MY STYLE - BLOG
A simple but effective approach is that if you are quickly stopped out in your current time frame on your first or second trade, switch to a higher time frame and take the next trade only in that time setting. Keep this setting for the rest of a successful trade and switch back to the lower time frame, once you exit.
This approach effectively avoids you to take multiple ranging trades and will help you identify trend direction.
The current TradeWithMe forum is not so user friendly and interactive. A more contemporary forum website has been created and all posts from the current website transferred there. Traders are welcome to join that site and be part of a vibrant discussion forum.
The only thing that matters in trading is that whats your bottom line.
Its not important that you have a great technical or fundamentals based algorithm, the fact of the matter, as we discussed a few posts ago is how often are you successful.
There has to be consistency in your trading. You cannot work with a win ratio of 60% and then see 100% of your trades making losses for 2-3 days. Something is wrong, if that happens. You dont trade because you have mastered statistics. At the end of the day, do you feel happy that you traded right? (not just making money), but whether the method that you follow, is money making or a random flash in the pan.
At TradeWithMe, our research has focused on why trades fail, and used that learning to improve. We were more than 150 points down on Nifty Positional trading in October till date, but in just one day today, we recovered all the losses as we realised what was not right.
So what makes the difference? Its about verifying that losing trades failed your trading rule reasonably or not. If that can be evaluated objectively and you feel that you are in the 90%+ rating there, then your system is consistent. Otherwise, go back to the drawing board.
Take our Fast reversal trading system for BankNifty. On October 8, we did some 17 trades with a net loss of 21 points or so. Thats pretty inefficient. On October 9, we just did 3 trades and made over 300 points, after analysing and fixing what didnt work on October 8. Its not about what went wrong, but what didnt work..... Think about this and re-invent your systems periodically.
Much has been written by many writers and traders about ranging periods.
As a technical trader, I prefer to allow the trading system to manage such days so that trading remains non discretionary and enable automation. What are the ways to handle ranging ? These are some ideas:
1 - Stay away from the market - easiest and most prone to opportunity profit losses.
2 - Put a limit on stop loss loss limit for the day and exit trading for the day.
3 - Enable a well thought out strategy to play itself out. One example of that is to take trades initiated following a cross of a threshold. For example, if RSI or Stochastics does not cross 30/70 or 20/80, do not initiate a new trade.
Option 3 is the most promising and can be used by both discretionary and non discretionary traders for consistent trading. The choice of threshold logic is wide open, and can include what the trader prefers and uses normally.
A fundamental input, that may be used is to stay away from periods that include ranging before a market news event. Thats optional.
The secret of hi lo trading. Its actually quite simple.
Whatever time frame that you trade in, learn to start looking at the bigger picture. I was wondering, why our performance in May to July was below par. And I got one insight, which set me thinking.
In order to make Hi-Lo trading - shorting from highs and going long from the lows, I used Fibonacci levels to determine resistances and supports. I looked also at the normal pullback levels as well. But it seemed like a bit of russian roulette.
It took me some time to figure this one out, and we have not yet completely put it into action. Whenever you trade, start looking at the bigger picture of the trends for the scrip that you trade in. Its not about seeing the 15/30minute or the 4 hour charts. Its about seeing the larger trend patterns.
It is possible to cancel noise in the market by switching to higher time frames. But what about looking at the bigger picture by compressing your current time frame. This is just one good way to identify all the trends relevant for your trading. For example, if you see 5 minute bars over 15 days on one screen, you will get an immense amount of information, that can be used profitably, by using your favorite trading method. If you are a trend follower, for example, you can plot all the relevant trend lines and avoid entries of new trades in mid trend or when the market is changing direction.
Check it out, and you wont be disappointed! There is no silver bullet solution to get to the pot of gold that you dream about. But making trading simpler by looking at the bigger picture certainly helps!
With the year now ending, an interesting realisation during our trading this month is the subtle changing of the market.
If you are a swing trader, you expect that higher highs and lower lows generally indicate an uptrend or a downtrend respectively. In ideal conditions, yes, they do, but the markets are no longer ideal with "algo"rithmic programmed trading, that try to fool small time traders who use this and other similar methods.
What these algo program trends show are higher highs and lower lows together! But there is a secret, its a pattern within a larger pattern, which continues to be well behaved. The question then is judging the shape of the larger pattern which is well behaved and filtering out the noise at the micro level.
This change has made intraday trading more complex, particularly Nifty trading. Volatile indices do not suffer this symptom so much, but then these are already high risk instruments because of the volatility.
What do you do then? Several answers:
- avoid trading in the periods when the market has these characteristics.
- Fine tune your risk/money management system.
- Avoid the low risk reward trades, where rewards are nebulous, small or doubtful.
Look at price action and volume that indicates the development of a significant trend.. since the old adage, "trend is my friend: is still the most reliable way of playing these choppy markets. The challenge now is now simply being able to filter out the noise.
This is simply amazing. Traders stay quiet and smug while running on the winning trail. But the moment they fall, they get the fear of God and freeze in their tracks like statues. They will stop trading or will trade and get out with 5-10 points profit in their next trade. And see the next long winning run just pass them by.
Why does this happen? Its simple.
When you begin trading you need to have a full strategy or plan. And not trade simply on the fly.
If you do the latter, you will be counting the pebbles, and miss the bigger story completely.
Losses are part of the trading game. On December 1, all my trades were stop loss trades in the morning, but I persisted and won in the later trades, closing with a small profit net for the day.
Budget for losses and profits.If your profit target is 100% your total trading outlay should be 150% which accounts for 33% losses in your monthly profit and loss statement.
Spread this 33% across each week and calibrate your performance on that basis and not by each trade.
Get that emotion out of your mind! and trade objectively. Come to me if you still have a problem.
Nearly all of the traders who are following my guided trading threads have
one major issue... They have all lost lots of money. Why does this happen?
Because traders jump into the ring, without any preparation or plans.
What are your risking normally - its your hard earned capital. If you trade
without any basic money management or risk management plan, you will surely
lose all your capital.
Here is a framework to set things in order, which can save you a lot of
tension, emotional drainage and fear of the market.
Fundamental - DO NOT TRADE IF YOU DONT HAVE FOLLOWING TWO POINTS MANAGED:
1. A trading system (even if these are tips) which doesnt generate better
than 60% winning trades.(and you will see why shortly).
2. You dont have a written money management plan, which you use,
Here is an example of the factors involved in money management. If you have a
capital of 100000, decide how much you can risk to lose in a day,week and a
Example, we say 0.5%-2% per day. This translates upto 40% per month,
which is unacceptable, so you have a weekly and monthly cap as well.
for the week
and 10% for the month.
So to avoid our capital disappearing into smoke, the first rules for
trading that evolve are:
If any day our loss exceeds 2%, (Rs 2000) stop we
trading for the rest of the day.
Any week, our loss exceeds 5% (Rs 5000)
cumulative, stop trading for the rest of the week.
Any month, your loss
exceeds 10%, (Rs 10000) stop trading further.
At each of the stops, incase
these are hit, we should review the trading methodology.
Unless our trading system delivers 60-70% winning trades on a consistent
basis, first on paper trades and then in the real trading environment, we dont
trade again. Money that you dont trade is money saved.
So on every day/week
and month, use the win %age and the loss amounts as barriers for any further
trades. And if you dont cross them, step back, review and fix the basic issues.
If you do cross, the barriers, you are cruising to success.
If the win trade ratio of your trading system is not >60% the absolute
minimum, then your trading method is faulty and you are gambling. Review the
method and fix it first, as suggested above.
Now, a little deeper into the daily loss of 0.5-2%. If your risk is say 2
% of capital in a day. Say for Nifty futures margin is Rs 40000. The risk
amount per day is 2% or Rs 800. So if you do 3 trades in Nifty in a day or lets
say 4, then you cannot risk more than Rs. 200 loss per trade or 4 points. Your
reward or profit per trade needs to be at least 2:1 times this risk or Rs 400
so that even if your success ratio is 50%, 2 winning and 2 losing trades you
lose Rs 200 per trade = Rs 400 total, and gain Rs 400 per trade = Rs 800, with
a net gain of Rs 400, you still are a winner. Target therefore for higher risk
reward ratios of 3:1, if you can.
See the linkage of the winning trade %age of greater than 60% instead of 50%
above and a modest risk reward ratio of 2:1. If these are met consistently, you
are winning consistently and making money.
So here are your trading rules:
Decide your daily,weekly and monthly loss risk %ages of your capital.
Example Capital 100000, risk %age per day 2%= Rs 2000, Weekly 8% = Rs 8000
and Monthly 15% = Rs 15000.
This means you cannot lose more than Rs 2000 in all transactions per day, Rs
8000 in all transactions for the week and Rs 15000 for all transactions for the
Within each day, week and month, follow the following methodology.
End of each day/week/month:
Compute the trade win ratio = Your trades that were proftable after
brokerage/(total trades that you did).
So if you did 8 trades in a day and 5 were profitable, your trade win ratio =
5/8 = 61% approx.
Analyse your winning trades. If your daily risk capital is Rs 2000 and if you
allocated Rs 1600 to the risk for your trades, say at Rs 200 for each trade (it
can vary for different scrips), did you win 2:1 = Rs 1600*2 = Rs 3200? The
individual trades ratios are unimportant, so long as the focus is clear. If the
profit number is not Rs 3200, review what went wrong, and confirm whether it
was a major or minor issue with your system.
Now at the end of the day/week/month, do the above nos tie up?
Win ratio consistently > 60%
Profit for day > allocated and utilised risk capital - if it was Rs 1600
for a particular day - your profit must be Rs 3200.
Profit for week > allocated and utilised risk capital used that week. Say
Rs 4000 - Your weeks profit must be Rs 8000 at least.
Profit for month > Allocated and utilised risk capital say Rs 12000 - Your
profits for the month must be Rs 24000 or more..
Stop, review and fix issues, whenever, these benchmarks are not achieved.
Paper trade when you strart trading again, to ensure that you are on the
right track. You NEVER lost money by not trading
Abnash Singh, Am a Trader helping small traders to realize their dreams.