Friday, December 26, 2008

Emotions Control in Trading

Dear fellow options traders :

Emotions control is an important aspect in trading that every trader has to master. 2 of the most common emotions that traders would have to face during trading would be - Fear & Greed.

When a trade is profitable, a trader might take profit too quickly in the fear of losing it. Another trader might be greedy for more profit but saw his or her trade reverse into a losing trade and then regret not taking some profit when available. Yet another trader might encounter a string of successful trades, become complacent & greedy and then bet a large portion of the trading capital into the next trade and promptly lose it all in one failed trade. It is also very common for many traders to hold on to a losing position, hoping (another type of trading emotions) that the stock price would reverse back into a profitable position but instead the stock price keeps plunging & eventually widen the trading losses. The trader would then feel numb of the escalating trading losses and won't even bother to resolve or learn from the trading mistakes.

So how do you handle such emotions so that you would become a better trader? 2 things that I would like to share which would help you would be (1) money management (2) trade management.

Simply put, money management is the strict allocation of a certain percentage of your trading capital for every trade. It's advisable to allocate not more than 5% of your total trading capital for every trade. This percentage of allocation could be adjusted lower if your trading capital is substantial or adjusted higher (not more than 10%) if your trading capital is small. Once you have decided on a particular amount to allocate for each trade, you would then need to determine what is the stop loss level ie. the risks that you are willing to take for each trade. For instance, in stock trading, you should stop out your trade once the stock price losses about 20% of its value. The purpose of money management is to protect or preserve your trading capital if your trade(s) goes awfully wrong. Money management also helps avoid over-trading so that you would not increase your trading "bets" to take revenge of earlier losses. Let's face it, even if you have entered a so-called high probability winning trade, you could still very well lose money in that trade if unexpected circumstances happen in the market. Thus, by practising strict money management on each trade, you would not experience the fear of losing a large fortune if a single trade failed miserably. You could then put your focus more on refining your trading technique to find another trading opportunity and you would have sufficient trading capital left to take up such trading opportunities.

As more & more people are getting versatile with internet surfing and that broadband internet access is becoming more readily available, more traders are now trading with an online trading account. Thus, trade execution and trade management is simply a matter of making a few mouse clicks in an online trading account. There is of course a short learning curve in learning how to do trade online but most online brokerage houses have extensive help menus and real-time customer service representatives to guide you step by step. Setting up a stop-loss and the setting up of a trailing stop-loss are 2 important trade management procedures that every trader has to adhere to. As mentioned earlier, setting up a stop-loss in every trade is part of a good management habit to protect your capital in case a trade goes against you. I would recommend that you set up your stop-loss immediately after executing your trade to prevent you from hanging on to a losing trade once your stop-loss has been hit. There is no point in hanging on & hoping that your trade would recover. There would be other trading opportunities available to you in the market. If you keep letting your trading position hit past your stop loss level & feel frustrated as your losses pile higher, you would not have the confidence or composure to put up another trade which might turn out to be profitable. Thus, be disciplined in your trading and follow your stop-loss level strictly. This would usually be set as a conditional order in an online trade.

When your trade becomes profitable, it's then time to put up a trailing stop-loss so that you can ride your profit if the stock price keeps trending in the correct direction. The trailing stop-loss can also capture the maximum profit achievable if the stock price starts reversing and hit the trailing stop-loss level. This will somehow control your greed of hanging on too long on a profitable trade without taking any precaution that a dramatic price reversal would wipe out all your profits. It would also arrest your fear of taking your profits too soon when you can let the trailing stop loss ride your profit higher. Again, setting up a trailing stop-loss, either percentage based or dollar value based, is conveniently achieved with a click of the mouse in an online trade.

Thus, to handle your emotions of fear & greed during trading, exercising proper money management & trade management would be the two best ways to counteract them. You must remember that with a good trading setup, your trade might have a high probability of success but even such a trade could very well go wrong at times, and your best protection would be proper money management & setting up of an appropriate stop loss.


Tony Chai

Sunday, December 07, 2008

Training Up to Be a Better Trader

Greetings Fellow Options Traders :

It’s been almost 5 years since I started trading stock options. I’ve decided not to trade the earnings gapping analysis technique any more. It has too much 50/50 elements of chance involved in it. I’ve experimented with many different indicators to predict the anticipated direction of gapping after earnings but alas, these indicators did not point to the correct direction of gapping consistently.

When trading this technique, I have to treat every position as potential 100% losing trades because most of the time the option would become worthless once the stock price gapped in the opposite direction after earnings announcement.

I’m currently attending Mr Michael Woo’s TFAL trading course and I’ve almost completed it. In my opinion I find Michael’s course provides the soundest foundation for anyone who truly wish to embark on the journey to become a serious, professional trader. The course is divided into 20 lessons (2-hours each) spread over 5 months. Michael's lessons encompass mainly on the skills of technical analysis. He taught us some very good trading setups based on certain technical indicators and/or chart patterns recognition. I felt the most important point that he has driven home was stressing the need to wait for price confirmation before entering any trade. Let the price action determines the entry instead of entering a trade prematurely even though you might have spotted a fantastic trading setup. Michael's course also covers other significant aspects of trading like money management, trading psychology & trade management.

Michael said to be a successful trader is easy as long as one follows the trading rules. I felt that these words were a great wake-up call to most of us since we would have, at certain points in our trading journey, allowed our hard-earned capital to be devastated by our in-disciplined trading habits like impatience, over-trading, not using & sticking to stop loss etc.

Currently, I would like to take some time to train up the trading methodologies & other aspects of trading that I’ve learned from Michael's course. I would certainly return to share my trading experiences once I’m ready.

Best of luck in your trading.

Yours Truly,

Tony Chai