to deal with them. For a professional trader, the concepts assume a kind of surreal, subtle form. Greed should be honed into a system of "how to let the winners run" and fear into a "trailing stop". The same thing actually ! Two sides of the same coin. The most successful traders are like well-oiled machines not reacting to anything but catastrophes, if at all. It is the moment at hand that is important to them and a very spiritual experience to make the most of it wisely, with humility and patience.

Never reinvent the wheel in trading

2008-08-31T07:58:00.000-07:00

This point is very important for those who are pretty new to trading in the securities markets. Yes, by trying to reinvent the wheel, you contribute by paying your fees to the market to learn the art. But I'm sure we all can do with a little more capital to trade. So, why not preserve it? Stop hunting for holy grails or new magic formulae. The reason is that there are far more important things to be honed, such as, Risk Management and Money Management.

Trading expenses

2008-08-31T07:57:00.000-07:00

Trading expenses form an inescapable reality for a trader. The shorter the time frame that your trades last, the more the importance of expenses. By expenses what I mean is not the car fuel, phone expenses and so on, but the taxes and commissions that are imposed on the trades.In the US, the environment is conducive for traders who make their living out of this activity alone. The expenses are commissions, SEC and other tax. The total expense for a retail scalper can be as low as .0028 % (all inclusive) compared to .033% for an equivalent trader in India. Far more than 10 times !From information that I recently got, trading even in Europe cannot be easy either, but the costs are much lower than India. Trading the US markets from London though can be one solution. Guys in the US have it good !

Trading tips in the stock markets

2008-08-31T07:54:00.000-07:00

Focus on the process and not the fruit

2008-08-31T07:51:00.001-07:00

Risk vs Reward

2008-08-31T07:49:00.000-07:00

More on Trading Emotions

2008-08-31T07:42:00.000-07:00

Confidence
Without confidence it is not possible to achieve much in other streams of life. In the equity markets, it is doubly true. If you lack in self-confidence, doubts may creep up in your mind. This may lead to indecision, which in turn lead to missed opportunities and losses. For day-trading and short interval trades, confidence is of utmost importance.On the other hand, on down days be careful. In many instances, you may be tempted to book small profits just to make your day balance sheet look pretty. This is not the issue. When you are faced with loss-making trades sooner or later, that same daily balance sheet will not look pretty at all.Never be far away from the correct principles of trading no matter what your mind is tempted to think. It is just too painful to reinvent the wheel.
Discipline
In order to be a successful investor/trader, you must be very disciplined. Stick to the plan of action. This means that you will stick to trading policies, trading plans and so on. Know your objective and work accordingly.
Ideas
Do not seek to implement new ideas that come all the time during markets. Remember, ideas are just ideas. If you feel there is value in them, they have to be thought about, refined, tested and then brought to the trading room. If you try to implement new ideas immediately to trading all you will do is to erode capital and confidence.
Hope
Do not allow hope to loiter anywhere close to your trading system. Hope has the potential to do maximum damage to your capital.

Trading Emotions

2008-08-31T07:40:00.000-07:00

Fear
No Risk No Return. This phrase is well known and it is not required for most of us. But for those who find taking the plunge difficult, it applies strongly. In addition to this, you will not learn unless you dive.
Despair
Despair generally arises when you are not applying your rules and are taking the wrong bets. The thinking process is retarded when despair arises. Take a break, take a deep look and you will generally find that you are doing something very wrong. That is, if you are following generally known good principles of trading.You will notice that in your bad times, if you have very little capital left, you will start compromising on the very principles that will give you any hope of recovering from your losses.
Doubt
When in doubt, don’t. Follow this simple rule and you will be better off in trading. There are many factors that influence the markets. At any point in time, even technical indicators, support levels, patterns may conflict each other. For example, there is a buy signal on the basis of 15 min charts but weakness in the 1 hour chart. If you cannot verify and come to a clear conclusion, just leave that opportunity alone. There will be many more coming your way.

Flaws in Technical Analysis

2008-08-31T01:27:00.000-07:00

There is a popular way of looking at Technical Analysis. “What is your success percentage?” is asked. This is a very wrong way to look at analysis. The reason is that a profit may be $ 10 at one time but a loss maybe $ 100 at another. There is no comparison. You will be surprised to know that many successful traders get only around forty percent calls correct but they ride them to maximum profits. The wrong approach has earned the science and art of technical analysis being labelled as suspect. Do it is the individuals using it who make the tool good or bad. While the science of Technical Analysis is criticized by some as having many defects, it is the user who has to be aware that it is just a tool to enhance your chances. Many new traders come to the market believing they have made the next big discovery of a money minting machine. Only Technical analysis combined with prudent risk management, money management and trade optimization can help you make profits. Technical Analysis tools are just a beginning to becoming a professional analyst. There are higher challenges most of which involve an individual’s psychological make-up.Remember that Technical Analysis is almost always the best tool if your time horizon is short, but only if used correctly.It is very common to see retail traders flocking to a new analyst with a new technique. Remember, your growth as a good trader will accelerate only once you give up the search for the next magic formula. You grow to be a professional trader once you stop looking for the next amazing trading indicator or the next amazing Technical Analyst giving great technical calls. You must start concentrating on trade Optimization instead.

Listen to the markets

2008-08-31T01:25:00.000-07:00

The market has a lot to say, just pay attention and you will find loads of useful information. For example, the principle “Do not add to your positions unless the markets prove it". This is shockingly true in the Futures markets. The players in the futures markets are generally those with high risk appetite. Most of the time they are well equipped, skilled and well informed. It is not a surprise that they are correct most of the time.

Haste makes waste

2008-08-31T01:21:00.000-07:00

You have a specialized, tested system. Wait for your conditions to be satisfied. Patience is an invaluable virtue for a trader.Futures how big players take positions before amateurs. They consider their bets as only that. It is a chance. More often than not the efficient or the big player has the advantage of leverage, information, infrastructure and so on. He may also be trading in the proprietary account or at very low commissions (brokerage) making him very difficult to beat.Follow trends, that should be your best chance. It requires patience to wait for trend changes. You will also have to time the point of entry very well since your margin for error is minimal, especially for a day trader.

2008-08-31T01:18:00.000-07:00

Spiritual Angle to Trading

2008-08-30T07:24:00.000-07:00

Does a person’s spiritual approach affect performance in the stock markets ? Is it linked to professional trading in any way? It is a debatable point. We all know about Warren Buffet’s generous philanthropic gesture in donating most of his hard-earned fortune to the Bill and Melinda Gates foundation. Money is important but probably not as much as many make it appear. Successful traders routinely give away a good percentage of their trading profits. Other things to be noted is that Greed is punished remorselessly. It is alright to expect to earn huge sums of money. But overdoing it may attract punishment.Unfortunately, there is no proof or measurement that so much greed attracts so much punishment, but such issues are interesting and need to be contemplated nevertheless ! Many profitable traders routinely give out a part of their earnings in charity. But for those who are just starting out, you do not have to face this issue yet ! Patience is a strong virtue in the securities markets. Nothing valuable can be earned in a tearing hurry. Everything has to be methodically earned. Even if you manage to earn a huge sum in a short while, it will be lost in no time since the ego makes sure you squander. Easy come, easy go, they say ! At the end of the day, one has to remember that desperation only leads to chaos. The moral of the story is that one must treat the securities markets as a serious game and money can be earned with the right knowledge, right approach and at the right timing.