Good Investing Lessons

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 ...