Trade to Trade Well

1
Trade to Trade Well

• Money is merely a consequence of skill level.
• Focus on positive mentality, discipline, and the
  control of losses
• Trading is a journey of longevity not a game to
  seek windfall profits or home runs on every
  trade
• The goal should be build equity
• There are various attributes that a trader must
  posses in order to be successful.
• Some are taught, some are innate, and others are
  gained through the passage of time.

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Taught and Innate Attributes

• Taught 
•         Risk management and discipline
•         Market knowledge
•         Technical and/or fundamental analysis
•         Proper order execution
• Innate 
•         Confidence
•         Discipline
•         Mental state of mind

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Attributes Obtained Over Time

•    You must realize that you perceive money on
  an emotional level through your life experiences
  therefore, the way you react to money is based on
  your inner feelings towards what it represents to
  you (e.g., comfort, safety, security, respect,
  success)
•    If you have had negative experiences with
  investing / trading, then those experiences could
  leave psychological scars
•    In order to trade like a professional, you
  must focus on proper trading, not on money
•   Through continuous education, you will learn
  to identify opportunities in the market where
  others see none

4
Time Attributes Cont

• Only those who adapt and change will survive.
• Beware of peer and social pressures that leave
  negative effects.
• Learn to control your surroundings instead of
  your surroundings controlling you.
• UNDERSTAND the risk you are going to take.
• ACCEPTANCE of risk is what determines your mental
  state.
• View losses not as failure but as opportunity to
  focus on the problem and learn from them.

5
Most Common Kinds of Losses Incurred by
Inexperienced Traders

• A handful of large losers in between small
  winners and small losers
• Not adhering to protective stops!
• Overtrading and large commissions costs
• Not knowing when NOT to trade
• Not following the trend of the market or sector
• Unfavorable risk-reward trades
• Excessive position size in volatile stocks

6
Simple Mathematics of Risk Management

• It takes a 100 gain to recoup 50 draw down 33
  for 25 draw down 300 for 75 draw down.
• of equity to risk on every trade?
• eGoose seeks minimum 31 risk/reward
• Formula for calculating position size
• If maximum risk per trade 2 of equity and
  equity 100,000, then risk 2,000
• If trade stop loss is 4 points, maximum position
  size should be 500 shares
• 500 shares x 4 points stop loss 2,000 or 2 of
  equityposition size risk divided by number
  of points stop loss

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Scaling Moving Stop Losses

• Scaling is an excellent method of reducing risk
  and smoothing volatility
• Averaging down panic reaction
• Scaling in with a portion of regular position
  size is planned in advance according to risk
  parameters
• Scaling out is a method of locking profits and
  moving break even to farther levels
• Moving stops is a method of completely locking in
  profits and moving break-even points

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Edwin Lefevre on Scaling

• Buying in a rising market is most comfortable
• When he is bearish and sells stock, each sale
  must be at a lower level than the previous sale.
  When he is bullish and buys, the reverse is true.
  He must buy on a rising scale. He does not buy
  long stocks on a scale down he buys on a scale
  up.
• Wants to see how the market takes care of itself
  after the reaction to the scaled in positions
• Never wants to buy stocks too cheap or easily

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Trading Diary

• Come to the market prepared each day,
• Learn what to do to prepare and do your homework
  daily.
• Before each trade, have a risk-reward calculation
  reason.
• Develop and use your trading plan.
• Be prepared for whatever happens.
• The art of trading is to NEVER ever need to react
  in panic.
• Dynamically update your plan as the market
  internals unfold.
• Use trailing stops and scaling at different
  levels of resistance.
• Use a Trading Diary to organize your analysis of
  the markets.
• Approach the market each day with a new plan.
• Complete your Diary daily and review it
  periodically weekly.
• Learn from your prior mistakes and successes.

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10 COMMANDMENTS OF TRADING DISCIPLINE

• 1) Trade free from fundamental prejudices. Hold
  no judgment on a stock. Dont try to rationalize
  a losing position or fall in love with a winning
  one. A stock may have its Fundamental Truths
  but the Absolute Truth is its price.
• 2) Focus on proper trading strategies, not on
  making money. Money is merely a consequence of
  skill level, or lack thereof. As long as you
  trade with unwavering discipline, dont review
  prior trades with a berating should have mode
  of thinking. Both winning and losing trades
  should be reviewed during your journey towards
  trading mastery.
• 3) Develop a trading style that is consistent
  with your personality and philosophy. Trade your
  nature!

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10 COMMANDMENTS OF TRADING DISCIPLINE

• 4) Determine the risk-reward ratio of each trade
  before entering. Risking the farm to make peanuts
  is unwise. Create the plan BEFORE the trade, not
  DURING!
• 5) At times the best action is no action. Only
  fools search for action and think that they must
  trade every day.
• 6) Trade with the trend since stock prices flow
  in the direction of least resistance. If a stock
  goes against the trend you expected, get out.
  When in doubt, stay out or get out.
• 7) There is no room for emotions in trading.
  Disciplined traders can observe the market from
  the perspective as if they are not in a position,
  even when they are. Do what the market is telling
  you, not what you think it should do.

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10 COMMANDMENTS OF TRADING DISCIPLINE

• 8)  Make the market come to you. If it doesnt
  play your hand in your world, step aside. Be
  strict, be disciplined, be patient and never
  trade when physically or mentally unfit.
• 9) The true battle is not with the market, but
  learning how to control your own emotional
  impulses, psychological demons, and human nature.
  Many internal battles of letting fear and greed
  interfere with logic and discipline (which
  unfortunately result in painful losses) will
  likely be needed in your trading maturation
  process.
• 10) There are no holy grails, magic software,
  or short cuts to success. Professional traders
  never cease being students of the markets. Spend
  time daily developing yourself to be a better
  person and trader, and take responsibility for
  your own trades and actions.

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Quiz

• Which trading discipline is least useful?
• Trade free from speculative prejudices
• Concern yourself with proper trading strategies,
  and not on making money
• Methodically consistently trade with a trading
  plan not hope
• Trading is all about proper thinking, risk and
  managing that risk
• As long is your trade was profitable, you were
  disciplined and did all of the right things

14
Quiz

• All of the following market trading discipline
  are useful except 
• Dont be angry at a stock even if it unexpectedly
  or even illogically goes against you
• There are no gifts on Wall Street
• Underestimating what the market can do can lead
  to financial ruin
• Dont believe everything you read or hear as many
  believe that the media makes its living by
  promoting fear
• The market needs to climb a wall of worry as
  excessive optimism is a sign that a top is near
• All are useful

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Quiz

• All of the following personal trading discipline
  are useful except
• The true battle is not with the market, but
  learning how to control your own emotional
  impulses, psychological demons, and human nature
• Disciplined traders can observe the market from
  the perspective as if they were not in a
  position, even when they are
• Your physical or emotional state does not affect
  your trading as long as you stay focused
• Spend time daily developing yourself to be a
  better person and trader
• Complete, maintain, and periodically study a
  daily trading journal