Good Investing Lessons

Here is my plan for Trading in 2010: Q1 2010 Research Work: Jan-2010: Identify Counters that can be used for short-mid term trading using RSMA method. Doing Back Testing to list out counters that works for last 3-5 years. Identify "new counters" that potentially can use RSMA short term trading method. Live Trading: Using the results obtained and testing the trading using Money Management Method. Trading sizing: Risk per trade: <$1000 Total Risk: <$10,000 (Max 10 Trades concurrently) Trading Log: Standard Log To be Kept with Excel Spreadsheet.

I started investing in stock market about 20 years ago. Initially subscribing to IPOs. I had not have luck with IPOs. All of them ended with money losing deal, even though I held on to them for a few years. So, I concluded that the IPOs in Singapore market is over priced. Then I started to read analyst reports on stocks and invest in companies (typically blue chips). Not much profit but good dividends during the good years. Then, came the financial crises. I went on to buy blue chip companies during crises and I held them over the years and sold of a about 120% gain over 5 years on average. Due to some distraction, I stayed away from the market during this crisis and missed the opportunity to buy during the lows. Recently (few months ago), I had been doing some stock trading and currency trading using technical analysis method for more than a year. So far, I had tried many different technical analysis using different indicators (Moving averages, MACD, RMO, Fibonacci, Stochastics, RSI e

Trading Rules Using Combinations of RSMA, Stochastics, RMO, MACD Mid Term Trend Following Entry Strategy 1 RSMA Buy Signal - enter on next day or day after (latest), skip if missed 2 Stochastic at Oversold and turning up crossing 25 3 MACD has gone down into negative territory 4 If N (Turtle True Range) exits 10% of closing price, do not Entry Exit Strategy 1 Stop Loss at 1.5~2.5 ATR or N (Turtle True Range) below entry and less than 10% 2 First Stop Loss point stay for at least 4 weeks before adjusting 3 Adjust Stop Loss point upon next RSMA Buy Signal (if trade is correct) Trade Sizing 1 Maximum Risk per Trade = $900 2 Maximum Total Risk = $9,000

I was watching the interview with Georege Soros by Google CEO and this sentence from George Soros and I was captured by this sentence. I think what he wanted to say was people don't make decision using information alone. When they make decisions, a lot of other things come in to interfere with the decision making. These things include emotions like fear, greed etc. Apart from that, people's anchoring causes them to be bias towards certain choices. In trading, it is very important to make sure we make decisions based on facts instead of emotions or intuitions. It is important that we do not let our emotions blind us the facts in front of us.

Risk Measurement (N) The trade size is determined by measuring the volatility using the Average True Range (N). Where N is the largest absolute value among the following: The distance from today’s high to today’s low The distance from yesterday’s close to today’s high The distance from yesterday’s close to today’s low Using Simple Moving Average of 15 sessions (SMA15) to determine the value. Setting Stops There are 2 ways in which we can set stops. One is to use 2N as guide to set stops. That means, for a stock where price is $8 and if N = $0.50, then, the stop will be $1.00 below the entry point. This is quite a large percentage of the entry price which will potentially resulting in large draw down. That may cause some sleeps. The second method is to use arbitrary support level and place 2 bits below the support. This method may result in too small stop and frequent stop out or the support may be too low that it may cause too much risk. I have come up with another method where you use

It was better to risk taking many small losses than to risk missing one large profit. In order for this to work, you must have a trading edge. Without which, you are taking unnecessary risk. Trading is like gambling. You want to know your edge first. You need to calculate your edge for every trading decision you make, because you can’t make “bets” if you don’t know your edge. It’s not about the frequency of how correct you are; it’s about the magnitude of how correct you are. For winning edge to happen, the expectancy of the trades must be positive: E = (PW x AW) - (PL x AL) Where: E = Expectation or Edge PW = Winning Percent AW = Average Winner PL = Losing Percent AL = Average Loser

"You shouldn’t care about how you got to the current state but rather about what you should do now. A trader who trades differentially because of swings in confidence is focusing on his or her own past rather than on current realities." - Bill Eckhardt. Key trading rule: Forget how you got here! Do not let your emotion affect you. If you keep thinking about how you got to your current state, your emotion will affect your decision making. For example, if you are sitting on the paper gain of 10%, you emotion may want to urge you to take profit even though the current market trend is still at your advantage. On the other hand, if you are sitting on a paper loss of 10%, your internal urge is to ask yourself to hold on to it hoping that it will turn around even when the trend clearly tells you that it will continue. Eckhardt clarified, “What this means is that once an initiation is made, it should not matter at all to subsequent decisions what the initiation price was.” It is impo

Recently, I had missed out the opportunities to make a few thousand dollars due to impatience. In each of the 4 cases, I sold out just before the break out because the counters refused to move while I was holding over a week. That cost me to missed out over $6,000 of profits. I noticed that I had unfounded fear of tying down my capital and not being able to fully utilizing my capital for additional gains. However, the true fact is that I have 75% of my capital sititng there and waiting. So, there is no compelling reasons to sell my existing positions since they had not breached the stop loss point. This is an important lesson to learn. Be patient and committed. Trade with more conviction then trying to hit-and-run. Quote Eckhardt did not want the Turtles to worry about linear decreases in their accounts. The slightest exponential curve from a big trend would eventually surpass the steepest linear curve they saw while losing. Discipline, money management, and patience were the only way

Here are some trading systems that can be used for trend following trading: ATR Channel Breakout : A volatility channel system that uses ATR as the volatility measure. Bollinger Breakout : A volatility channel system that uses the standard deviation as the volatility measure. Donchian Trend : A breakout system with a trend filter. Donchian Trend with Time Exit : A breakout system with a trend filter and a time-based exit. Dual Moving Average : A system that buys and sells when a faster moving average crosses over a slower moving average. Unlike the other systems, this system is always in the market, either long or short. Triple Moving Average : A system that buys and sells when a faster moving average crosses over a slower moving average but only in the direction of the major trend defined by a very slow-moving average.

In order to get positive return in the long run, we need to have positive expectancy in our trading system. In trading, the best edges come from the market behaviors caused by cognitive biases. To find an edge, you need to locate entry points where there is a greater than normal probability that the market will move in a particular direction within your desired time frame. You then pair those entries with an exit strategy designed to profit from the type of moves for which the entry is designed. Simply put, to maximize your edge, entry strategies should be paired with exit strategies. To understand why this is important, let’s dig further into the components that make up the edge for a system. System edges come from three components: Portfolio selection : The algorithms that select which markets are valid for trading on any specific day Entry signals : The algorithms that determine when to buy or sell to enter a trade Exit signals : The algorithms that determine when to buy or sell to

Drawing from the teachings of Turtle Traders, I must keep my trades to myself and increase confidence and faith in myself. The Golden Agri case is a classic example. I bought at 0.315 on 15th July and it went up to 0.335 the next day. I happen to call a friend (who is a full time trader, sort of) for some sharing. He warned me to sell away stocks that are in-the-money to cash out quickly because overall market seems to be soften. That prompted me to sell off my Golden Agri at 0.315 for a quick profit (5.5%). Sounds good for a one-day job. After selling, I realized that I had made 2 mistakes. One, I was succumbing to fear of losing because I didn't justify the selling by the chart and the counter did not hit my stop loss. Two, I was not sticking to my rules and consult my charts before making any moves. Important Rule: Trading is a lone game (Jesse Livermore, Turtle Traders). Do not discuss your trade with other people. This important rule was both mentioned by Jesse Livermore and T

One of the key factor in successful trade is the set the stop loss at the right place. Selling off too early is often the cause of my losing trade and at the end I sit and wait to see the stock move up much higher that it was and could has resulted in reasonable profit. I sold off Ascendas India Trust at 0.68. I was getting impatient over this counter. Within the next 3 trading sessions, it went up to 0.71. Healthway was sold at 0.10 and it closed at 0.105 on 17th July. Parkway was sold off at 1.69 on 17th July during intra-day and it turn out that it was closed at 1.71. Now the counter looks a little bullish. Again, the same mistake as the above 2 counters. Looking back at my records, I could have made a lot more money if not for selling off too early. I was able to pick the right stock but often too early in the stage. But if I has set my stop loss a little lower, those trades would not have been prematurely sold off. Another issue is the trading horizon. I seems to be very impatient

Dos and Don’ts for Thinking Like a Turtle 1. Trade in the present : Do not dwell on the past or try to predict the future.The former is counterproductive, and the latter is impossible. 2. Think in terms of probabilities, not prediction : Instead of trying to be right by predicting the market, focus on methods in which the probabilities are in your favor for a successful outcome over the long run. 3. Take responsibility for your own trades : Don’t blame your mistakes and failures on others, the markets, your broker, and so forth.Take responsibility for your mistakes and learn from them.

People have developed certain ways of looking at the world that served them well in more primitive circumstances; however, when it comes to trading, those perceptions get in the way. Scientists call distortions in the way people perceive reality cognitive biases. Here are some of the cognitive biases that affect trading: • Loss aversion: The tendency for people to have a strong preference for avoiding losses over acquiring gains. • Sunk costs effect: The tendency to treat money that already has been committed or spent as more valuable than money that may be spent in the future • Disposition effect: The tendency for people to lock in gains and ride losses • Outcome bias: The tendency to judge a decision by its outcome rather than by the quality of the decision at the time it was made • Recency bias: The tendency to weigh recent data or experience more than earlier data or experience • Anchoring: The tendency to rely too heavily, or anchor, on readily available information • Bandwagon ef

Turtle Traders has been able to consistently make profit in their trading. There are reasons for the performance. We can learn from them. The Way of Turtles can be summarized as below: Trade with an Edge : Find a trading strategy that will produce positive returns over the long run because it has a positive expectation. What it means is that the probability of winning must be higher the losing so that in the long run, we will win in the game. Manage Risk : Control risk so that you can continue to trade or you may not be around to see the benefits of a positive expectation system. The overall expectancy of the trading must be positive to achieve positive return in the long run. Be Consistent : Execute your plan consistently to achieve the positive expectation of your system. Execution is always the key factor in ensuring positive returns in the long run. Keep It Simple : The core of our approach was simple: catch every trend. Two or three trades might account for all your profits, so do

Here are the steps to build your own system: Designing a High Reward-Risk System for Managing Money Expectancy = (Probability of Winning * Average Win) Minus (Probability of Losing * Average Loss) Ensure Reward to Risk Ratio is above 2. That means Average Loss should be small and Average Wins should be big. Set stops that will be reasonably small. Do not enter trade is the stops has to be too large for comfort. Use systems to spot opportunities that will provide better probability of winning. NOTE: It is extremely dangerous if you are not adequately capitalized. Many traders failed due to excessive draw downs. By simple probability, the bigger player always wins against the smaller player. Technique I -Get Best Reward-to-Risk Ratio and then Leverage Yourself Have a system that can spot good opportunities. Not quite duplicable. It involve good return with small draw downs. 5-1 is not quite achievable. 2-1 is generally possible and good enough. Above that would be great. Technique 2 -Op

Nicolas Narvas: There was no doubt in my mind now that I could not make money by buying a stock and then trying to cheer it on. JONES & LAUGHLIN had convinced me of that. I could remember how I almost felt myself willing and pushing that stock upwards. It was a very human feeling, but it had no effect upon its market any more than spectators have on a horse race. If one horse is going to win, it will win, even if thousands of onlookers are cheering for another one. It was the same now. I knew that if I bought a stock and turned out to be wrong, all the cheering and pushing in the world would not alter the price half a point. And there was no telling how far the market might fall. I did not like the trend, but I knew it was no use trying to fight it. The situation reminded me of George Bernard Shaw's remark at the opening night of one of his plays. After the curtain fell everyone cheered and clapped except one man who booed. G.B.S. went up to him and said: "Don't you li

JACK SCHWAGER TRADING GUIDE The following notes have been taken when I read Jack D Schwager’s book: Getting started in Technical Analysis. Apart from the technical knowledge of identifying opportunities, Jack emphasized much on trading discipline so that even when your ability to spot a good trade is only 50% accurate, you can still turn up a winning position overall by using proper risk control. The idea is to be able to cut losses short and let the winner run. To start trading full-time, you must treat is like normal working so that you will cover all the activities need to ensure sustainable earning. PREPARATION TO TRADE FULL-TIME Step One: Define Trading Philosophy / Strategy How do you plan to make trading decisions? (a) TA (b) FA (c) Both Step Two: Choose Market / Product You can trade in multiple markets. For a start, focus on one. Note the diversification and volatility. Step Three: Establish Risk Control Plan 1. Maximum risk per trade (example $200 or $500) 2. Stop Lost

Money Management is the most important component of investing and trading. Van Tharp (Definition): Money management is that portion of your trading system that tells you “how many” or “how much.” How many units of your investment should you put on at a given time? How much risk should you be willing to take? Aside from your personal psychological issues, this is the most critical concept you need to tackle as a trader or investor. “Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half” - Bruce Kovner “Never risk more than 1% of your total equity in any one trade. By risking 1 %, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. ” - Lamy Hite “You have to minimize your losses and tv to preserve capital for those very few instances where you can make a lot in a very short period of t

There are two things investors or traders must learn. One is to control the greed instinct and the other is to be patient. "You know, a professional gambler is not looking for long shots, but for sure money. Of course long shots are fine when they come in. In the stock market Pat wasn't after tips or playing to catch twenty-points-a-week advances, but sure money in sufficient quantity to provide him with a good living." - Quote from Reminiscences of a Stock Operator This is particularly true for full-time traders who solely depends on speculating the market for a living. It is extremely important to preserve the capital. Cutting losses fast and letting the profit run is the basic rule that all traders must follow. Failing to keep to these rules are the main reason for the failure of many traders.