swing trading

Do You Want Increased Profits? Then Go After Decreased Losses!

by

I’d like to share with you a frequently overlooked source of profits from your trading. It’s a simple concept yet so very important if you expect to be able to continue trading for any length of time! The concept is that of controlling both the number of losses you have and the dollar amount of those losses. I realize that statement sounds so obvious that you might be tempted to put this article away in favor of a night of Netflix, but please stick with me here. I’ll share some things with you that you probably don’t expect to find here!

To better visualize the concept I’m describing, picture a large washtub, the kind you probably remember from your childhood. Now imagine the difficulty of filling the washtub if it has several ‘six-inch’ holes in the bottom! No matter HOW MANY garden hoses you have filling it up, the water is running out faster than it’s going in!! Now imagine plugging each of the holes, one at a time. Plug the first one and the difference is almost imperceptible. Plug the second hole and you begin to notice that there is less water splashing on the ground. Plug the third and you actually may see the water level in the tub begin to rise … just slightly, perhaps, but rise nonetheless! Plug ALL the holes but one and the difference becomes measurable! Now that you’re down to one hole, let’s begin to repair it a piece at a time. First we cover HALF the hole … while the tub still leaks, you can now tell there’s more water going INTO the tub than running out the bottom. Patch half the remaining leak and you begin to adapt to the idea that it’s OKAY if a little water comes out, just as long as there’s more going in than coming out!

Our trading accounts are something like that. Most new traders have HUGE trading account “holes” and the money is draining out faster than they can replace it! No matter how profitable they are on some of their trades, they just seem to give it all BACK! If we’re smart about our trading when we notice that, we’ll STOP trading until we find the challenge and FIX it! What I’m describing are the DIRECT results of FOCUSING on the profits and almost totally forgetting about controlling the losses. There are many reasons for that but despite the reason, the results are the same. Left unchecked, such a situation will take us totally out of the trading business in a very short period of time! Does this describe you and your trading account? Would you like to know how to ‘FIX’ it? Let me share with you four RULES for trading which directly address losses and if followed, can ‘plug’ many of your profit leaks!

RULE 1. Wait for the stock to CONFIRM the anticipated direction before entering the trade

This rule can decrease the NUMBER of losses you experience. As simple as that sounds, it’s one of the most often violated principles of good trading habits. So often is this rule broken that we are all familiar with cute little descriptions such as “catching a falling knife.” What you use for this confirmation is your own affair; price rise or fall, momentum, frequency of trades or bid / ask “size” are just a few ways. Personally I combine them all (more or less), developing a ‘feeling’ about the confirmation, rather than a measurable quantity. However you choose to define confirmation, let experience be your best teacher here and do NOT enter the trade until you’re convinced the stock is moving your direction!

RULE 2. When you are filled on the entry, place a STOP loss to minimize your potential for loss.

This rule controls the AMOUNT you can lose on any one trade. I like to use about 1/2 of the stock daily movement for my stop loss amount. For example, if a stock price moves on average, say $1 every trading day, then I’ll back off 1/2 of that, or 50 cents and place my stop loss there, limiting the losses possibly incurred on that trade. Whatever you use, be FAITHFUL in adhering to the protection afforded by the stop. In other words, DON’T CHANGE IT. If you’re stopped, you’re stopped. He who trades and runs away lives to trade another day!

So much for minimizing the NUMBER and dollar amount of losses. Equally important is allowing your profits to maximize AT THE SAME TIME! Here’s how to do that.

RULE 3. When you become profitable in a trade, replace the stop loss with a TRAILING stop, trailing by that amount of profit.

Say you’re up 25 cents in a trade and you have your stop loss in at 50 cents below your entry (on long positions). Replace the stop loss with a 25 cent trailing stop. At THIS point, you’re WORST CASE outcome for the trade is BREAKEVEN (give or take a couple of pennies)!!! You have virtually NOTHING to lose and EVERYTHING to gain from that point on!

RULE 4. Leave the trade alone from this point on!

The market overall will do a much better job of managing the trade (with the above rules observed) than you or I EVER could! Once you’ve reached the MAGIC POINT in your trade, just go away and do something else. Your trade is on autopilot!

The Profit Room

 

 

Lack of a Trading Strategy

by

If you know the pitfalls of trading you can easily avoid them. Small mistakes are inevitable, such as entering the wrong stock symbol or incorrectly setting a buy level. But these are forgivable, and, with luck, even profitable. What you have to avoid, however, are the mistakes due to bad judgment rather than simple errors. These are the “deadly” mistakes which ruin entire trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself closely and stay diligent.

Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid traveling in a sleet storm. But if you don’t know about the dangers of ice, you might drive as if there were no threat, only realizing your mistake once you’re already off the road.

Although trading involves risk, never treat it like gambling. You must have a solid trading strategy, one which you plan, test, and revise repeatedly. You need to stick to this strategy, and never act on spur-of-the-moment decisions. All you do when you act on a gut feeling is jeopardize any and all of the thoughtful planning you’ve done by giving yourself completely over to chance. Remember that you can never control where a single trade will end up, but you do have control over a long-term plan.

And don’t evaluate your performance on the basis of individual trades. A gambler might think that a small loss is a failure while one huge risky gain means success. Traders should never think this way. Instead, judge yourself by the consistency and profitability of your overall strategy. This is the only way to stay in control of your trading success.

To do this, of course, you have to build a solid strategy. This means developing a set of pre-defined rules that you follow consistently. You should set goals for each week, or possibly each month (but never for a single day, as there are too many things you won’t be able to control over such a short period of time). Next, decide on realistic profits and losses for each trade. Then, according to these markers you’ve set for yourself, carry out your plan without exceptions.

If your set profit for a trade is, say, $300, sell when you reach that milestone, even if you have a feeling the stock will rise. Otherwise, you corrupt your plan with too much risk, and you’ll never know if your overall strategy was successful or not. You may have gotten lucky with one trade, but you haven’t determined any kind of consistency.

Keeping to a strategy will allow you to revise what you’re doing, learning which goals and limits will work and which won’t. Straying from your strategy teaches you nothing useful that you can apply over the course of your trading career. So, while you may gain a few hundred, or even thousands, of dollars on a single trade, who knows how much knowledge you sacrificed, knowledge could have gained you tens or even hundreds of thousands of dollars in the years to come.

The Profit Room

 

Control Your Emotions, Succeed in Trading

by

Why is it that some people are successful in trading the markets? And why is it some people fail? Is it luck that determines if you are successful or not in making money from the market? Is it the system or strategy that a person use which determines their success?

A lot would say that it is the system or strategy that they employ which ultimately determines if they come out winning from the market.

Every system that exists on the internet will show you how to make money using it. Without a doubt, it will make money for you. The question is usually how much money will the system make for you. All the systems that are out there will show to you how their system has worked base on historical data or activity and then at the bottom of the page there would be a disclaimer clause that states ‘.. Historical data does not determine or guarantee future earnings….’

So why is it that these sites or page include this disclaimer clause?

The disclaimer clause is incorporated in it because they know that there are certain elements which they can not control. Human emotions.

Human emotions are always the key to either success or failure in any business. And it is no difference when trading the markets. Read all the books about trading that you want, buy all the successful system that you want. If you can’t control your emotions, you can’t succeed in the markets.

That’s the reason for the disclaimers clause because the one thing that the author can not control is their subscribers or customers emotions.

In the market there are but only two main emotions that every trader will experience; GREED and FEAR. When this emotion appears it is not how we eliminate it but rather how we act on it. There are natural emotions that can not be eliminated. This emotions forces us to action, thus how we act on it will determine the outcome.

Like anger, when we are angry at someone, it’s either we say something nasty or we can just kick a bucket or we can just dive into a pool of water. Which ever action that we take, it produces a different outcome or result.

All too often when we begin to see two to three consecutive loses on our trading activities, we would begin to have doubt. When this happens we are already at the state of fear, we fear losing more of our money and thus begin to doubt that the system is working.

While no system is absolute, meaning no system will guarantee that you will make money ALL the time. The system seller would say that we would be able to make money consistently, provided we follow their system to the dot.

On the other hand, when we begin to see two or three consecutive we begin to feel on top of the world. We begin to feel that we can start making good money from the market and then start tweaking the system or maybe putting more money in the market to leverage our earnings or maybe begin to take on more positions, which ultimately make us deviate from the system which we were using. This is when greed has already stepped in to rule our thoughts.

There is saying ‘The system is only as good as the person using it’. So if we don’t follow the system either with we are making loses or when we are creating profits. We would ultimately fail. And to follow the system requires discipline. The discipline to act on our fear and greed when it sets in, will determine how well we do in the market.

Once again discipline is the key. We must have the discipline to say ‘I have reached my target. I should take profits now even though it may go higher’ when greed sets in. And when fear sets in one should say ‘I have to take a position even though the market does not seem to be moving in my favor’

While these are but two circumstances when greed and fears arises, there are, and will be many instances when we need to make a decision to either enter or exit the market. And these are very two most important decisions to take in order to succeed in the markets. The discipline to follow the system diligently no matter what happens to the market

So no matter how good the system is, the only and sure way is to lasting success in the market depend on the discipline to overcome our personal emotional to follow a particular system religiously.

The Profit Room

 

Trading Expectations

by

As we all know, when we open a trade, we look forward to it being a winner. Given the win rate of a certain trading strategy, there is a random distribution between wins and losses. However, we trade to make money with a proven strategy. The Profit Room’s strategy allows you to be confident when you place a trade. So we don’t “panic close” the trade when the market goes against us, or exit too soon when we are in profit.

If you know the expectancy of your trading strategy, you will be able to deal with these situations better. There is a psychological aspect here: knowing the predictable profitability of a larger number of trades you undertake will build your confidence, which in turn reduces your tendency to shortcut winners and to let losers run too long. Having this confidence will thereby improve your overall results.

How to determine the expectancy of your trading system? Assuming you keep records of your trades, you should go back and look at all your trades that were profitable versus all your losing trades. Do this over a period of at least 3 months and at least 100 trades. The more data you can use, the more accurate the result. We only need 4 pieces of information: number of winning trades, number of losing trades, amount of money won and amount of money lost. From this data we can calculate the following:

Net profit = amount of money won – amount of money lost

Win rate = number of winning trades / total number of trades

Lose rate = 1 – win rate

Average winner = amount of money won / total number of winners

Average loser = amount of money lost / total number of losers

Average reward / risk = average winner / average loser

Expectancy per trade = win rate x average winner – lose rate x average loser

Or, alternatively, expectancy per trade = net profit / total # trades

Expectancy per month (profit forecast) = expectancy per trade x average # trades per month

Expectancy per amount of money risked = win rate x (average reward / risk + 1) – 1

Or, alternatively, expectancy per amount of money risked = net profit / average loser / total # trades

We hope this information helps you in determining your expectancy rate of trading.

The Profit Room 

Is Day Trading For A Living Your Cup Of Tea?

by

If you like working with money, then maybe day trading for a living is what you should be doing. This type of trading works daytime hours only, from the moment the stock market opens at 9:30am until it closes at 4pm in the afternoon, you can do a lot of trading in that amount of time. Day trading for livings with your own money, if you loose it, then you have no one to blame but yourself. However, it may be a good way to watch your money grow too. The following is the basic definition of what day trading is all about. Maybe it is your cup of tea, maybe not, only you can decide.

What is Day Trading?

Day trading for a living is when you take a position in the markets with a view of squaring that position before the end of that day. Day trading for a living mean a trader usually trades many times a day looking for fractions of a point to a few points per trade, however, by the end of the day he or she will close out all their positions. The goal of the day is to capitalize on price movement within one trading day. Unlike investors, the day trader will hold positions for only a few seconds or minutes, and never overnight.

What day trading really means.

The meaning of day trading is actually a misunderstood term. True day trading means not holding on to your stock positions beyond the current trading day, meaning your not suppose to hold on to your stock overnight. Trading this way is really the safest way to do day trading, this way one is not exposed to the potential losses that can happen if the stock marked is closed due to news that can affect the prices of your stocks. There are many people out there today who are not very good “day traders.” Because of greed, they will hold their stock position overnight, setting themselves up for the catastrophic elimination of their capital. In day trading currency, the term “day trading” changes slightly. Because currencies can be traded 24-hours a day, there can’t’ really be any overnight trading. You can have open positions for longer than a day with active stop losses than can be activated at any time.

There are a few different types of day traders out there today, it can actually be subdivided into a number of styles.

Scalpers- This type of day trading involves the rapid and repeated buying and selling of a large amount of stocks within minutes or seconds. The goal here is to earn a small per share profit on each transaction while minimizing the risk.

Momentum Traders- This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops.

The advantages of day trading for a living is there are no overnight risks. Because positions are closed prior to the end of the trading day, news and events that affect the next trading day’s opening prices do not affect your portfolio. Day trading for a living takes skill, experience, and knowledge. Make sure you get educated before you decide to take that on as your main source of income.

The Profit Room

Emotion In Investing

by

Humans are all emotional being. We do not always make decisions rationally. Emotion is part of us as investors. Investors might feel better towards stocks at certain point or they might feel that owning stocks are risky and avoid it at all cost.

Investors may also feel attached towards a specific company and continue owning the stock without regards to its fundamental. For example, you might like Google’s search engine so much that you decide to buy the stock  without doing any research. You figure that Google’s search engine is so much better that buying the stock will give you profit, right? Wrong. Now, I am not here to bash Google as an investment, but analyzing an investment goes beyond the products and companies. Most investors can identify good companies and products. It is quite easy. You know that a Mercedes is a better car than a Ford or a Civic.

The next question is how much should you pay for a Mercedes or a Civic? This requires us to put aside our emotion for a second and think clearly. Sure, you’d like to have a Mercedes in your life. It is luxurious and have a lot more fancy features than a Civic has. But, that does not mean you should overpay for it. It works similar with stock investing.

Google is a good search engine, probably the best that is ever produced so far. Sure, you probably pay more for Google than other generic search engines. But, please don’t over pay. You invest in Google to profit from it not because you like its products.

So, how do we eliminate emotion from our investing decision? We can’t eliminate it completely but there are certainly tools that might help. One is to calculate the fair value of a common stock that you are investing in. Fair value of an investment is dependent upon the streams of profit generated by it. In the long run, if company A earns more than company B, then company A will be valued more than company B.

For a company that is growing such as Google, you can incorporate its growth and calculate the fair value with growth. This is a fundamental approach to long term investing.

Emotion is hard to ignore. We are not immune to that. But following your emotion will cost you a lot of money. Just watch those investors who buy the peak of a stock. Don’t follow the herd and keep your focus on the fair value of your stock. You will do really really well.

The Profit Room

 

Five Forex Trading Tips You MUST Know

by

Jumping into Forex trading with both feet? Here are five must-know tips on Forex trading and mini Forex to help you stay afloat in the Foreign Exchange currency market.

Know your Forex trading market.
Educate yourself about the currencies that you trade. The more you know about the country whose currency you’re trading in the Forex market, the more accurately you’ll be able to predict which way the money will move.

Pick a Forex trading system – and stick with it.
Savvy Forex traders will tell you that system is everything. Forex trading by system lets you automate your trades based on history, following the traditional peaks and valleys. Set up a system and live with it to make the most of your Forex trading.

Practice makes perfect – but it’s not the real world.
Practice Forex trading accounts are great for learning how a particular trading account works – but they’re not the real world. Many experienced traders recommend starting off with a mini Forex account to minimize your losses while you get acclimated.

Keep your eye on the margin.
Margin trading is a great way to lose a lot of money quickly. Stay away from Forex margin trading until you’re sure you know what you’re doing.

The only win that counts in Forex trading is the bottom line.
In Forex trading, the bottom line is how much money you made at the end of the day. Don’t count won or lost trades – only dollars and cents.

The Profit Room

Not Limiting Your Losses

by

If you know the pitfalls of trading, you can easily avoid them. Small mistakes are inevitable, such as entering the wrong stock symbol or incorrectly setting a buy level. But these are forgivable, and, with luck, even profitable. What you have to avoid, however, are the mistakes due to bad judgment rather than simple errors. These are the “deadly” mistakes which ruin entire trading careers instead of just one or two trades. To avoid these pitfalls, you have to watch yourself closely and stay diligent.

Think of trading mistakes like driving a car on icy roads: if you know that driving on ice is dangerous, you can avoid traveling in a sleet storm. But if you don’t know about the dangers of ice, you might drive as if there were no threat, only realizing your mistake once you’re already off the road.

Traders often fail to limit their losses in search of a big win. Of course, the only way you can make a fortune with trading is to actually stay in the game, and it’s hard to stay in the game when you’ve already lost all of your money. The problem is that people often feel like any loss is a failure, and so they don’t incorporate a strategy for “safe” losses. They may feel like “planning” for a loss is planning to fail when, in fact, it’s planning to keep themselves in the game.

Losses are a part of our business. The key to trading success is to limit your losses. Too many traders give a trade way too much “room,” and they take big hits, which can shrink an account down by 20%, 30%, and sometimes even 40%. You have to put a system into place which will ensure that you set small losses to avoid emptying your account.

There’s a huge difference between losing big on a regular basis and losing small in a controlled trading plan. You already know that you should keep your losses small; the key is to keep them smaller that your average wins. Even if your winning percentage is only 50%, you’ll still be profiting if you set yourself up correctly. For example, if you have a weekly strategy that gets you $300 for every win but only takes $200 for every loss, a tie of a win and a loss will still get you a $100 profit for that week.

The real key is to set a weekly goal and to be sure that you set a loss limit for each trade. So let’s say your goal is $300 each week, and you want to be sure that you lose no more than $200 per trade. If your first two trades of the week were losses, then you’re down $400. But all you need is three more wins through the rest of the week to make your profit. Once you meet your goal, stop trading, otherwise, you may end up with further losses, putting you behind schedule and gouging into your account funds, which will simply set you back further.

The basic rule: always know when to exit a trade. Set a loss limit and stick to it. But also set short-term goals, and stop when you’ve reached those goals. Don’t ever gamble. Remember that looking for small gains over the long term is a much more reliable and consistent strategy which will help you avoid losing too much too quickly.

The Profit Room’s Team