You Do Not Always Have To Be Right To Make Money In The Market

It is myth in the market that you have be right a lot to make a decent money in the market. I am going to show you in this article that you can be wrong even 65% of the time and even then make money.

In order to do that you have to follow money management rules. And place only those trades that you are shore that you will make at least twice the profit in dollar amount in comparison to your risk.

What this means is that if you are risking $100 per trade you need to make at least $200 after expenses in any given trade if you do get a trade which make that amount of money easily you will not take that trade.

So let’s take hypothesis in which you take 100 trades and 65 of those trades are loss and 35 are profit and you capital is $10000 so you take 2% risk on every trade which is $200.

Profit – 35 * 400 = 14000

Loss –   65 * 200 = 13000

You have made $1000 profit which is 10% of capital even when you are wrong 65%! Of time.

So you see now that if you follow some of the money management rules in your trading you could have made a lot of money.

You will think that it’s not possible in real world that you cannot do that kind of trading where even after 5 losses you cannot be able to take same amount of risk and you are not able to take same level of risk in the market.

It is hard to do not in doing as in practical sense but in the psychological sense. But you do not have to worry we humans are slave to our habits good or bad. So if make a habit to follow this rules it will become easy for us in some time.

Money Management Rule

 

Money management is number one reason for failure of people in the market. If you do not know how to probably manage your money in the market you will suffer loss even after a high winning percentage. So here are some points that I learn from my trading.

Decide your stop and profit target before entering trade

You have to decide your stop if your trade goes against you what is the level was you will get out of your trade. At which level you are going to take profit.

Calculate your risk reward

After you have decided what is your stop and profit level the next thing that you have to check is the reward exceeds your risk. Minimum risk reward ratio should be 1:2.

Decide the risk percentage

Decide the percentage of your capital that you are willing to risk on any given trade. The maximum level is 2%.

Calculate your risk in dollar amount

You should always calculate your risk in dollar amount which mean that if you have $10000 account the amount of risk per trade will be $100 if you decide to take a 1% risk on your trade.

Risk same amount of money on every trade

If you have decided that you want to risk $ 100 per trade you should not adjust according to your winning or losing trade you should always make the new trade with $100 risk.

Does not change risk level very often

It means that your $100 should not change in month. If you had make profits in two month only then you should change it according to the capital.

Take high probability trades

You should only take trades that give you at least twice the reward on the risk. In the above example when you risk $100 you should at least make $200 on the trade after expenses.

You should follow above principles to make profits from start of your trading. You will not make profit on every trade but if you follow the above principles you will make profit over all.

Candlestick Chart Pattern: Hammer

Candlestick Chart Pattern Hammer

Hammer is bottom reversal pattern. It’s a single bar pattern. Which give an indication of change of trend. So finding this pattern in the bottom of downtrend is normal.

But you should wait till the end of next day for the conformation of the change in trend.

 

How are they identified?

A price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies later in the day to close either above or close to its opening price. This pattern forms a hammer-shaped candlestick.

 

What does it signifies?

It is an indicator of trend is going to change; it’s shows that bull investors are strengthening.

 

What are the points that make them more effective?

  • A significant downtrend.
  • The upper wick is small
  • The lower wick is twice the size of the real body.
  • Color of the candle do not matter.

If all or some of the above condition are true in the pattern that you are looking at then there is a good chance that you will see a trend reversal.

 

eurusd chart with hammer

 

As you can see in the above daily chart of EUR/USD there is hammer pattern at the bottom of downtrend which totally reverse the previous trend.

The real body is small. But the upper wick is not small. The lower wick is more than twice the size of the real body.

You could have buy EURUSD the next day with stop loss at the low of the hammer and you would have made a great risk and reward return.

25 Rules Of Profitable Trading

25 Rules Of Profitable Trading

So what are rules of profitable trading there are rules which some of the best traders in world find about after decades of trading. So do you want to become a great trader or you just doing it have some fun.

Are you really serious about your trading career and want to life of your trading income in coming two years. Then you should start with following rules. So that you can become a professional trader fast as possible.

 

1% of capital

You should never risk more than 1% of your capital on any given trade. For example your capital is Rs. 10000 so the maximum risk that you can take on a trade will be Rs. 100.

For example you have a share which you want to buy whose current price is Rs.50 and stop loss is at Rs. 45. Then the risk per trade will be Rs.5.

= 100/ 5 = 20 shares of that stock.

You should never buy more than 20 shares of that company.

 

Place stop loss first

You need to place your stop loss first and then the trade that you want to make. So that when the stock or security that you are trading will be stopped out if the trade goes against you.

Even the greatest trader did not make profit on all trades so you should always keep your  losses small and profits big at least 1:2 which mean that if you risk as in the previous example Rs.100 you should make at least Rs 200 from the given trader after expenses.

 

1 profit / loss trade stop trading

This is my rule which works best for my so that I do not over trade. Over trading is one of the reasons why so many people cannot make in market. So protect yourself from it.

There will be another day you can find better trade tomorrow do not worry. If you have a losing trade get up from where you are trading and do something else. Always have something else to do beside trading.

 

Master one method at a time

Don’t try to be a jack of all investments. Stick to the field you know best. If you keep changing your trading style and method you will never be able to master any method so focus on one method one market till you become really good at trading that.

Know everything there is to know about that method of trading and practice.

 

50 % of profit out of the market

Whenever you make any money in the market make a rule to take 50% of that amount out of the market. Even if you make Rs. 100 take Rs. 50 out. Even the greatest trader in the world had some time of lag in the market when he was not able to make money. So it is good idea to have reserves.

Accumulate the amount which you can invest in risk free and  tax free government bond have interest amount equal to what you will need for your living expenses.

For example your living expense per month is Rs. 50000 and current rate of risk free interest is 7.5 % so you will need Rs 80,00,000 to make that much interest. I know that amount is large but you can make this money if you follow the method of taking 50% of your profit out of the market.

 

Trade with long term trend

Always trade with the main trend and when you cannot tell what is the main trend do not tread at all. You will make a lot of money if you follow this principle.

 

Always move the stop loss with the trend

You should always move your stop in the direction of you trade, which mean if you are long on a trade you should move your stop loss up never down and when you’re short you should always move your stop down never up.

 

Never take advice

Taking advice in other parts of you life can be helpful but not in trading you should make you decision yourself and take full responsibility of it.

You should always make a trade according to your analysis and never according to advice given to you by others.

 

Ignore the news media

The media is there to report the news to give you what had already happened so what you see on the news have no future implications.

 

Know everything about the security that you trade

When you are trading you should know everything that you can find about that market and security so and keep learning about it.

 

Don’t try to buy at the bottom and sell at the top.

Selling top and buying bottoms is not possible. This can’t be done – except by liars.

This is pretty self explanatory that you should not try to take out highs or lows you should focus on high probability. Mean you should be focusing on getting the best return by taking the least risk.

 

Don’t buy too many different securities.

It is not a good idea to buy too many securities. It is better have only a few investments which can be watched.

Know your trading style and time you can give to the market and accordingly you should select the number of securities that you should trade in. The maximum limit is 20.

 

Check your investments periodically.

If you’re a intraday day trader who focus on 1 hr chart you should check the market every 4 hrs for new setups and what your old set ups have done. If you’re a short term trader you should check your trade daily. If you’re a long term trader you should check your trades weekly.

 

Keep it cash

Always keep a good part of your capital in a cash reserve. Never invest all your funds.
You never know then a good trade is going to show up so having sufficit capital to trade will come in handy at the time like this.

 

Ask yourself what you really want.

Most people trade the market for fun and excitement what they get from trading that is why most of them fail. If you want to make money in market your first focus should to make trades which are high on risk reward ratio more than 1:2.

 

Keep it simple and consistent.

Long term profits are made and kept by those who have a simple system that they understand and master by following it in long term. Consistency to follow the system in the long term so that you can get returns.

 

Have realistic expectations.

When trading markets you should have realistic expectations. When you start to trade do not think that you can double or triple your money every month that is not possible. Even the greatest trader in world George Soros have a annual return of 35 %.

 

Learn to wait.

Patience is a virtue that will make you rich in long term. That do I mean by “learn to wait” is when you do not see a trade according to your trading setup you should not trade just for sake of trading.

 

Clearly understand the risk/reward Ratio.

Before entering any trade you should always know what is your risk on the given trade and who much you are going to earn if the trade goes in your direction. If you risk Rs. 100 on a given trade you should make at least Rs. 200 or more on that trade.

Never trade with serious personal problems.

If you have any serious personal problem you should not trade because you will not be able to give your 100% on the trade and you will lose your edge. Always remember there will be other day and you should wait.

 

When in doubt reduce the amount of investment

If when in a trade and your previous analysis of the trade is not make sense anymore you should reduce your position.

 

Average Up

If want to average, average up with 10% profit if the position reverse after investment.
If you have been trading for less than 1 year and you profit is less than 20% annually you should not think about averaging at all you should first get to or above the level of 20% annual return level.

If you are above that level you should only average when you have profit in trade is more than 10% of current investment.

You should only add new position when even after adding a new position if the trend reverse you will lock in 10 % of profit at your stop loss level.

 

Cut your loss with stop loss and let your profit run

The golden rule of trading your profit must always be bigger than your losses. If you are able to achieve a bigger profit than your loss you will always be profitable in the end.

 

When in doubt stay out

When you do not have clear reason to sell or buy do not trade there will be another day and you can make money then.

Look after the losses and the profit will take care of themselves.

If you focus on keeping your losses under control and never let them go above the predefined level. Your profits will take care for themselves.

This are some of the rules that you should follow when trading if you follow them every day in your trading and read them before you trading and make sure after the trading that you have followed them all in less than 2 years you will become a professional trader. You can read more this rules by great trader in Investment Psychology Explained: Classic Strategies to Beat the Markets by Martin J. Pring in the chapter “Classic Trading Rules”. I love this book if you haven’t read it you should read before you start trading.

Reference:  Investment Psychology Explained: Classic Strategies to Beat the Markets
Martin J. Pring

Image Source: investopedia.com

Bollinger Bands

In bollinger bands we use 20 day sma and then draw two lines above and below at the distance of standard deviation.

How to trade bollinger bands?

bollinger bands

bollinger bands on wipro nse

Bands give two singles when:

A buy signal is generated when price cross above the upper band.

A buy signal is also generated when price cross above the moving average.

In the same way the sell signal is generated when the price cross below the lower band or the moving average.

Like all the other technical analysis method it is not a foolproof system and you should use money management principles while trading with bollinger bands so that you can make decent profits out of your trading.

Volume Related Indexes And Oscillators

There are a lot of volume related indicators that use volume and price combinations to give a different picture of what is happening in the market. They are divided in two type indexes and oscillators.

 

Indexes

Indexes are cumulative sums of data, of different combinations of volume and price that continuously measure supply and demand over a period of time rather than over a specific period.

They do not have upper and lower limit. The level of indexes is not important the important thing is divergence. When the price is moving in other direction then the index that is divergence.

The divergence is a sign that trend is about to change. A good index is which change direction before price.

We can also use trend line, channel and occasionally pattern analysis on indexes. But the most important use of indexes is divergence analysis in trending markets.

 

Oscillators

Oscillators are limited and bounded to a specified past period. They trend to “oscillate” within these bounds and show that the volume or price is relatively high and low. These indicators show relative change then absolute chance as in indexes but is amenable to divergence, trend line and pattern analysis.

Oscillators are more successful in trading range then in trending market.

You should not use technical indicators alone they should be used as secondary to price analysis.

 

List of Volume Related Indexes

  • On-Balance-Volume (OBV)
  • Price and Volume Trend
  • Williams Variable Accumulation Distribution (WVAD)
  • Accumulation Distribution (AD)
  • Williams Accumulation Distribution (WAD)

 

List OF Volume Related Oscillators

  • Volume Oscillator
  • Chaikin Money Flow
  • Twiggs Money Flow
  • Chaikin Oscillator
  • Money Flow Index (Oscillator)
  • Elder Force Index

 

Volume: Important Piece Of The Puzzle

 

Volume is number of shares or contracts traded over a specified period, usually a day, week or month even year or it can be one trade which is called tick volume.

Volume is generally shown below the price chart in all the charting software. Or you can integrate the volume in the chart as you can see in the chart below in the daily chart of Reliance.

volume

How to use volume information?

“Volume indicators and signals are usually derived not from volume itself but from a change in volume.”[1]

So when you looking at volume the actual number do not hold that much meaning but the change in the figure is important. For example a share that has average volume of 200 shares and then volume rose to 400 shares a day that is very important from the point of view of the analysis.

How should a change in volume be interpreted? These general rules date back to work of H.M. Gartley in 1935:

  1. When prices are rising:
    1. Volume increasing in good sign.
    2. Volume decreasing a sign of weakness.
    3. When prices are declining:
      1. Volume increasing is impressive.
      2. Volume decreasing is questionable.
      3. When a price advance halts with high volume, it is potentially a top.
      4. When a price decline halts with high volume, it is potentially a bottom.

What the basic meaning is that when the volume is increasing with an increase in price it is a good sing that the stock or security will keep on increasing. If a stock price is increasing without a significant increase in volume then that is sign of weakness.

Super Trader

Super Trader, Expanded Edition: Make Consistent Profits in Good and Bad Markets
is a great book it will help you become a great trader from inside out. I completed reading the book now and I learned a lot. I did all the exercises that are provided in the book. The most useful exercise that I found was about how to solve your inner conflicts and how to act against our instinct of self-sabotage.

The most important thing that I learn from the book is that you have to keep learning and there is no end to it. If have forgot that for quite some time. Now I am starting back.

You develop as a trader as you go on. The most important possible thing that you can do as a trader or investor is not to repeat your mistakes again. In that way you can grow no matter what.

You can use technical analysis to improve your chances in the stock market.

After reading this book I keep journal of the things that I did wrong and how not to repeat the mistake again. Some of things that I learned by doing this are:

  1. Never run behind the market when price are moving fast you should wait for them to settle.
  2. Always sell at your stop.
  3. Never trade because you have remaining capital in your account find good trade

The most important thing that you have to learn as a trader is mange your risk.

You have to get most possible return by taking less risk as possible. A good rule of thumb will be to risk 1% of capital on a trade. For example if you have capital of Rs. 1,00,000 you will risk Rs. 1000 per trade. This is one of the method that is described in Super Trader.

How to calculate the number of share?

Now you know that you need to risk Rs. 1,000 on trade; you can now determine the number of shares you should trade. For example, current price of the share you want to trade is Rs. 50 and your stop-loss is at Rs 45.

So the risk per trade is Rs. 5 so you can buy 200 stocks of that company. I usually buy less than that because you will get need to add commission and government taxes and all. So buy 10% less than the number you got from the previous calculation. In this case it will be 180 share of that stock.

The simple thing is “Cut Your Loss Short and Let your profit run”.

Ask this question to yourself everyday have you cut your losses short and let your profit run today?

If answer to the question is yes then tap yourself on back.

If the question is no then ask yourself. What is the reason that I did not follow my plan? Then you should make plan if same situation come up again what will you do. After you have thought out your plan you should visualize the situation happening again and you are applying your contingency plan. If you want to read more about it you can read Super Trader.

I think you should read or at lest review the main points of Super Trader once a month so that you can absorb all that is in there.

You can read more about how to become great trader. You should keep learning if you want to make consistent profit in market. Because markets are always changing you have to change too you have to adapt to the changing market.

How to Make Profit From Reversal Formations In Stock Market

Reversal formations are of several different type to make profit from reversal formation you need to know the basics of this formations  So we will start with basic definitions and then go into the detail understanding of all the formations. Some of the examples of this formations are like head and shoulders, triangles, rectangle, wedge etc.  We will learn about them all in detail.

What are Definition of Reversal Formations?

Stocks price move in trend. Sometime the trend is straight, sometime curve, sometime long sometime short. Some of these trends we can see clearly on chart and some are not that clear. You can see several type of trend in action when you study price chart of any stock.

Sooner or later this trends change direction this sometime start with a consolidation pattern and then there is change in trend. When his happens they form a pattern what we call a reversal pattern. This is indication that the trend is about to change it can be in any direction up or down. By use of reversal formations we can change our strategy accordingly.

As technical analysis we just have to follow trend. In this chapter you will learn how to spot this reversal formation and make changes to your portfolio accordingly. So that you can make profit out of the trend that is about to start.

How much Time is Required to Build a reversal formation

The time required to build reversal depends on time frame you are using. Like it will take hours in minute chart weeks in day chart and months in weekly chart. So there is no fix time that is required to form a reversal pattern.

We can understand reversal in trend by an analogy like when there is speeding car which is running at 90 km/h it will not stop instantly it will take some time. In same way when we’re is trend up or down it will take so time to reverse it.

4 Killer Ways To Use Your Psychology For Making Profit From Stock Market

I am currently reading Super Trader, Expanded Edition: Make Consistent Profits in Good and Bad Markets what I have learned so far from this book is that

  1. You need to work on yourself
  2. Develop you business plan
  3. Develop a Trading system that work in all kind of market
  4. Position Sizing

1. You need to work on yourself

You need to work on yourself first the important thing is that you take care of all the problems or personality traits that are good for you as a trader and investor.

2. Develop you business plan

You business plan should be according to the type of personality you have. Find out your personality type. Then make your business plan. I am an Strategic Trader.

This type of trader has a great chance of success but is

(a) likely not to recognize emotional
mistakes,

(b) lean toward perfectionism, and

(c) have a strong desire to be right.[1]

That pretty much tell everything about me. So what type of trader you are.

3. Develop a trading system that work in all kind of market

What that means is that you should have a trading system that is fit up, down or side ways  trend in the market. So no matter where the market is going you will make money.

4. Position Sizing

This is the single most important thing that you need to know while trading. This is one of the most important reasons that most of the traders fail.

If you want to read in more detail about this things the your should get Super Trader, Expanded Edition: Make Consistent Profits in Good and Bad Markets so that is for now I will keep you updated about new things that I discover about trading.

 

[1] Super Trader: Make Consistent Profits in Good and Bad Markets Page 23.