Monday, December 7, 2009

Conversations Monday Dec 7

Aakash Gupta says: "I also invest my savings and read trading books like Mr.Gaurav above. I aspire to follow up my engineering with an MBA in finance and have a career in equities.

I would be obliged if you could advise me on how to get the experience and the risk understanding that you have mentioned above."

My Notes: This is a sensible question. True to the Indian tradition, I often use high sounding words which read well but mean nothing. (I do not do this deliberately, just part of our national ethos).  So, some explaination is in order.

Experience: This consists of two parts: the theory of trading with technical analysis, and, the actual implementation of your learning.

To learn the theory you should (a) Read as many books as you can on TA. Don't believe them, just read them. (b) Make a short list of books that impressed you. This will tell you about the methods that make you confortable. (c) Browse the web on TA topics. Every day for a fixed period of time. (d) Make Notes. Write anything. Just random thoughts, but write. (e) Invest in attending TA seminars, conferences, Investor Camps!

To get the experience: (a) begin with position trading, in which you keep positions for days to weeks. (b) Do actual trades. (c) develop a set of rules (99% mechanical) and write them down. Trade ONLY with your rules. Revise the rules once a month. (d) Maintain a trading journal, which should have your observations of what the market does. maintain an errors journal where you note down the periods when you did not follow your rules.

The experience can come from your own trading or from a trading job. The process remains the same.

Still there?

Risk understanding

(a) Collect the money that you wish to invest in the trading business. Put that money in a seperate bank account. This is important. (b) Now define your risk parameters. Not more than 5% of your capital should be invested in any one trade. Not more than 2% of your capital can be used to meet a loss. (c) Assume that you have no other sources of income. Every month, look at the P&L for the month and ask yourself: If I invested X times more, I could earn X times more. At that point, my earnings will have to support my business expenses, my family expenses, savings, taxes, reinvestments in business. Have I reached a point where I can do this? If the asnwer is Not Yet, then ask yourself: can I afford to invest more in trading? These questions and asnwers will get you the required understanding of risk. It takes time, but you will get it.

11 comments:

gourv said...

Hello Sir,
Gourav here.Thanks for advising on such things which other wise very hard to get.You are the only person in the industry who is giving such advice for free else everyone one is selling something.I know from my experience(bit less although)only confident and honest people can do that.Many many thanks to u sir.
I have 1 query....on my last question i had asked for ur advice on leaving a Software job and doing a trading job,not altogether leaving it.Is it OK..???I no longer have the jeal and intest to work on IT filed.please suggest me weather i can try for a trading job or I should go for MBA(Though it is not necessary for trading).I know I am troubling u a lot but I cant get the answer from anyone else.If u r feeling iritating to answer me on the blog then please email me.Thank u sir.I wish u all the best in your life.

Regards
Gourav

amitkbaid1008 said...

Sudarshan Sir

I just want to know whether it is possible that an electronic stop loss does not work i.e. when you place SL order already in system electronically with trigger price @ x and sell price some 20 paise below trigger price and your order does not get executed even after ltp < x-1

kk said...

RESPECTED SIR

EXCELLENT NOTE

THANKS

men said...

Dear Mr. Sudarshanon,
I have cut and paste one of your comments for some clarification "Not more than 5% of your capital should be invested in any one trade." Here say I have a capital of 5 Lakhs, and want to invest 1 Lakh in 5 counters, then I should buy shares for Rs. 5000/- everytime I buy these company shares? And for a 5 Lakhs capital how many companies should one look into?
I have asked this question as I tend to invest in a max of 2-3 companies and have done ok, but once I diversify into too many (more than 5) I tend to loose, which means some where there is some mistake somewhere. Also I buy the same quantity on declines rather than keeping the amount fixed.
Thanking you,

men said...

Mr. Sudarshan, would you condiser the the highs on 2,3,4 of Dec which are 5162,5181,5162 as a triple top? I googled and found that a double top normally signifies a correction provided the volumes are good, now for the nifty what volumes must I consider? Thanking you,

tushki said...

sir pls tell me trading rnge for unitech

Aurobindo said...

Hi Sudarshan,

I am very passionate about mechanical trading.Never trade actively so far its been pencil trading.I keep writing trading algorithm programs in Java, MQL4. Recently I built trading system based on Artificial neural networks.This has been my favorite pass time. I been getting good results from mechanical trading systems and also from systems based on neural networks. I believe even you would have spent the same time for evaluating your trading systems. Do you aim for a "smooth equity curve" while building these system? Do we need to use drawdown as a "optimisation" factor for smooth curve? i.e.,Do we need to grade the our systems based on drawdown?

2) Do you have any strategies based on "Displaced moving averages"? The markets seems to respond to "Displaced moving averages" more than any other indicator. Say 20 X 20 seems to be the best.Please suggest us if you have any strategy around this indicator.

saket said...

hello sudarshan sir i would like to ask on how to trade when markets behave so volatile like they did today for 10mins it is difficult to understand such movemnts n take decisions during market hours when such situation arises.how does a trader react.

v4u said...

hi sir
just to follow your path
want to become success in stock market
so want should i do to know your long term as well as short term pick
your view on niftty
pl reply

kk said...

RESPECTED SIR

MANY MANY CONGRATULATIONS ON WINNING BULL'S EYE
YOU HAVE TAKEN TECHNICAL ANALYSIS TO A NEW LEVEL . IT'S NOT JUST 1-2%, YOU HAVE COMPLETELY OUTCLASSED SATISH AND PHANI . I THINK IT'S A WIN OF THE COMPLETE TECHNICAL ANALYSIS COMMUNITY

AND YOU ARE OUR REAL HERO

THANKS FOR ENCOURAGING AND GUIDING US.
MAY GOD BLESS YOU.

v4u said...

hi want your reply
where i can see your long and short term pick
your view on niftty future