iCharts Discussions

[akpanicker]

Most pundits tell you to make a good trading plan and stick to it to achieve success - most newbie traders do make a lot of well thought out plans and follow it to tee and still end up at the wrong end of the ladder.

My take on this- is something like this – plans are inherently impersonal – though they do give you the ability to find the right decision without getting entangled in emotional cobwebs , what happens in real life is that unless the plans are implemented by some robo trading software at critical moments you would find yourself divorcing the plan. So what needs to be done is to develop the right habits – habits that become a part of your behaviour ….so you can say what you need is some behaviour modification. The best part of this that the right response becomes almost reflexive.

Let me dwell on one such habit worth cultivating for a long trading career

never take a large loss on any single trade

For any trade there are four possible outcomes – small loss small profit large loss large profit. Out of this you need to eliminate the possibility of large loss completely. What I am suggesting is that you can achieve this by behaviour modification – by developing an intolerance towards loss to the extent that you are not going to stay on in a trade beyond a small loss. This is done by keeping a small stoploss and strictly honouring it once it is hit . But you cannot keep an arbitrarily small stop and hope to succeed as your capital will be depleted by all the small stops like a death by slow bleeding. That is where the need to identify the low risk entrypoints come in. That is another topic altogether. Having identified such a low risk entry point and entered the trade the behaviour modification that I am suggesting relates to how you manage that trade. I would be comfortable with a trade only if it moves in my favour in a short span of time and I would take a partial profit at the earliest available opportunity to cover at least the cost of the trade so that as far as the remaining position is concerned it becomes a risk free trade. This would ensure a small profit and keep the possibility of a large profit open too. This way even while some capital is tied up in a trade the effective capital exposure is nil !

That is it ….but then most of the newbies and those purists who would not countenance any method that cannot be made into an afl or some other program , this may come as a bit of a disappointment because this demands application of mind and discretion. Generally a winning trade would move into profit without much delay and this behaviour modification suggests developing an intolerance towards staying on in a trade that is not profitable…..and in time one reflexively scratches a trade that is not doing anything even before hitting the stop !

[kumarsanjai]

this is important part to learn

[Transcap69]

AKP,
Good writeup...keep up !
I had a question..You wrote
"never take a large loss on any single trade "

How d u quantify "Large"? is it 10% ,20% or less or more..of the equity
Amit

[rk_a2003]

Look at the quite convincing presentation by ‘akpanicker’. It could be his own write up or could be an extract of his reading. After reading it we will get an overall impression that it’s a good one. There are hell lot of books advocating desirable trading psychology and also methods/strategies. Which often express contradictory views? For example have a look at this Part of the ‘akpanicker’ post.

“Generally a winning trade would move into profit without much delay and this behaviour modification suggests developing an intolerance towards staying on in a trade that is not profitable…..and in time one reflexively scratches a trade that is not doing anything even before hitting the stop!”

Generally for a trade to move in your direction without much delay one need to time the trade which was in general described as impossible in the markets. It also suggests developing intolerance in a trade that is not profitable and also advocates reflexive action which makes you to get out of the trade even before hitting a stop. This again goes against the trading wisdom of “plan your trade” and “trade your plan” and inducing emotional element into the trading. In this way you are trading your emotions not your plan by exiting the trade well before hitting a stop loss. Trading emotions is a sure way to perish in the markets.

If it was the intention of author also to keep a SL with Time limit it's fine otherwise this approach won't work.

[pkholla]

RK: May I make 2 observations
1) Umesh1 (Gann intraday thread) advocates exiting after 1 hour if your NF trade is not doing anything much (either target OR SL). Same as Panicker?
2) I have many times seen this typical trade: buy N future or call, slowly gains 3 rs, falls again, goes up again 2 rs then starts sliding and steadily goes below your purchase price and on to the SL. Perhaps what Panicker says can be followed by squaring off at just below second failed attempt of your buy 2 rs above your purchase. With minimum damage to your capital. Enter again with full josh when conditions are favorable
Rgds, Prakash Holla

[vinay28]

prakash, your second point is followed by experts anyway. When the price fails to go above (or below if it's a short) previous high (or low), they square off their trade and re-enter when it does later.

[opportunist]

[akpanicker]

kumarsanjai, Transcap69, rk_a2003,pkholla,vinay28, opportunist – my sincere thanks to you all for taking pains to post a response and giving me a frank feedback.

Perhaps if I should have mentioned that the above is to be viewed in the context that my trading is purely intraday and my favourite instrument used to be nifty futures but now mostly nifty options . Well now, on to the clarifications…

Never take a large loss….how much is large…..well there is no point in specifying a particular percentage…..it is a function of your trading capital and risk appetite….but I would put it like this - a large loss is one that would make it emotionally difficult for you to take the next trade …small loss is one that you are comfortable taking and forgetting.

The write up is mine but the ideas expressed are definitely not something that I have thought up…..of course they are influenced by the reading of a large number of trading related books and articles over the years….what I have tried to express are the things that worked for me in my evolution from being a losing trader to a winning trader and they have not come about all in a single go….but gradually fell in place over a long period of time.

As for timing , though I did mention that you have to identify a low risk entry point I did not elaborate on it. Probably that has a bearing on my expectation of the trade to go in my favour immediately because fading is my bread and butter setup . The assessment of risk is a deciding factor in the placement of stoploss as also the decision whether to take that trade or not .In the behaviour modification that I suggested ,perhaps I failed to emphasize the role of developing an eagerness in taking partial profits and making the trade a risk free one at the earliest opportunity , as much as developing an intolerance towards holding a trade that is going nowhere …the practice of getting a partial profit at the earliest so that the trade can comfortably cruise even till the end of the day played a crucial role in the transition from a break even (number of small gains/small losses effectively evening out over time ) to snake and ladder ( few small losses/ large number of small profits / a few big losses wiping out all accumulated profits) to net profit ( few small losses/many small profits / a few big profits) stage.

And finally the disclaimer – perhaps if you harbour a sneaking suspicion that this is not borne out of any noble intentions such as to mentor the budding trader but sounds more like an ego trip by an old fool – you are not far off the mark…..any positive takeaways are a a case of unintended consequences ! Having said that …. the response becoming a reflexive thing and recognising a trade that is going nowhere and scratching it before it hits the planned stop are definitely things that you do as you mature as a trader …..the aim is not to remain in the newbie stage…what I am saying is the way my own trading has moved on from the early days of sticking to the plan. In the trading arena the ability to put two and two together and coming up with five …..though yields wrong answer….may provide better solutions. Oho….there I go again….perhaps I have made the clarification more confusing ! Looks like I am not a very effective communicator – though I did my graduation in communications engineering…..so I had better stick to my trading and refrain from ranting ruminations !

[vinay28]

good explanation panicker. As long as anything works, it's fine. By the way, you have said "......because fading is my bread and butter setup......."

Is this fading same as that explained by bill wolfe in his wolfe wave theory?

[opportunist]

[Transcap69]

AKP,
a very good write up on Behaviour Modification...thanks a lot for your insights on trading psychology and risk management. In fact you are one of the elite traders who respects risk a lot. I
In case time permits pls throw some light of money mangement and trading methodology intraday.
thnks
keep up the good work
amit

[pkholla]

[rk_a2003]

akp your ‘ranting ruminations’ are really interesting and with insights…..Well …May I request you not to stop it.