Wednesday April 7, 2010
Insight into stock trading
PERSONAL INVESTING
By OOI KOK HWA
ooi_kok_hwa@hotmail.com
A LOT of retail investors like to trade in stocks. As a result of high losses incurred over the years, especially on stocks that have been delisted, they do not believe in holding stocks for the long term.
They believe stocks are suitable for trading and not for long-term investment.
Stock trading is not as simple as trading based on tips and market rumours. Most retail investors actually rely on tips from their remisiers to help them make quick gains from the stock market.
Investors need to understand that trading involves high discipline, commitment of time and skills. Based on interviews with some top traders, Jack D. Schwager concluded that all successful traders are serious about their trading and are willing to spend a lot of time on market analysis and trading strategies.
The secret to their success is usually a methodology that worked for them, together with having very rigid loss-control.
They always act independently of the crowd and have the patience to wait for the right timing for trading. In addition, all the successful traders understand that losing money from trading is part of the game.
A lot of traders always say that trading in stocks has a lower risk than buying stocks for the long term. Many retail investors like to buy stocks for trading because they do not have the patience to hold stocks for the long term.
But whenever they incur losses, they tend to change their original objective of stock trading to long-term investment, not knowing that the majority of those stocks for trading are not suitable for long-term investment.
While some of them may be aware of this important fact, due to their unwillingness to admit their mistakes by cutting losses, they choose to continue to hold on to the stocks. As a result, they get stuck with a lot of poor fundamental stocks in their portfolio for the long term. Most of the time, they will hold those stocks until they get delisted!
'Investors' need to understand that stock trading involves constant locking in of gains and cutting of losses. They must always set target profits (profits per trade or PPT) and maximum loss (loss per trade or LPT) for every trade. They need to set the target number of trades that are supposed to bring gains, which is also known as trading success ratio (success ratio or SR).
They then need to set the target number of trades that they are willing to be involved in per month (trades per month or TPM).
Hence, profits that can be made by a trader will very much depend on his SR as well as TPM. Most of the time, the target PPT and maximum LPT are relatively constant and are dependent on individual risk tolerance level and skills.
For example, an investor has set his PPT at RM500, LPT at RM300 and SR at 60%. If he sets 10 TPM, based on SR of 60%, of the 10 trades that he has made, six trades will make gains of RM500 each and four trades will incur losses of RM300 each. The net gain for 10 trades will be RM1,800 ((6xRM500) – (4xRM300)). If the trader intends to increase his profits, he needs to do more trades per month; in other words, increase the TPM.
Given that the movement of stock prices is random, the probability of stock prices moving up or down is 50%. We think it is a great achievement if a trader can achieve an SR of 55% to 60%. Most retail investors hope for 90% because they are not willing to cut losses.
As a result, they will wait for the stock price to break even whenever it drops below their purchase prices. However, the longer they wait, the more losses they will incur. Most of the time, of the 10 trades done, they may achieve SR of 90% where nine trades may give them gains but the one trade that incurs loss may wipe out all their nine gains!
We agree that the above methodology is easier said than done. A lot of times, investors may have the discipline to lock in their gains, but do not have the discipline to cut losses.
Besides, investors need to allocate a certain amount for their trading capital, which is the amount that investors are willing to lose in stock trading. It should not cause financial problems to investors if they lose all the trading capital.
Lastly, investors should not average down their losing position. If they have incurred losses in the past three to four trades, it means they may have lost touch with the market timing and sentiment. In this case, it may be good for them to take a break from trading and analyse the reasons behind those losses before continuing.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2010/4/7/business/6003482&sec=business
Showing posts with label Trading Versus Investing. Show all posts
Showing posts with label Trading Versus Investing. Show all posts
Wednesday 7 April 2010
Wednesday 3 February 2010
Stock Market Strategy: "One-day trade, Swing trade or Long-term trade"
Stock Market Strategy
Stock market is a risky place to make a profit.
Who are these players generating all this trade -speculating or investing - in the stock market?
There are many types of trades in the stock market. However, essentially the three most popular of them are:
It is common to think that the swing trade has a time horizon between the one-day trade and the long-time trade. The time horizon of a swing trade is dependent on the event(s) influencing the player to terminate the trade.
The more astute would notice that all these types are characterized by a single factor (risk tolerance profile) of the players: their ability to hold onto their position in the stock market for various investing time frames.
The beauty of the stock market is that it can be used for various purposes by different investors.
http://www.assetinvesting.com/?p=4473
Stock market is a risky place to make a profit.
Who are these players generating all this trade -speculating or investing - in the stock market?
There are many types of trades in the stock market. However, essentially the three most popular of them are:
1. One-day trade
2. Swing trade
3. Long-time trade.
It is common to think that the swing trade has a time horizon between the one-day trade and the long-time trade. The time horizon of a swing trade is dependent on the event(s) influencing the player to terminate the trade.
The more astute would notice that all these types are characterized by a single factor (risk tolerance profile) of the players: their ability to hold onto their position in the stock market for various investing time frames.
The beauty of the stock market is that it can be used for various purposes by different investors.
http://www.assetinvesting.com/?p=4473
Tuesday 20 October 2009
Graham's view of people who trade continuously
"Everyone knows that most people who trade in the market lose money at the end. The peopl,e who persist in trying it are either unintelligent, or willing to lose money for the fun of the game, or gifted with some uncommon and incommunicable talent. In any case, they are not investors."
"Too many clever and experienced people are engaged simultaneously in tryng to outwit one another in the market. The result, we believe, is that all their work and effort 'cancel out', so that ... each conclusion ends up by being no more dependable than the toss of a coin ... the activities of the stock market analysts are the same as the activities of a tournament of bridge expert. Everyone is very brilliant indeed, but scarcely anyone is so superior to the rest as to be certain of winning a prize .... because the analysts communicate freely with each other, it is as if all the contestants in the bridge tournament gathered around and argued with each other what strategy each should use."
"Too many clever and experienced people are engaged simultaneously in tryng to outwit one another in the market. The result, we believe, is that all their work and effort 'cancel out', so that ... each conclusion ends up by being no more dependable than the toss of a coin ... the activities of the stock market analysts are the same as the activities of a tournament of bridge expert. Everyone is very brilliant indeed, but scarcely anyone is so superior to the rest as to be certain of winning a prize .... because the analysts communicate freely with each other, it is as if all the contestants in the bridge tournament gathered around and argued with each other what strategy each should use."
Thursday 10 September 2009
Keep it Simple and … Smart
Keep it Simple and … Smart
By Benny Lee, Chief Market Strategist, NextView Investors Education Group
You would be surprised find that many successful traders do not have advanced knowledge or a PHD in analyzing charts to make trading decisions. Many traders who have acquired professional certificates or degrees in finance and investing may be good analysts but failed when they start to trade. Many are engrossed in techniques and ideas and have forgotten the bottom line – making money from trading.
The objective of every trader (including investors) is to make money on a consistent basis. Many traders still think that their trading decisions should be correct all the time. Of course, not every trade or trading day or even trading month is going to be profitable. This is simply the nature of trading. There is no one successful trader who has not lost any money before in their trades. Keeping it simple can go a long way toward changing the traders’ mindsets about trading so that they can start to trade successfully and make money consistently.
A trader can make hundreds of possible trades during the course of a trading day or week. However, how many of these are your setups. A setup is a set of rule or rules to make the trading decision. How many of these setups have you traded in the past and how many are you intimately familiar with? Getting familiar with the set ups means that you know the characteristics of the set up, i.e. its advantages and disadvantages.
Your set up should be easy to understand and not complicated. Many traders think that putting in more rules and advanced ideas makes a better setup. Most of the time, it leads to confusion. Have simple trading rules in your setup, as long as the rules are able to minimize your trading decision risk by getting a clear picture of what the market is telling you.
Trade only a few setups, 1 to 3 is plenty. You cannot possibly trade every setup or even identify them in a real-time environment, unless you have programmed your setups in automated trading systems. Even that said, you may not have the money to trade all the setups. Furthermore, many setups can also be in opposing directions leading to even greater confusion.
Choose a few setups that you are most comfortable with and profitable (with the highest reward to risk ratio and low drawdowns). Stick with those and ignore all the others. Trade the setups that provide clear and obvious visual recognition. When choosing the setups that you want to trade, select the ones that can easily be identified visually.
Become intimately familiar with your setups. Reducing the number of setups of your trade will allow you to understand how they act, when they are likely to set up and when they are likely to fail. You will have an idea of the expected outcome whenever you make that trading decision. A good trader knows why he lose a trade.
Many traders often let their emotions take over their trading decisions. I have experienced losing a trade and then wanting to take revenge by trying to trade using my instinct. Of course, that will eventually lead to more losing trades. If you do not have a setup, wait. If your setup does not trigger, wait for the next one, even if it takes hours, days or even weeks, depending on the setup that you have. Exercise patience and discipline while waiting for your setup to trigger.
Losses often occur not because of a poor entry, but because the trader did not have the confidence of what he or she saw and allowed a small volatility in the market to take him or her out or, even worse, refused to take the stop loss that the trader had set because of a failed setup.
By trading fewer setups and becoming comfortable with them, you will be able to plan the trade ahead of time and develop much greater confidence in your trading.
The Advantages to Keeping It Simple… and Smart
First, good entries become profitable trades because the trader has confidence in the setup and will not be shaken out at the first bit of market noise. The trader understands the consequences of making that trading decision and would expect how the trade will react to these market noises because of the previous experience.
Second, the trader has become familiar with the setups so that the trader can quickly and easily identify when the setup has failed, exit and limit losses. The trader is able to accept losses because he or she knows that this is part of the plan and if he or she continues to follow the plan using the set ups, he or she will eventually make money from the market after a period of time.
Third, with this newfound trust and confidence that comes with following fewer setups, the trader is less inclined to chase setups that he or she is not familiar with and does not fully understand because the trader knows “his” or “her” setups will be profitable.
The Bottom Line for Your Trading
If your trading method is complicated or requires too much evaluation in real time, you will hesitate before entering and not trust it while in the trade. In the end, you will not follow your own method, which is equivalent to having no trading method at all.
Do not analyze during the market. Sometimes when a setup is triggered, the trader starts to analyze further using other indicators or setups because he or she just do not have enough confidence and do not want to lose on that trade.
Simple strategies work best because they allow you to trade with confidence, and, if you trade with confidence, you are one step closer to eliminating the emotion of fear in your trading.
Benny Lee is a trainer, trader and practitioner of technical analysis. He conducts Technical Analysis workshops, seminars and courses for private and professional investors, traders, remisiers and fund managers in Malaysia, Singapore and Thailand. For more of his articles, please visit: Benny Lee's column )
http://investasiaonline.com/forum/view_topic.php?id=64
Comments: Any investing system should be simple and easy to follow and implement. The system should be applied consistently and can be shown to be productive over a long period. The above article has so many ifs and buts.
By Benny Lee, Chief Market Strategist, NextView Investors Education Group
You would be surprised find that many successful traders do not have advanced knowledge or a PHD in analyzing charts to make trading decisions. Many traders who have acquired professional certificates or degrees in finance and investing may be good analysts but failed when they start to trade. Many are engrossed in techniques and ideas and have forgotten the bottom line – making money from trading.
The objective of every trader (including investors) is to make money on a consistent basis. Many traders still think that their trading decisions should be correct all the time. Of course, not every trade or trading day or even trading month is going to be profitable. This is simply the nature of trading. There is no one successful trader who has not lost any money before in their trades. Keeping it simple can go a long way toward changing the traders’ mindsets about trading so that they can start to trade successfully and make money consistently.
A trader can make hundreds of possible trades during the course of a trading day or week. However, how many of these are your setups. A setup is a set of rule or rules to make the trading decision. How many of these setups have you traded in the past and how many are you intimately familiar with? Getting familiar with the set ups means that you know the characteristics of the set up, i.e. its advantages and disadvantages.
Your set up should be easy to understand and not complicated. Many traders think that putting in more rules and advanced ideas makes a better setup. Most of the time, it leads to confusion. Have simple trading rules in your setup, as long as the rules are able to minimize your trading decision risk by getting a clear picture of what the market is telling you.
Trade only a few setups, 1 to 3 is plenty. You cannot possibly trade every setup or even identify them in a real-time environment, unless you have programmed your setups in automated trading systems. Even that said, you may not have the money to trade all the setups. Furthermore, many setups can also be in opposing directions leading to even greater confusion.
Choose a few setups that you are most comfortable with and profitable (with the highest reward to risk ratio and low drawdowns). Stick with those and ignore all the others. Trade the setups that provide clear and obvious visual recognition. When choosing the setups that you want to trade, select the ones that can easily be identified visually.
Become intimately familiar with your setups. Reducing the number of setups of your trade will allow you to understand how they act, when they are likely to set up and when they are likely to fail. You will have an idea of the expected outcome whenever you make that trading decision. A good trader knows why he lose a trade.
Many traders often let their emotions take over their trading decisions. I have experienced losing a trade and then wanting to take revenge by trying to trade using my instinct. Of course, that will eventually lead to more losing trades. If you do not have a setup, wait. If your setup does not trigger, wait for the next one, even if it takes hours, days or even weeks, depending on the setup that you have. Exercise patience and discipline while waiting for your setup to trigger.
Losses often occur not because of a poor entry, but because the trader did not have the confidence of what he or she saw and allowed a small volatility in the market to take him or her out or, even worse, refused to take the stop loss that the trader had set because of a failed setup.
By trading fewer setups and becoming comfortable with them, you will be able to plan the trade ahead of time and develop much greater confidence in your trading.
The Advantages to Keeping It Simple… and Smart
First, good entries become profitable trades because the trader has confidence in the setup and will not be shaken out at the first bit of market noise. The trader understands the consequences of making that trading decision and would expect how the trade will react to these market noises because of the previous experience.
Second, the trader has become familiar with the setups so that the trader can quickly and easily identify when the setup has failed, exit and limit losses. The trader is able to accept losses because he or she knows that this is part of the plan and if he or she continues to follow the plan using the set ups, he or she will eventually make money from the market after a period of time.
Third, with this newfound trust and confidence that comes with following fewer setups, the trader is less inclined to chase setups that he or she is not familiar with and does not fully understand because the trader knows “his” or “her” setups will be profitable.
The Bottom Line for Your Trading
If your trading method is complicated or requires too much evaluation in real time, you will hesitate before entering and not trust it while in the trade. In the end, you will not follow your own method, which is equivalent to having no trading method at all.
Do not analyze during the market. Sometimes when a setup is triggered, the trader starts to analyze further using other indicators or setups because he or she just do not have enough confidence and do not want to lose on that trade.
Simple strategies work best because they allow you to trade with confidence, and, if you trade with confidence, you are one step closer to eliminating the emotion of fear in your trading.
Benny Lee is a trainer, trader and practitioner of technical analysis. He conducts Technical Analysis workshops, seminars and courses for private and professional investors, traders, remisiers and fund managers in Malaysia, Singapore and Thailand. For more of his articles, please visit: Benny Lee's column )
http://investasiaonline.com/forum/view_topic.php?id=64
Comments: Any investing system should be simple and easy to follow and implement. The system should be applied consistently and can be shown to be productive over a long period. The above article has so many ifs and buts.
Thursday 20 August 2009
Trading Versus Investing
Trading Versus Investing
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach.
In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment.
Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price.
The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
http://www.investopedia.com/university/technical/techanalysis2.asp
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach.
In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment.
Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price.
The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
http://www.investopedia.com/university/technical/techanalysis2.asp
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