TRADING HABITS
The key takeaway from: "Trading Habits: 39 of the World's Most Powerful Stock Market Rules".
Trading Habits: 39 of the World's Most Powerful Stock Market Rules
Why you should read this book?
The authors explain the concept of trading and the basic structure and mindset that you should have. For beginners, this book is a good starting point as a lot of concepts are covered in crisp content. 39 Rules That Will Make You a Stock Market Success Learn trading rules from some of the most successful traders, like Richard Weissman, Dean Karrys, and Paul Tudor Jones that will give you an edge in the markets. Benefit from someone with more than 20 years of experience. Each of these trading rules is a game-changer, whether you are just starting out, or you need a refresher. Just building your system?...
“The right trading behaviors start as rules and evolve into habits.”– Brett Steenbarger
Things to Remember:
In trading, the first step is to learn what you need to do to be profitable. Education should be your first priority. Nurturing your comprehension of trading vocabulary is critical to your success. Trading methods, trading systems, trading plans, risk/reward ratios, and win rates can sound mysterious to newcomers. Find good sources of trading information and learn as much as you can.
A winning trading system must either be designed to have a large winning percentage, or big wins and small losses. There are systems with fewer wins than losses, but they are profitable over the long term because the losses are kept small, and the winning trades are larger than the losing ones.
The key is capping the downside risk when you’re wrong, but leaving the upside profit potential open. In other words, cut your losers short but let your winners run. A stop loss is your insurance against having any big losers. You can let winning trades trend as far as possible, capturing those unexpected, outsized moves that are outside the bell curve of normal price movement, also, using a trailing stop-loss can be highly beneficial when leaving your winners run. Cutting winners short at the beginning of a trend and letting a loser run on the wrong side of a trend, are the two biggest causes of unprofitability.
Your trading system must be built on quantifiable facts and not opinions. It must not consist of two words, which are Greed and Fear. “Buying a dip” is not a signal. But buying a pullback in the S & P 500 Index to the 50 days SMA, or the prices reaching the 30 RSI on a daily chart inside an uptrend over the 200 days SMA, is based on quantifiable facts.
Your reward should be two or three times larger than your capital at risk to make the trade worth the risk. Enter when the odds are low that your stop loss will be hit before you’re profitable enough to exit. Use trailing stops when possible to maximize winning trades, exit a winner when you have a reason to, and not because open profits make you nervous.
The best way to profit in the stock market, or any financial market, is to capture a trend in your time frame. It is found that the longer the time frame, the simpler it is to capture the trend. Long-term trend followers filter out the noise capture trends on daily or weekly charts and strive to avoid the random, intra-day noise. Start with the weekly price chart to establish the long-term trend, and then work down through the daily and hourly charts to trade in the direction of that trend. The odds are better if you’re trading in the direction of the long-term trend.
In any market you trade, you should look for clues as to whether it is being accumulated or distributed, or just traded actively by the majority of participants. Make a habit of trading on the side of the flow of capital into or out of your market of choice, instead of resisting the reality of price action.
The more times a support or resistance level is tested, the greater the odds that it will be broken. Old resistance can become the new support, and the old support may become the new resistance. What causes price resistance and support on charts? Price has memory. If the price makes a new high, then reverses and goes lower, many people left holding stock at lower prices will decide that if the stock returns to that price level, they will sell it immediately. These holders create a group of sellers waiting for the old price high to be their sell target. A similar thing happens to create a price support level. A group of people wants to buy a stock for $98, and when the price pulls back briefly to a price level like $100, then moves up to $105, those that wanted to buy cheap, missed the first opportunity. Frustrated, they decide that if it pulls back to $100 again they will buy at that price. This creates willing buyers at the new support level, just waiting for the opportunity to get in. This is what causes key support and resistance levels for stocks; the memories and goals of the market participants.
Make a habit of identifying old support and resistance levels and trading off them as long as they hold in a range-bound market, then look at trading a breakout.
Bull markets have no long-term resistance, and bear markets have no long-term support. Big trends in bull or bear markets are usually followed by a time of price consolidation. Prices stabilize and find new ranges to trade inside of.
The last hour often tells the truth about how strong a trend truly is. “Smart” money shows their hand in the last hour, continuing to mark positions in their favor. As long as a market is having consecutive strong closes, look for an up-trend to continue.
The end of the day is the time when many trend followers take their own signals. You can also consider whether you take profits at the open, entries at the close, or trade end of day only. Get in the habit of trading your time frame in a disciplined manner, whatever strategy you choose.
Above the 200 days is where bulls create uptrends. Bad things happen below the 200 days; downtrends, distribution, bear markets, crashes, and bankruptcies.
For a market to drop 20% into a bear market, or ‘meltdown’, or ‘crash’ it will typically the first fall through its 200 days moving average. The 200 day is a trend trader’s first warning sign that the trend has changed. Buy and hold investors can reduce their drawdowns in trading capital if they exit their long positions when the price closes below this line.
The best way to develop a strong edge in trading is to study, test, trade, and master a specific thing. It is hard to beat an expert in a specific market, setup, chart pattern, trading system, or stock. You will have a much better chance if you have a small watch list of specific stocks or setups.
The two most profitable ways to trade are to buy extreme lows that are caused by unfounded fears, or to buy breakouts or momentum at the beginning of a large trend, riding it to big profits. Both are difficult to do because a trader must overcome their own fear.
The best trades are those that you fully understand and accept the risk/return potential. But the best traders are those that immediately go in your favor because your entry was at the right moment. There is little stress associated with these trades because it is immediately profitable. The odds of having a winning trade from the beginning increase if you wait for an initial move in the direction you want to enter, instead of stepping in to catch a falling knife, or sell a rocket short that is blasting upwards
Hope isn’t a trading plan, it isn’t a signal, and isn’t a guide on what to do. When it comes to making decisions about your trading account, traders must get in the habit of trading hope for facts and emotions for trading rules. Hope is a great tool for personal goal setting, but a terrible guide when making trading decisions.
If everyone thinks you’re nuts for buying a deep dip in price because the world could end, then most of the selling pressure should already be gone, and a market should be due for a rally. The “everyone hates your trade indicator” is good because it shows that the majority has already made their move, and you’re the first to spot a new trend or reversal.
Extremes in sentiment are a sign that the majority have already made their move and a new move could be near. Obvious or unexpected aren’t trading signals, so you need to look for technical signals that line up with the extreme market sentiment.
A losing trade costs you money, but letting a losing trade get too far out of hand can cause you to lose your nerve. Cut losses for the sake of your nerves and your capital. Letting a small loss turn into a big loss is expensive both financially and emotionally. If you want to be a trader for the long haul, you must always take the small loss where you planned for the sake of stress management. There are more productive ways a trader can spend their time than watching every tick of the price and praying that it reverses so they can get back out. Never trade position sizes so large that your emotions take over your trading plan.
The motivation for taking a trade should be a good signal with a good risk/reward ratio and probability of success.
A trader has to allow themselves to be bored and wait for just the right moment. Being early to trade can cost you money because you’re front running a signal that may never happen. It’s also dangerous to chase a trade late in a move because the risk/reward ratio will not be as favorable as a trend advances.
Self-control, patience, and impulse control will save you a lot of time, money, and sanity.
Get in the habit of going with the flow, and avoid trying to predict where the flow is going.
Profits are yours once they go into your account, and if you want to keep them, you will need to treat them with the same care as the money you started with. Remain flexible and go with the flow of the market price action. Stubbornness, egos, and emotions are the worst indicators for entries and exits. You should focus on finding the trend, and then trading in the direction of its accumulation or distribution. This will give you a substantial edge over other, less disciplined market participants. Downtrends, uptrends, and range bound markets have different characteristics, and successful traders identify what kind of market they are in and trade the price action as it unfolds. Get in the habit of taking good signals based on price action, and leave your opinions and predictions at the door. A trader can only be successful after they have faith in themselves as a trader, their trading system as a winner, and know that they will remain disciplined.
One thing that is learned over the years of trading is that crisis = opportunity.
The opportunity that comes from a crisis is to sell short early, buy the fear later, and sell the relief rally when the world doesn’t end. Your signals must be based on reactive technical analysis, past support and resistance levels, chart pattern confirmation, and technical tools like the MACD, RSI, and key moving averages.
Get in the habit of watching how the market reacts to news that is counter to the existing trend. Manage losses and maximize gains. A stop-loss is the cost of insurance you pay to avoid being caught on the wrong side of a large market trend. Stop losses should be placed at a price level that will not be easily reached unless your trade is not going to work out. Stop losses should be placed outside the range of normal price action and out of the reach of ‘noise’. find the spot where you say “If price gets to this level, then I am probably wrong about the direction.”
Position sizing can be correlated to the quality of a trade setup. Never lose more than 1% of your total trading capital on any one trade. The 1% rule means you never lose more than 1% of your total trading account on any one losing trade, through the use of proper position sizing based on the right technical stop loss level for trading a particular stock or index. First, find the right stop loss level that will show you that you’re wrong about a trade, then set the size of your positions based on that price level. Never lose more than 3% of your total trading capital on your worst day.
Understand the nature of instability and adjust your position size for the increased risk due to volatility spikes. Place your stop losses outside the range of noise so you’re only stopped out when you’re wrong.
Some Useful Quotes:
- Look for low risk, high reward, and high probability setups.– Richard Weissman
- The answer to the question, “What’s the trend?” is the question, “What’s your timeframe?– Richard Weissman
- The larger the market gaps, the greater the odds of continuation and a trend.– Linda Raschke
- The uptrend is most likely to end when there is a morning rally first, followed by a weak close.– Linda Raschke
- Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.– Alan Farley
- Successful trading is about consistently doing the difficult thing so often that it becomes second nature.– Richard Weissman
- The best trades work almost right away.– ArtOfTrading.net
- Wishful thinking must be banished.– Jesse Livermore
- Money is made by discounting the obvious and betting on the unexpected.– George Soros
- Trade the market, not the money.– Richard Weissman
- When there’s nothing to do, do nothing.– Richard Weissman
- Trade what's happening...not what you think is gonna happen.– Doug Gregory
- Going up on bad news or down on good news are among the strongest market tells.– Richard Weissman
- The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system.– Ed Seykota
- Be disciplined in risk management and flexible in perceiving market behavior.– Richard Weissman
- When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position size when my trading is worst.– Paul Tudor Jones
- Never allow a statistically significant unrealized gain to turn into a statistically significant realized loss.– Richard Weissman
HAPPY TRADING!
0 Comments