Your First Day...Butterflies in your Tummy

Hello Everybody, Hope you all are doing great. It is been a while I was away from the stock market but now I am back and back to have more fun then ever. Hmm, sounds funny :-). Not really, because I have butterflies in my tummy thinking about entering to the market, be it stock, forex or equity market.Tick tock, tick tock. Clock goes minute by minute and hour by hour. But I am still thinking " shall I dive down and buy this stock ... or may be wait for a while to get a better offer ??". This thought comes to mind again again and then .... I miss the train. No worries, there is always a next train coming behind.

It is always better to keep yourself safe rather then burning your fingers.OK .... no more scary stories. Lets get to the point. What I mean by saying all these no nonsense story is that before you think of getting into the stock market, forex or equities or any other market first you need to evaluate "Mind your Trades". By saying this you need to assess if you are

• Ready to trade now
• Are you happy and confident 
• Have you done your homework
• Have you got enough funds
• Can you sit tight and wait for the result

If your answer is YES to all, then you could go ahead and place your entry with a full confidence.

Since if you read through this far I assume you are eager to know more about trading strategies and trading psychology

Below is an example of uptrend pattern where you can buy on every pullback with a stop-loss  near previous bottom and take profit above previous top.

Bullish trendline

In my next posts lets discuss some of the fantastic strategies and see how trading psychology is very important element while trading.

Money Management Formulas

Why money management is vital? What happens if you don't put stop-loss?  Well, here is my view.

Have you ever asked yourself this question? Why do I trade for? Do I trade for the money or for the thrill? Please don't bother telling me, just show me your records.If you don't have your records then you KNOW the answer :-) , right ?

This is a very skillful lizard balancing nicely while looking through all around, almost 180 degree. Money management is an equivalent skill for you if you need to stay in market. Money management is like thus balancing act you got to do all through for every single trade. Without money management you are doomed to fail in this huge financial market.

Now you must guess HOW IMPORTANT it is to keep records for your trades. If you keep records, then slop of your equity curve will show how serious you are about trading.

This is how a profit/loss journal looks like. You can actually track your trades, see reasons behind your profits or losses and how well/bad you are doing and how you can improve by analyzing your past trades.

The goal of money management is to accumulating equity by reducing losses on loosing trades and maximizing gains on winning trades. Once you have your customized trading system, you must establish your money management rules and stick to them. So now you must be knowing that money management has got two goals: survival and prosperity. The first priority is to survive, then make steady gains and prosper.

In the above picture you can see the performance of first and second quarter of 2006. The graph shows steady growth of the account. four out of sixteen trades are loosing trades but they are well manageable and stopped with minor looses.

Following are the steps of money management.

• Measure your account value on the first of the month—the total of cash, cash equivalents, and open positions.
• Calculate 2% of your equity. This is the maximum you may risk on any given trade.
• Calculate 6% of your equity. This is the maximum you are permitted to lose in any given month, after which you must close out all trades and stop trading for the rest of that month.
• For every trade, decide on your entry point and a stop-loss; express your risk per share or per contract
• Divide 2% of your equity by your risk per share to find how many shares or contracts you may trade. To get a round number, round it down.
• Calculate your risk on all open positions by multiplying the distance from the entry point to the current stop by the number of shares or contracts. If the total risk is 4% of your account or less, you may add another position, since you’ll be adding 2% with your current trade, bringing the total to 6%. Remember, you do not have to risk 2% per trade; you may risk less if you like.
• Put on a trade ONLY after meeting all of the above conditions.

Remember, both your trading system and your money management must be good in order to win in the markets.

Once you are in a winning trade, trail your your stop to lock some portion(let's say about 60%) of your gain and risk rest 40% gain. This is called trailing stops.

If you keep on following your money management rules and maintain discipline you will definitely see huge improvement in your trading account.

Trading Psychology....Keep Cool and Act Fast

While opening a new trade or tracking your existing trade do you get nervous? Is your palm sweating while you place your order or your heart beats faster? Don't worry. This happens to all traders, specially beginners. But it also sometimes happens to most experienced trades. This is a normal trader's psychology. These happen because of fear, greed, expectation and circumstances. Most of the time market psychology is determined by the investing behavior of the masses. Because market movement depends upon mass investor psychology, so very often we see market turmoil.

Let's wait for a second and see this beautiful flower. What do you feel? Feeling better and calmer? Purpose of adding this beauty is to take the mind off from market distractions and think straight.

Now back to the question. Question is how to overcome this irrational market sentiment and and concentrate on trades? This can only be possible if you become a disciplined trader.

Discipline is necessary for success in most business, but specially in the market. You have to watch yourself because you have nobody to else to watch.  You have to design and test your system and follow the rules. It means learning to enter and exit in response to predefined signals. It means doing the right thing, not the easy thing. The first challenge is to involves in setting up a good record-keeping system.

Below is a sample trading journal that looks like this. You can see the performance report of the account as well as overall profit losses.

HOW TO MAINTAIN TRADING JOURNALS

• Record all your traders in a spreadsheet. Keep track of entries, stops, targets, profit and losses.

• Record the total balance of your account at the end of each month. Plot it in a chart to create an equity curve. The angle of the equity curve will show you if you are in the right direction or not. If you get a steady up line that means you are with the market. If you get a negative slop then you need to analyse your strategies again. If you get a jig-jag curve, that means you are a impulsive trader.  

• Third thing is to printout the chart pattern that signals you to buy or sell the equity and paste it on the left side of your spreadsheet, the reasons for entry and also write down your target level, stop loss. When you closeout the trade, printout the chart again and paste it on the right side of your spreadsheet. Write down the lessons you learned. You can evaluate from this if your strategies are working or not and you try to improve yourself by not doing the same mistake again.

If you keep following the rules and maintaining your records, you will definitely see a huge improvement to your trading account as well as within yourself and you would become a fine trader very soon.