Fine Tuning Your Money Management System

1.Risk is chance of loss, chance of losing something.
2.Risk Management  is managing  outcome , which is different than expected .
3.Risk Management -Managing and measuring the area where loss can occur .
4.Healthy Money Management psychology begins  when you believe and acknowledge  that each 
trade outcome is unknown at the time you enter the trade.
5. Every trade has a random outcome, we need to manage our loss on losing trade.
6.Some losing trade are normal part of trading
7.Let your winning trades  run  & Cut your losing trades short. 
8.Avoid being in market that do not provide Winning % [ Report and Holiday  market in Christmas]
9. Trade Risk versus Market Risk:-

"Trade Size" controls your Trade risk ,some control like stop loss settings
"Account Size" controls your Market risk, out of control of trader  like GAPS,News Event etc.Fund your trading account for Risk Control.
Market risk can be recovered if we manage Trade  Risk correctly.
10.Win Ratio : No of winning trade / no of Total trades
11 .Payoff Ratio : Average Winning Trade /Average Losing Trade 
12. Percent of capital at Risk  : what is the optimal percent of capital at risk on each trade?

13.Risk Of ruin - Screen shot below show even if we get the 2:1 risk  : reward and  50 % winning : Risk of ruin is reduced to 0.8%.Make Sure you make risk of ruin work for  you than against it.
WARNING SIGNAL-  if draw down on last 10 trades exceeds 12% , avoid exposing your self to obscene risk. 

Risk Management Checklist

1.Always use stops 
2.Use a proven and tested methodology for calculating stops rather than an arbitrary figure.(http://perfectniftytrader.blogspot.in/2012/01/nifty-future-risk-management-plan.html)
3.Protective Stops, Time Stops and Trailing stops  should be followed religiosly
5.Never exceed a 2% risk (of your trading account size) on any given trade. 
6.Always trade with risk capital (money you can afford to lose). 
7.If you are not comfortable with risk ,completely ignore the trade.
8.Always be adequately funded to take next 30 trades.( Sample Size Trading)
9.Maximum  losing trade in a week allowed to take in Day /Week
10.Maximum  losing trade allowed to take in Day /Week
11.Maximum  losing amount  allowed to take in Day /Week
12.Always trade with maximum 2 lots only.
13.Maximum Trade to take in Day/Week/Month
14.Use scaling out of positions to boost your percentages.
15.Make Sure you make risk of ruin work for  you than against it.

Nifty Daily Chart Update -26th Sep 2012

Daily Trend is up above 5515 (SAR)

Weekly Indicator is Bullish OB, Daily Indicator is Bearish (Stochastic)

Rising Window Support 5263 ,5447

Low of the Window 5450 -immediate major support

Bullish Engulfing pattern 5227-5350-5435-5545

Support are 5498-5440-(5330-(5377-5385)-5343)-(5280-5290)-5240-5160-5088-5040-5000

Resistances are 5498-5630-5700-5937-6169-6328

Profit Target   are (5280-5290)-5350-5375-5443-5500-5630-5700-5937-6169-6328

Nifty Daily Chart Update -17th Sep 2012

Daily Trend is up above 5350 (SAR)

Weekly Indicator is Bullish, Daily Indicator is bullish Over bought zone.

Rising Window Support 5263 ,5447

Low of the Window 5450 -immediate major support

Bullish Engulfing pattern 5227-5350-5435-5545

Support are 5498-5440-(5330-(5377-5385)-5343)-(5280-5290)-5240-5160-5088-5040-5000

Resistances are 5498-5630-5700-5937-6169-6328

Profit Target   are (5280-5290)-5350-5375-5443-5500-5630-5700-5937-6169-6328

Nifty Daily Chart Update -10th Sep 2012

Daily Trend is up above 5315 (SAR)

Weekly Indicator is Bearish, Daily Indicator is oversold zone  with bullish reversal

High of  Shooting Star 5450 can be critical resistance ,Window Top 5410 can  be resistance 

Piercing Pattern at 5164 , Window Low 5220 ,Bullish engulfing pattern 5240

Support are 5240-5160-5088-5040-5000-4950-4800

Resistances are (5280-5290)-(5330-5343)-(5377-5385)-5440-5498-5630

Profit Target   are (5280-5290)-5350-5375-5443-5500-5630

Nifty Daily Chart Update -4th Sep 2012

Daily Trend is down below 5348 (SAR)
Weekly Indicator is Bearish below 5325, Daily Indicator is Bearish OS zone  with bullish reversal
High of  Shooting Star 5450 can be critical resistance ,Window Top 5410 can  be resistance 
Piercing Pattern at 5164 , Window Low 5220 ,Bullish engulfing pattern 5240
Support are 5240-5160-5088-5040-5000-4950-4800
Resistances are (5280-5290)-(5330-5343)-(5377-5385)-5440-5498-5630
Profit Target   are (5280-5290)-5350-5375-5343-5500-5630

Nifty Daily Chart Update -3rd Sep 2012

Daily Trend is down below 5356 (SAR)

Weekly Indicator is Bearish below 5325, Daily Indicator is Bearish OS zone  with bullish reversal

High of  Shooting Star 5450 can be critical resistance ,Window Top 5410 can  be resistance 

Piercing Pattern at 5164 , Window Low 5220 ,Bullish engulfing pattern 5240

Support are 5240-5160-5088-5040-5000-4950-4800

Resistances are (5280-5290)-(5330-5343)-(5377-5385)-5440-5498-5630

Profit Target   are (5280-5290)-5350-5375-5343-5500-5630

Nifty Weekly Chart Update -3rd Sep 2012

Below 5325,weekly and daily Stochastic Chart  is bearish

High of  Shooting Star 5450 can be critical resistance 

Bulls are safe only if  nifty closes above 5378  and 5358 

78.6%  of the last major fall was held

Trading Affirmations

Mark Douglas, a person I consider one of the pioneers of trading psychology talks about trading affirmations in his book Trading In The Zone (A book ever trader should own). I think it’s really important to understand all of these truths and principles and believe them if you want to be consistent in your trading.

I acknowledge there may be aspects,components,principles of Successful trading that I may not be  aware of.As my awareness grow of what it meant to be great trader , I will not take for guaranteed or assume there new awareness have integrated into my mental system in a way where they are completely functional or non conflict, from any thing else which i have already learnt.I willingly and wholeheartedly give the power to change the structure of my mind.Accepts the enhancement and change enthusiastically ,lovingly go way any reservations or resistance. I empower this word to become my internal and external reality.

My methodology identify pattern and market behavior and give me  signal to do something .It is normal for my mind to think this signal are telling me what is going to happen next . To be consistent successful trader ,I realise I have to trained my mind ,which don't think normal until new way of thinking become functional part of my mental environment.

During this process of integration , I may find rational part of my mind , in one way or the other arguing ,for knowing what is going to happen next.I resolve when I find myself from the process of thinking,assuming or believing  that i know , I will generally  re focus my thought on new understanding and nature of the market and trading.


What I know now is every trader contribute to overall behavioral pattern of the market and there every one who trade is a market variable ,that has potential to confirm or invalidate any pattern or any signal.Believing these make it easy to understand that signals are just an edge where there  are just  higher probability of one thing happening over another. As a result  , I no longer  pay  any particular significance on edge that present itself.Each day it become easier for me to put the trade on when edge present itself because i know believe  from very core of my identity I don't need to know what is going to happen next to make money. I just need to keep my mind focus on the probability.

There fore   I am always asking myself, what's probable and what 's possible and what probable it is  and how much it is going to cost to find out meaning what does the market have to sound like and look like to tell me that this trade isn't working in the time frame i traded .

What I know now ,every market moment is truly unique regardless of  how similar it may look or feel of something i have already experienced. Therefore ,Every time i find myself connecting the 'NOW' moment of market  to something that is already in my mind  , I  will actively  disconnect the two , actively focus on present moment and refocus on 'ANY THING CAN HAPPEN' .
All I need to know is 
a.Is market confirming my defination of edge 
b.what is the risk  of finding out whether the trade is going to work
c.Can I accept the risk ?

If answer to a and c is 'YES', and if i had a plan to take profit ,Then I resolve to enter the trade without reservation or hesitation.

Now I know ,I am not responsible for what market does or doesn't  do, nor i am responsible for predicting  what market will or won't do  ,what I am responsible for making sure , I am in most  conducive state of mind  to perceive  what is possible from market objectives  and my objectives of consistently making money.Therefore ,I need to check quality of my mind  by asking question that "am I in best state of mind to trade objectively and without susceptibility of making trading error" ,if not I resolve not to trade or scale back  in a manner that corresponds to my diminish capacity.

Each day , i am getting better and better on  making these assessment about myself and I know that mistake exists in my life that points a way to success.I was not born with the definition of what it mean to make the mistake.Children do not know concept what it mean to make a  mistake until taught.These concept are learned more often in painful way.There it is natural for me to avoid pain and  it is natural for not taking responsibility for anything that i define as a mistake.

However there is problem here, Every mistake points towards success ,fulfillment and satisfaction . Inside each mistake there is secrets hidden to be unlocked to push us forward on the path of  success ,fulfillment and satisfaction .By Taking trading exercise, it is natural for trader to go through cycle of  emotional pain and dissatisfaction.I resolve to reverse any cycle of  emotional pain and dissatisfaction by accepting my result as true  reflection of my level of development . My goal is to become consistently successful trader , the process of doing so have several steps but more importantly it has a first step and that first step has to be consistent with my true level of development .Where I am right now , not where i would like to be or assume I am based on what i would face myself.for important first step , i should be willing to  stop beating myself  and accept i don't need  to be perfect but at the same time acknowledge that every outcome is true reflection of my level of development.

I resolve to give my self permission that I dont need to prove anything from my trading to any body. I just need to give my self permission to learn , I whole heartly give that permission now. knowing be defination that any thing  i need to learn doesnt exist inside me.

Consitent successful trader, I cam imagine myself is  future projection of my self, I am going to go inside future projection step by step ,accepting my results along the way not as a mistake but as thing to learn to acheive future projection of my self .

Trading Psychology Journal Part 4

Winning requires absolutely no skill at all.It required no skills to be winner.‘you don’t need to know ANYTHING about trading or the markets to put on a winning trade.You can make money either Buying and Selling  ,so by default 50%  of  winning possibility is associated with every order.

Mental errors traders fall for are a result of the belief that the technical methods are telling the trader what is going to happen next on a trade by trade basis. That is not what technical methods were designed to do.

Technical methods, and technical analysis methods were not designed to tell the trader what is going to happen next on a trade by trade basis. This is the standard trading thinking of putting the probabilities in your favor, cutting your losses and letting your profits run.

But I would take it a step further and say the technical methods, aka technical analysis methods were not designed to do that because they cannot generate order flow and move the market.  Order flow based methods actually can tell you what can happen next on a trade by trade basis, for they deal with and analyze the very foundations of every marker – transaction flow and liquidity.  That doesn’t mean that they can escape statistical measurement – they can’t.  What order flow can do is offer drastically better and more accurate explains for why price has moved in the past and why it will move in the future.  It can actually tell you what is going to happen next on a trade by trade basis, instead of just hoping that a trading edge develops over the long run.

We have to accept the randomness principle, which is to accept the fact that any trade event can be a random unique outcome, but that can produce a consistent result over the long run. Traders who fail to acknowledge this principle will find that trading can be very frustrating.

Technical methods define and identify patterns and collective human behavior.  The patterns definitely exist, they repeat themselves over and over again.  The problem is that the outcomes do not always correspond with the patterns on a trade by trade basis.

If the last trade was a winner, this trade, even if the charts are the same, even if the same exact signal, the same looking chart, there is no guarantee this trade, that this trade will be the exact same as the past one.

There is a “random distribution between wins and losses over any sequence of trades that you might look at.”.Thinking in terms of probabilities.

Pattern - whem this set of criteria there is higher proabilities one thing over another.

When pattern present itself => there is no points analyzing the pattern.

There is no correlation ship between pattern and risk.

There is no correlation ship between pattern and profit.

Now we have to get into the nuts and bolts of how the markets work.  One of the reasons why people have such a difficult time with this is because their initial exposure to the markets themselves is through electronics.  Through electronics there is a real disconnect between what your are actually participating in and what is causing you to want to participate in it in the first place.  Markets started as exchanges.  All prices are people generated events.  Everything happens because of what people believe.

What actually has to happen for prices to move is this:  If the last price of something is $10, for the market to actually move to $12, all the offers at $11 have to be taken out.  In other words, people who are trying to sell at $11 they have to get their orders filled before they can get to $12.  For someone to actually bid it to eleven, or bid it to twelve they are doing the exact opposite in that moment of what it takes to be successful.  They are not buying low, they are buying high.  They are buying high relative to the last price, or buying higher relative to the last price.

Patterns represent collective human behavior.  And when a set of criteria is present in the market, there is a higher probability of one thing happening over another.

That people, that other people will come into the market to bid it higher, or offer it lower form here.

We are obliged to other traders to come in to buy something at a worse price than what we thought was low to make us winners.  (for a long trade).Most of us out there are dependent on someone else to move the market for us. 


The trading errors come from believing that when the pattern is present that it is going to give me a winning trade on this one.  This trade is going to be a winner.

 The typical trader thinks I am not going to put this trade unless I think it is going to be a winner.

We don’t want to get into trading with the possibility of being disappointed, dissatisfied, or betrayed.  A lot of traders feel that way.  The problem is, when that potential exists it has the affect of affecting the way that we see market information in detrimental ways.

The human mind was made to create patterns.  It will see patterns in random data.  A turn-of-the-century statistics book put it this way:  ’Too fine an eye for pattern will find it anywhere.’  In other words, you’re going to see more on the chart than is truly there.  Also, we don’t look at data neutrally – that is, when the human eye scans a chart, it doesn’t give all data points equal weight.  Instead, it will tend to focus on certain outstanding cases, and we tend to form our opinions on the basis of these special cases.  It’s human nature to pick out the stunning successes of a method and to overlook the day-in, day-out losses that grind you down to the bone.

Regardless of the reason for getting into a trade, if other traders don’t buy into that reason, or if other traders don’t have another reason to want to buy at a price that is worse than yours.  You bought the stock at $10, someone is going to want to buy it at $11, buy it at $12, at $13, and not only be able to buy it at 11, 12, 13 and 14, there are going to have to take out all the offers, all the traders who think it is high at 11, 12 and 13.  And so, if these people aren’t coming into the market to do that, then whatever reason you thought you had might not be so good.  That is why it is critical to pre define your risk before you get into a trade.  Professional traders do not think of it any other way because they know it takes other people.  My reason might be great, but if someone else isn’t buying into it what different does it make?  It doesn’t matter because it is not a winning trade.

The pattern shows up first. Then what we have to do is put up our money.  Meaning, how much am I willing to risk to find out if it will work. Most traders because they evaluate, because they judge and because they analyze and build a case for the pattern being right, they actually talk themselves out of believing that the risk even exists.

Just simply a higher probability of one thing happening over another.  Higher probability over a series of trades.


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5 FUNDAMENTAL TRUTHS TO TRADING

Mark Douglas, a person I consider one of the pioneers of trading psychology talks about these 5 Fundamental Truths to trading along with 7 Principles of consistency in his book Trading In The Zone (A book ever trader should own). I think it’s really important to understand all of these truths and principles and believe them if you want to be consistent in your trading.

THE 5 FUNDAMENTAL TRUTHS OF TRADING:
1. Anything can happen.
2. You don’t need to know what is going to happen next to make money.
3. There is a random distribution between wins and losses for any given set of
variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing
happening over another.
5. Every moment in the market is unique.

THE 7 PRINCIPLES OF CONSISTENCY:
1. I objectively identify my edges.
2. I predefine the risk of every trade.
3. I completely accept the risk or I am willing to let go of the trade.
4. I act on my edges without reservation or hesitation.
5. I pay myself as the market makes money available to me.
6. I continually monitor my susceptibility for making errors.
7. I understand the absolute necessity of these principles of consistent success
and, therefore, I never violate them.

Trading Wisdom Quotes - Mark Douglas

"There is a random distribution between wins and losses for any given set of variables that defines an edge. In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. What you don't know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. When you really believe that trading is simply a probability game, concepts like "right" and "wrong" or "win" and "lose" no longer have the same significance. As a result, your expectations will be in harmony with the possibilities."

Mark Douglas

Nifty Daily Chart Update -31Aug2012

Daily Trend is down below 5361(SAR)

Weekly Indicator is Bearish below 5325, Daily Indicator is Bearish OS zone 

High of  Shooting Star 5450 can be critical resistance 

Window Top 5410 can  be resistance 

Piercing Pattern at 5164 

Support are 5280-5250-5160-5088-5040-5000-4950-4800

Resistances are (5330-5343)-(5377-5385)-5440-5498-5630

Profit Target on Long Side are 5350-5375-5343-5500-5630

Nifty Daily Chart Update -30Aug2012

Daily Trend is down below 5362(SAR)

Weekly Indicator is Bearish, Daily Indicator is Bearish zone 

High of  Shooting Star 5450 can be critical resistance 

Window Top 5410 can  be resistance 

End of wave -5 Target 5440 is complete.

5300 and 5400 are imp. S/R  as per Open Interest level

Aug Expiry is expected to close between 5300 and 5400

Piercing Pattern at 5164 ,5280 ,Change of polarity at 5280

Support are 5280-5250-5160-5088-5040-5000-4950-4800

Resistances are (5330-5343)-(5377-5385)-5440-5498-5630

Profit Target on Long Side are 5350-5375-5343-5500-5630

Nifty Daily Chart Update -29Aug2012

Daily and Weekly Trend is up above 5368(SAR)

Weekly Indicator is Bullish OB, Daily Indicator is Bearish zone 

High of  Shooting Star 5450 can be critical resistance 

Window Top 5410 can  be resistance 

End of wave -5 Target 5440 is complete.

5300 and 5500 are imp. S/R  as per Open Interest level

Piercing Pattern at 5164 ,5280 ,Change of polarity at 5280

Support are (5330-5343)-5280-5250-5160-5088-5040-5000-4950-4800

Resistances are (5377-5385)-5440-5498-5630

Profit Target on Long Side are 5350-5375-5343-5500-5630

Nifty Daily Chart Update -28Aug2012

Daily and Weekly Trend is up above 5367(SAR)

Weekly Indicator is Bullish OB, Daily Indicator is Bearish zone 

High of  Shooting Star 5450 can be critical resistance 

Window Top 5410 can  be resistance 

End of wave -5 Target 5440 is complete.

5300 and 5500 are imp. S/R  as per Open Interest level

Piercing Pattern at 5164 ,5280 ,Change of polarity at 5280

Support are (5330-5343)-5280-5250-5160-5088-5040-5000-4950-4800

Resistances are (5377-5385)-5440-5498-5630

Profit Target on Long Side are 5350-5375-5343-5500-5630