July 2009

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July 20th:To take Profits or Not……

We,as Traders,are always left with this dilemma as our trade goes in the desired direction……Ah,finally after 4 stopped out trades and 2 that one should have adhered to the stops,finally a trade that goes our way……..Now comes that irritating dilemma,more a result of Fear than Greed,that gnawing feeling in the stomach:If I don't take this profit here,then this trade will also go the way of the previous 6.The mind then conveniently steps in and gives convincing arguments of taking the profits there and then…………..Anyway,who goes broke taking profits?What is the harm of taking it all here and getting back in at a lower price?And even if price goes higher,then I'll think about it and reenter.I am already in pain taking the last 6 trades,I need some relief,need to break this losing run and get a win on my trade sheet……………..So on so forth,the mind goes,each time chipping the firm resolve of sticking to the method,convincing the trader that it is better to take it off……..The trader caves in,he takes his profits,in fact why only profits,he takes them all off,ahh,sweet gains,a great feeling, a new high……Yess!!!!I am back,says the trader………Great Going,says the Mind……Fantastic win,exclaims his friends……….Oh No,not so fast,my friend,says the Market,I am gonna pummel you on your next one.And after I am done,this win will look like a drop in the ocean.

Meanwhile the Trader is thrilled,he has finally broken his losing run……..he envisages himself as a cricketer who scored 6 sucessive below ten scores,but now puts up a 52.He is back…………and so he thinks.Price now retracts from the point of exit,the Trader is even more thrilled,he now feels on top of the world,he now places himself on par with the world's best,nothing can stop him,he is truly the best……..Price retracts a bit further,he waits and watches,price then gaps up to his point of exit,and starts what would be a meteoric rise,but the Trader does not know that……he waits now for a pullback,a pullback that never comes and when it does,it's too far from his exit…..Too egoistic to get in at a higher price,he swears never to look at that stock again,he now feels better about himself…….well,no harm done,that trade was still a good trade,it was still a profitable trade.He comforts himself by saying that he did not want to be too greedy,and this rally looks like a blowoff rally anyway and is doomed to collapse,so on so forth.

While so much goes on in his mind,the stats show that he lost x,x,x,x(on his stopped trades),2x,3x(on the trades that he had not taken stops) and made 2x on his last trade……Totally:-7x…….He starts to get nervous,irritated,he now looks for a stock that had not yet run up the way the above stock had……and plonks his money there.But Stock B is in a tight range and in consolidation phase,the fact that the entire market had run up and this stock didn't should have told him something……But the Trader is in too much of a pain to think straight.He now loses 4 more stopped trades…..Sitting at -11x,he is frustrated,disappointed,all that previous highs that he experienced were now a huge low.He now loses his confidence,his inability to pull the trigger at the right time sends him lower and lower.Sitting at -11x,he decides that adhering to stops is all utter nonsense,a strategy to make people lose money more than anything.He gets back into Stock A,hoping that it continues its rise,but Stock A now gaps down freezing the Trader….Refusing to accept his losses,the Trader prays.The Market gleefully preys.At -4x,the Trader gives up…….At -15x,he blames the markets,he attributes all his problems to the operators,the government,God,his wife …….

This Trader took 12 trades in all,losing 11……..even if he had lost 5 at an avg of 2x,therefore -10x,and gained the way he did on the other 7 at x,therefore +7x……..he would have won 7 in 12 trades and still landed the month with losses.This Trader had taken 9 trades in the direction of the market trend.The Market blasted upwards,the Trader was long most of the time,yet sustained huge losses………..Too much of the Mind Factor coming in?Too much of trying to be smarter than the market?Well,a bit of everything…….but this Trader will always wonder if Trade 7 had gone his way and he had not tampered with the play,what the results would have been?……………Cutting Losses and letting Profits Run,the old adage continues,it is vital……Yes,Profit Taking at certain vital points can be an add to the method/system.But there has to be a strategy to it.Mindlessly pulling out small profits can be detrimental in the long run….a cascading effect is triggerred off,finally hammerring you into submission.

Can you go broke taking small profits?Oh Yes,you can….Be careful with this one wrong thought in the Trading Mind.

More on this later…….

Sincerely,
Saint


July 20th:Not only cut the Losses,but Ride the Profits.

Adherence to stop losses is important and vital,but allowing a trend trade to run its course before tampering with it is as important,if not more………Let us take another Trader.Unlike our Trader friend above,this Trader is more disciplined,more ruthless.He knows the importance of stops,he realises the importance of his capital and its preservation,…….he therefore adheres to his stops.Not only does he adhere but he realises that stops are to be placed at vital points(talking Tech Trading).He takes on the Market and after 10 trades,he makes 5 losses,and 5 wins ie 5x-5x=0.He has lost commissions,and misc charges and made nothing.His next 10 trades have 6 losses and 4 gains…all gains are about x,and losses at x each.He ends this on a losing note as well.

This Trader has gotten it better than the previous guy……..he is following half the Wisdom and finds himself perenially at Breakeven to Mild losses.After 20 such trades,he realises that his fallacy was in placing stops in the first place.The next 10 sees him hurtling down and joining the previous Trader in his ranks……..what has happened is a slow breakdown of the discipline by the Market,which is nothing but a Totality of Minds in action.Frustrated and disappointed,he thinks that his fault lies in the method,his system,and runs around in circles collecting this afl and that.

So too,at the end of the month,when we look at our Trade Analysis,we kick ourselves for not adhering to our stops……We notice instantly that our stops of x was not adhered to a few times and that led to the downfall in that month…….Nothing could be further than the truth.What the Month end analysis does not show is that the profits earned of say x or 2x was in a move of 10x or 12x…..to put it crisply,we did not capitalise on the move.Not capitalising sends the mind into Regret.Regret sends the Mind into Wrong Decision.Trades are taken when they should not have been.Stops are placed at incorrect points.Multiple useless,unnecessary trades are put,and the broker instead laughs all the way to the bank.Even if stops are taken,the trader does not make enough to cover the losses sustained.Sustained lack of victories sends the Mind into Defeat Mode and he then finds every possible way to shoot himself in the foot…..

The Wisdom of the Ancients has always been to cut the losses,and to ride the Profits…..Somehow,the 2nd half of that great wisdom stands neglected……Obey that Wisdom,and great profits follow.Neglect it,and Peril will follow in a matter of time.

Saint


July21st:Just a one liner……….

"While amateurs go broke by taking large losses,professionals go broke by taking small profits"…… William Eckhardt


July 29th:The Beginning……

To really get everything out of that move,except probably the first part,and the last part………to milk the whole move and therefore justify the great wisdom of "Cut your Losses and Ride your Profits" …….it is important to remove the "I" from our trading.Markets trend all the time,yes,many great writers of many great books will state that markets trend 20% of the time,and the other 80% it is range bound…..True and Far from true.True if we are talking about one timeframe.Far from true if we are taking about multiple timeframes………..The trend trader knows for a fact that markets trend 100% of the time,only that it happens in different timeframes.And if that be true,there is always a winning trade and profits at hand for trend moves are what trend traders trade and these moves every day,every hour,every minute.

Knowing this,a method had to be found that minimises the entrance of the "I" into the trading sphere…..to minimise profit taking,predictions,anticipations. Thus was born what we call the Flow Methods…..It was designed to shut down the "I" in our trading as much as possible.By that,what is meant is that,………..We go with the Flow!!To humbly accept whatever it is that the market gives us.Both profits and losses…The only thing to be thought is the place to enter,to add and to reverse,…….The adds were in to maximise the profits.Initial whipsaws in a new trade taking out only our initial positions were to minimise the losses.Pivots became the Centre of the Flow Strategy but other signals were brought in to get out as near to the End of the Move as possible,and get in as near to the Beginning of the Move as possible.And then the emphasis that one timeframe alone is not enough……..The Flow Trader therefore shuts his mind and trades what his/her Eye sees,and this he/she does over different timeframes.

The great enemy of the Flow is a Sideways Range……..a lot of it is overcome by trading not one stock,but multiple stocks,and not one time frame,but multiple timeframes.Range bound activity irritates and frustrates the trader,stops trigger off again and again,with very minimal profits,the mind…the "I"…..now starts its blabber,its gibberish…………What if this range activity goes on forever……..What if multiple stops go on happening…….what if this method or that method does not work anymore……….if I have taken 10 losses,why not 20 more…….The mind goes on and on.And decisions are then made contrary to what should actually have been the correct decision.It never is the range bound market,on an overall, that eats our capital……it is the "I" that destroys it.The interference with the Flow of things.The Meddling arising out of great Fear.

The strategy therefore is actually very simple:To allow the Market to do what it wants to do,………………to get in and then hold on tight.To bring our "intelligent" meddling down to zero.To accept whatever the market gives us.Knowing fully well,that Markets do not go on a flat line,and that multiple trades on different timeframes will put money in the pockets.