Archive for December, 2005

Books that influenced me the most

December 21, 2005 at 6:58 pm · Filed under Uncategorized

The books that changed the way I thought about trading:

1. Trade Your Way to Financial Freedom by Dr. Van Tharp

Excellent book on building trading systems. Key points covered are psychology, expectancy, risk management & position sizing. I was shocked when I first read this book because I realized I was concentrating on stuff that was a very small component of trading. Trading successfully requires you to concentrate on the above mentioned points instead of throwing all your effort on the entry methods.

2. Trading In The Zone by Mark Douglas

Though many traders don’t like to read on psychology it is very very important. Most like only to concentrate on trading methods. This book goes to the roots of the real reasons why traders succeed or fail in trading. I have read this book 5 times and everytime I learn something new.

3. The Market Wizards & The New Market Wizards by Jack Schwager

These two books contain interviews with top traders. Few of the interviews are superb. If you want to be very successful at trading, sooner or later you need to have attitudes to trading like the traders interviewed here.

4. Reminicences of a Stock Operator by Edwin Lefevre

Fun to read book. Don’t follow the risk management strategies used in this book (actually there is no risk mgmt used & that is the problem). But good trend trading advice & other general trading ideas. You read it once and you will always come back to it.

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Trading History

December 21, 2005 at 6:40 pm · Filed under Uncategorized

In the US I have traded stocks & futures. I have swing traded stocks and later mostly concentrated on the Nasdaq 100 Index ETF (QQQQ). I traded commodity futures & also daytraded DJ Euro Stoxx 50 futures on the EUREX exchange. Initially I suffered many losses but quickly learnt how to control risk. One trader helped me a lot during this phase suggesting various strategies and pushing me to concentrate on risk management instead of trading strategies. By the time I started to get the hang of trading properly I had to leave US. I did manage to break into profits significantly before I left the US.

I arrived in India in Oct 2004. Have been swing trading stocks (on a small scale) since Jan 2005 to test out my strategies. I am currently researching methods to trade the NIFTY futures with minimum drawdowns. Ideally I would like to restrict my trading to NIFTY futures only. It is less work than swing trading stocks but requires more discipline & control in managing risk. My aim is to earn steady monthly income with minimum drawdown.

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The Beginning

December 21, 2005 at 6:08 pm · Filed under Uncategorized

I first started getting to know the markets in mid 1999 when I was working in the US. It was a wild bull market. Of course, I did not know that. Many of my colleagues told me that I should invest in stocks because they always rise, eventually. They also told me about the spectacular gains they made in the recent years. I started reading a bit by borrowing books from the library. Then bought the book titled “How to make money in Stocks” by William O’Neil. It was a very good book that suggested the techo-fundamental approach to the markets. I also tuned everyday to various finance talk shows. Watched CNBC too. Everyone seemed to be making money, lot of it. I am very risk averse and probably that is what saved me from getting wiped out. Instead of trading with money I started to paper trade using free online free portfolio services. Invested hypothetically in few stocks based on whatever I had learnt from the above mentioned book. I almost doubled my portfolio in about 3 months (it is easy when you are paper trading). Feeling very excited I opened a brokerage account so I could trade with real money. Markets started to crash a week after that. This was new to me. I had never seen it earlier. I always saw the charts for the past 1-2 yrs and there were no significant crashes other than the significant 1998 market pullback. I did not fund my brokerage account. I went back and looked at long term charts in detail and realized that markets don’t rise all the time. I saw what happened in Oct 1987, the long grinds of the 1970s etc, many other mini crashes/pullbacks etc. Then on one of the forums I read about swing & position trading and I started to research on how to manage risk in the markets. I later funded the brokerage account later to test out my swing & position trading strategies always focusing my attention on reducing drawdowns. I am still learning but now I know a lot more on managing risk which is more important than the trading strategies. I have realized that with proper money/risk management any reasonable strategy can be successful.

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My Trading Style

December 19, 2005 at 9:28 am · Filed under Trading Strategies

My trading style is a mix of swing & position trading. I start all trades with a duration of 5-7 trading days in mind. But if the trade keeps on going I don’t exit it, I use a trailing stop to let the profits run. So few of the swing trades could turn into position trades lasting few weeks.

DataI trade NSE stocks only. I maintain a database that is updated each day.

Setups

I basically look to buy on dips in strong trending stocks. I use 20 & 50 EMAs to indentify trends. If 20 EMA > 50 EMA the stock is in an uptrend.

There is no question of trading downtrends because shorting is not allowed in the Indian stock markets. I think it is crazy not to allow shorting. I did read somewhere recently that SEBI is looking to allow shorting in the near future.

To pinpoint dips in uptrends I just look for Fast Stochastics (3,1) dropping to 20 or below. To me this is a oversold condition.

Note: The only discretionary part of this trading plan is the selection of stocks. From the shortlist generated at the end of the day I eyeball the charts of each stock and select the ones displaying smooth & steady trend. If the chart looks erratic I don’t trade it.

Entry

Once I shortlist oversold stocks in uptrends I key in buy orders for the next day to buy these stocks above the most recent high. If the buy is not triggered the next day I keep trying to buy it on subsequent days (upto 4 days after the oversold condition occurs) on a break above the most recent high.

Initial Stop

The initial stop is placed just below the most recent swing low OR 2 times ATR(10) away from the entry price (whichever is closer to the entry price).

Position Sizing

I buy the number of shares determined by the formula below:

Number of shares = Initial Risk / Entry Price

Here, Initial Risk (R) = 1% of total equity / (Entry Price – Initial Stop)

Number of shares is rounded off by ignoring the decimals.

Note: The total value of any single position cannot be greater than 10% of total equity. If this happens the number of shares is adjusted to bring down the total value to 10% of total equity.

Exits

I exit half of my position when the profit on it touches 1.1 times R. This is done by having a stop limit order in place. The rest of the position is closed when the trailing stop is hit.

Trailing Stop

A trailing stop is placed (and adjusted daily if required) for the 2nd half of the position. The stop level is computed using the following formula:

Trailing Stop Level = Highest High since entry – 2 times ATR(10)

Note: ATR(10) in the above formula is for the highest high bar. The above formula ensures that the trailing stop value only increases, it never decreases.

So that is it. That is the current plan, I will tweak very slightly if required. I plan to trade using the above plan. I have paper traded it to get a feel of what all I have to do before, during & after the trade. I will post my selected stock picks on a daily basis. I will also post my progress from time to time.

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