Thursday, January 7, 2010

Trading is serious business, not a game

Reader Ashok uses five minute charts with the Parabolic SAR system. His problem is: "Also, for a beginner, SAR is the best indicator or he should simultaneously learn to watch multiple indicators ? Or, in other words, for a beginner, which minimum indicators DO YOU suggest, which maybe JUST ENOUGH to do the job and yet not be too engrossing."

My Notes: The parabolic SAR will not make money if used blindly. Neither will any other indicator. Since you are a day trader, having a view on the market + on the day, is the starting point for analysis. When you take a trade, the SAR will allow you to ride the trend and stop you out when the trend finally turns around. Therefore, you can use the SAR for exits, but the entries will still have to be determined by you.
What do I suggest?
First, establish a bias. Decide the direction in which you wish to trade. This will normally be the intermediate trend of the market.
Second, before market open, determine the rules to be used to trade the market on that day. Examples: Opening range breakout, MACD, Using stochastics to buy dips or sell rallies, buying pullbacks to the 20 MA, .....
Then, when the trading day starts, follow your rule for that day. As you get experience, you could really use more than one rule.
More important, there will be many days with whipsaws when you feel that nothing is going right. That is part of trading. You will end up as a winner since your discipline ensures that probability will be on your side.


Reader Arun writes: ".i m great fan of you.Trading at 9:00 am gives people like me more time to trade.i can only trade 9:00 to 9:30 and 2:30 to 3:30.Every morning i search for you in CNBC.Most of your recommendations turn out to be right but unfortunately for me


i shorted one lot each patel engineering @ Rs-455/-and educom @ Rs-737/- and suffered huge losses.Would you plz tell how to decide correct stoploss?"
 
My Notes: Welcome, dear fan. Whenever I suggest a short selling candidate (about 1 in 20 suggestion is for short selling, rest are for bying because this is an uptrend) I always give the warning that short selling is only for professional traders. Since you work in a PSU, you are NOT a professional trader. You should NEVER take any short positions in the market. I feel extremely distressed when I read about experiences that cause such losses.  The issue is not about putting proper stop losses. The issue is: you are doing something which you have no business to do.
 
I am giving a story I read in New Market Wizards:
 
A group of Doctors deided to invest in buying a Stallion. Well bred stallions cost a lot of money. When their stallion arrived, eventually they discovered that the animal was a female. Their friends teased them, and the doctors said "next time we will inspect the horse thoroughly before buying".
But that is not their mistake. Their mistake is in trying to do a business in which they have no expertise. If they start trading futures, they will fall in the same problem of not knowing the job. It is like a trader deciding to become a neurosurgeon after reading medical books over a weekend. He is doomed to fail.
 
Have Fun!

14 comments:

RayOfLight said...

Very fair advice. Still, it would be great if you could post about how one should go about setting stop-losses. Both for long and short trades. Also, where to set it when one takes a new position vs when the position is in good profit. Thank you.

ASHOK JOSHI said...

Thanks for a very prompt reply on SAR etc.
You have said a very imp. thing to begin a day:"First establish a BIAS". Now in this context I wish to ask you, as to HOW DO mkt. technicals help you to establish a bias ? As, for a new or layman trader, overnight US mkt. or SGX or general country news set the initial tone for such a bias. But out of your expertise, I wish ask you to help me in letting tech. chart decide the bias.
Pl. ans. the following Sir:
1. Suppose at mkt. opening SAR gives 'green' dot, THUS, sh. BIAS be decided 'BY-DEFAULT' there and then and one sh. instantly buy Nifty then at 9.01am or is this not right ?
2. Or suppose SAR first gives 'green' YET you wait and wait TILL the first 'red' comes and THEN you ENTER the trade, because from then-on, it is more prudent to keep following the SAR indicators by default, and like you said, "your discipline (from there-on) ensures that probability will be on your side".

[I want to ask the above, even particularly so, as 99% times I have seen in my paper trades that when mkt. opens gap down, 1st dot is obviously 'red' BUT, BUT, in max. times Nifty ACTUALLY rises slowly and the 'red' followers of 9.01am (shorts) are trapped and by the time the 'green' appears it is too late for the shorts to get out in any profit at all. SO, even though gap down generated a 'red' or vise versa, one sh. not have bought as, actually the Nifty ROSE then-on, resulting in a loss.
SO, this exp. of paper trade over many gap up gap down days, made me to conclude and ask you thus, for corroboration, SH. ONE ENTER at the 2nd dot generation, red or green and keep on following by-default through the day, or instantly enter on the 1st dot itself and with the discipline of reversing with the SAR indicator?]
3.Lastly, by the way, I use the 'Nifty intra-day page by Sameer' as I am new and do not know any other free live chart. Pl. guide me on this too(or is it diff. for you to that Sir?). Because I told you ab. that 30 sec. delay thing in bet. my getting to see the dot and being able to ACTUALLY execute the trade.

THANKS in anticipation of your reply to the above 3 points.

Swingtradingideas said...

Dear Sir,


Thank you once again for bringing up topics of professional trader. Its really painful to see people loosing money by trading in futures
Louise Bedford of www.tradingsecrets.com.au has thrown light on this topic

It is tempting to feel that if you have been successful in one area of your life, this should spell automatic success in the financial market. This simply does not happen.
There is a psychological phenomenon called the ‘halo effect’. This effect is responsible for an oversimplification of events in the world.Its not at all necessary that if you are good on one field you will also get success in other field.

Trading is also one area where IQ does not guarantee your success.Some of the dumbest people make great traders
One can read the article at http://www.tradinggame.com.au/webpages/1471_article.php?id=241

Pradhan Iyer said...

Hi Sudarshan,
May I ask you how can one extend his profits on a trade which is going right in one's direction. My problem is I tend to book out early. I am not being greedy here but I want to know.
They say, if its been a good day, make it a great one!

Nirav said...

Dear Sir,

Is there any difference between trading methodology and trading style? And yes then please tell what are the difference between them? Because as you have said in this blog only that Swing Trading is style of trading so what is trading methodology?

kk said...

RESPECTED SIR

THE WHOLE WORLD IS BEARISH ON U.S . SOMETIMES BACK I EVEN HEARD FROM RAKESH JHUNJHUNWALA THAT U.S STORY IS OVER .
BUT LOOKING AT THE 100 YEARS CHART OF U.S,IT DOESN'T SEEM SO ,IT LOOKS THAT DOW IS IN A MULTI YEAR RANGING MARKET WHICH OFTEN HAPPENS IN A BULL MARKET, AND THAT'S WHAT THE THEORY TELLS US
IT HAS HAPPENED MANY TIMES BEFORE. EMERGING FROM THE GREAT DEPRESSION , THE DOW STARTED IT'S BULL MARKET IN 1942 AND AFTER MAKING A TOP IN 1965 IT REMAINED IN A RANGE OF 930 TO 600 FOR 17 LONG YEARS. AND THEN THE BULL MARKET STARTS ONCE AGAIN I THINK FOR THE LAST 10 YEARS ALSO DOW IS IN RANGE OF 14000 TO 6000 . AND WHO KNOWS AFTER 5-7 YEARS OF CONSOLIDATION IT ONCE AGAIN RESUMES A BULL MARKET .

sahil said...

my suggestion is never develope bias, a professional traders should only trade on charts. I have seen many traders taking shorts on dubai crisis day wen nifty was recovering tho there was buy signal on chART, even i did same but i exited my shorts immidiately. Similarly i noticed same many times. If a stock is in uptrend a day trader should watch only current days trend for buying, like abanoffshore is in uptrend frm 1260 i think but it was sell 2 days b4 for intraday traders.

TOOCOOL7610 said...

SIR

CAN U PLEASE POST UR ELLIOT WAVE ANALYSIS ON NIFTY MONTHLY AND WEEKLY CHARTS FOR LONG TERM INVEST MENT DECISIONS

THANKS

kotesh said...

sir,

I am a big fan of u and appreciate ur teachings.

My question will help not only me but also many unprofessional traders. Please go through.

I am not a professional trader and lost much amount but still trades (ofcourse looses). I am addicted to it.

I used to trade in futures now i trade in options.

Finally i decided for one plan.

i,e i want to buy a futures lot or lot size of shares and sell one Call Option.
I buy the shares as if i invested in it.

Ex: I buy Reliance 300 shares at 1080 and sell CA of around 1150. If it crosses 1150 this month i will sell the shares. (and sell 1150 PA) if it is not i again sell the CA(if it is morethan my bought price of shares) which is 10% morethan the share value of Starting day.

If it comes much below to the bought price and CA are not available for the strike prices which are greater than the bought price, in those months i will do nothing.



Is it good idea? If it is so, please tell on which stock i can implement this plan.

The stock.....
1) must be in f&O
2) options volumes should be
reasonbly traded
3) better to high beta stock
(i.e, premiums should be high)
4) Fundamentally good (i.e, the
price should not become less
than 50% of current price)
5) should generally gives dividends

I have some stocks in my mind like NTPC, POWERGRID, RELIANCE, SUZLON, NAGARFERT, RNRL, RPOWER, GMRINFRA etc.

again RELIANCE,SUZLON,GMRINFRA comes for final shortlist.

Kindly comment on this idea, and advise for the stock

THANK YOU IN ADVANCE.

PPTrader said...

Sir,
According to my reading ABAN has broken out on weekly timeframe.I am posting for the first time so i dont whether my observation is correct or not. Kindly comment.

Regards

sam said...

i m big fan of yours, gets most simple and useful insight from you everyday.. want to know about automated trading , searching for this from a long time.

sam said...

i belive that its tuff to predict market , so why not draw a line around a pivot point and trade in following way.
BUY ABOVE THt line if sustain and sell below if...

Ravi said...

Dear Sudarshan,
I've been paper trading the nifty 50 stocks and comparing some of the stock picks of others from TV 18 for a while now and have been doing well. I've been using stockhastics, 20 dma, volume charts and MACD indicators to see stock moves. Stockhastics have very successfully indicated many a times overbought and oversold stocks, I was having trouble with predicting sideways consolidation then I added MACD to my watch and that helped me understand a sideways stock. The 20 dma also helped me in identifying buying opportunities.
Now I'm having trouble in finding out how to decide a stoploss and a definite target, are there any other indicators that I can use for this purpose? Searching had yielded no results.
And also I wanted to ask if you can suggest any other indicators that I can add to my watch.

Thanks for the frequent advise and help.

Regards,
Ravi.

ரங்கன் said...

Sudharshanji
(My name is Rangan)
So this is what all about 'horse trading!'. Having a full time job I also bit my hand once in while treading in 'shorts' (I meant trading), Sir) Now I am strictly into delivery mostly not less than one month.