Saturday, July 27, 2013

10 Things no one told me when I started trading


1. Buy something when its going up, sell something when its dropping. 
So obvious, but when it comes to stocks, everyone's looking for the next "bargain", but most likely you'll buy low and sell lower.  I remember averaging down into NFLX as it kept dropping. Threw in the towel pretty much at the lows. Also vividly remember averaging into a Russell futures short, almost maxing out my margin. Again, threw in the towel pretty much at the top, fearing a margin call.

2. Catching tops and bottoms is the hardest thing to do in trading, do something easier. 
 Despite all the twitter geniuses buying the lows, do not bother trying to catch the bottom or the top. Let price retrace enough to give you an uptrend or a downtrend confirmation. The easy money is made in the "middle" part of the move.

3. Do not stay short above the 21 EMA. Do not go long below the 21 EMA. 
Or use whatever moving average you want, but for a short term trader, a 21EMA seems to be a good one to use. Basically, if the market is uptrending and above the 21EMA, stay the hell out of the way and dont try to catch price tops.

4. No one told me how to tell whether a markets going up or down
How would one know whether a market is uptrending or downtrending? What is your technique to identify this? Its easy to say "follow the trend", and go long when a market's going higher, but how do you know when it starts uptrending or downtrending? And what tells you when the uptrend has ended? Find ways to identify both. And test this strategy.

5. Do not trade when there's no liquidity.- No brainer.

6. ES futures is pretty much the hardest market to trade. 
Its the most efficient market in the world, everyone and their mother is basically analysing this market endlessly. Trade something better, which trends well.

7. Do not try to justify a bad trade.
If you are in a bad trade, and the trade is going against you, dont try to look at news, fundamentals, other time frames, corelations, etc etc. Get the hell out of the trade if your stop is hit.

8. Never look for fundamental reasons for price to do something. Price can go up, down or sideways irrespective of fundamentals. 
I admit I've shorted the S & P more times than I would like to remember and lost money. My justification? Ofcourse price is too high!! Look at all the reasons zerohedge provides about how the economy sucks and the fundamentals are weak, all the companies are missing earnings and all the job numbers are manipulated. Due to all thee reasons, S & P is only a few days away from a 10% drop. No? Bullshit. Respect where price is.

9. Following someone's trades, especially on twitter is a great way to lose money. 
People with thousands of followers, ofcourse they have to nail every trade right? WRONG. People are just as lost as you are, and the fact that they hide their losers under the rug, or sell a service doesnt mean you should follow their trades posted on twitter. If you want to follow them, pay them for their service, and hold them accountable for all trades. Dont half ass it. If you follow someone and you lose money, whats the accountability? Who are you going to blame?

10. Chart patterns rarely work. Chart patterns work even less when you trade off a 5 minute chart.  Price does not "have to" do something just because of a chart pattern.
After studying over 14000 charts patterns spread over the years from 1991 to 2008, Thomas Bulkowski  found out that these patterns are now 3 times more likely to fail than in the past. And everyone you know is trying to trade chart patterns off a 5 min chart. Wonderful! Good luck with that.

2 comments:

  1. A lot of what you say makes sense, but:

    Do not stay short above the 21 EMA. Do not go long below the 21 EMA. **Everything becomes over-extended. When a stock pops 100% in a three day period you should be looking to short it. And that's over the EMA21.

    Never look for fundamental reasons for price to do something. Price can go up, down or sideways irrespective of fundamentals. **True price will do whatever it wishes, and after tracking stocks that popped on a daily basis, I found that 50% were pretty much technical breakouts. But take CREG for example, it popped on fundamental news (China's decision to open up to more foreign investment.) : - http://bit.ly/11oP2FP

    Following someone's trades, especially on twitter is a great way to lose money. **Sure can be. But, people with followers also bring in volume..and volume tends to run a stock up.

    Chart patterns rarely work. **Of course not...They just increase your chances of being on the right side of a trade. And although Bulkowski has noted the lessening of successful trade patterns, his site (dated 2013) still suggests some patterns are better than others. In particular his High Tight Flags: http://bit.ly/znl421




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    Replies
    1. Thanks for the comment :)

      " **Everything becomes over-extended. When a stock pops 100% in a three day period you should be looking to short it. And that's over the EMA21. " - I Agree, there are systems built on shorting over extended conditions above the 21 EMA, as long as one follows a strategy for it, it works perfectly fine. I use a mean reversion ssytem based on ADX and 21EMA as well.

      As for CREG, no dispute some news like that might move price, but we have no way of knowing it in advance anyway, so if its a stock you follow, then price action will get you in the move, otherwise, its OK to miss moves IMHO because for every time it works, it fails multiple other times.

      As for chart patterns, yes they do work, but the win rate trading chart patterns on a very small time frame chart is low.

      Thanks again for the comment, and your blog looks great :-)

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