| Do’s | Don’ts | |||||
 | Trade only through registered Members. In the interest of your own safety, it is important to trade only through registered members since the commodity exchanges have jurisdiction over them in terms of their own rules, bye laws, etc and can therefore, play a role in resolving investor grievances or even take action against the members if necessary. The exchange has no jurisdiction over entities who are not their members. |  | Don't get misled by rumors, luring advertisements and promises, and bull/bear run of market sentiments. Take an informed decision. Do not get misled by rumors, luring advertisements, etc. nor get swayed by bull/bear run of market sentiments. | |||
| Familiarize yourself with FMC guidelines and rules, regulations, byelaws, circulars, etc. of MCX. Familarize yourselves with FMC guidelines and rules, bye laws, etc. of the exchange to have an adequate understanding of the legal framework under which the commodity futures are traded. This would be useful in terms of giving you a better understanding of the procedures relating to trading, clearing and settlement, your rights as investor, etc. | | Don't trade any contract without knowing the associated risks. You should be fully aware of risk associated with your position in the market arising out of variety of factors such as Government policy, volatility, macro-economic factors, international price movements, etc. | |||
| Take an informed decision Be sure that you are taking an informed decision. Read the product note available on the exchange website to understand the commodity specifications. Keep track of Government policy announcements such as the Minimum Support Price, Export/Import policy, etc, which have a significant impact on the prices of commodities. Also keep track of exchange announcements made through circulars regarding the methodology of computation of due date rates, launch of new contracts, etc. Understand the commodity thoroughly. Study historical and seasonal price movements of the commodity. | | Don't undertake off-market transactions. Do not undertake off-market transactions which are not only illegal but also unsafe since the same may not fall under the jurisdiction of the exchange. | |||
| Understand the Delivery and Settlement Procedure. Thoroughly understand the delivery and settlement procedure which differs from commodity to commodity in terms of quality implications, place of delivery, options, penalties, margins, etc. This information is given in the product note available on the website. Understanding of delivery would help in avoiding rejection of your delivery. | | Don't accept/pay cash. Do not pay cash to the members nor take any cash as payments. It is in your interest to deal through cheques, demand drafts, etc. since these instruments leave a proper audit trail. | |||
| Understand and Comply with Taxation and other relevant laws. Before initiating a trade, ascertain whether the price of the commodity is inclusive or exclusive of various taxes applicable at the delivery centre at the given point of time. Be aware of implications of various taxes such as Sales tax, Service tax, VAT, etc. Make sure that you understand and comply with accounting standards for derivatives. | | Don't sign blank Delivery Instruction Slips. It is not advisable to sign blank delivery instruction slips, since the same can be misused. | |||
| Pay all applicable margins. Collect / pay mark-to-market margins on a daily basis. Pay all the applicable margins on your futures position to the member. Also, collect or pay (as the case may be) mark-to-market margins from/to the member which are required to be settled on a daily basis. | | Don't delay payment/deliveries to Members. Do not delay payment or deliveries to members to avoid losses arising out of penalties, closing of positions, etc. | |||
| Insist on documentation with the member such as Member Client agreement, and Know Your Client. Enter into an agreement with the member since that would ensure that you have recourse to all the investor protection mechanisms of the exchange. Co-operate with the member in filling up the 'Know Your Client form. This form has been devised to ensure that a member knows all his clients properly, and you are thus protected from the risk which may arise out of a member having unsuitable clients. Only clients with pan numbers are allowed to trade on commodity exchanges. | |||||
| Read and understand the Risk Disclosure Document. The Risk Disclosure Document provides valuable insight into the risk associated with futures trading. It is therefore, in your interest to carefully read and understand this document. | |||||
| Insist on signed Contract Notes containing all relevant information such as Member Registration Number, Order Details, Trade Rate, Quantity, etc. Insist on signed contract notes with all the relevant information for all your trades. The contract note is a proof of the transaction between you and the member and is absolutely essential for you to be able to approach the exchange for redressal of your complaints, availing arbitration mechanisms, etc. | |||||
| Obtain receipt for collateral deposited with the Members. Take a receipt from your members for collateral deposited with them. | |||||
| Insist on a periodical statement of your ledger account. Monitor your account with the member properly by insisting on a periodical statement of your ledger account. | |||||
| Freeze your demat account in case of a long absence. Freeze your demat account if it is not being used frequently for any reason, so that it is not misused. | |||||
Sunday, July 3, 2011
Commodity Trading Rules
Friday, July 1, 2011
The reasons why stock market traders lose money
Many people think trading is the simplest way of making money in the stock market. Far from it; I believe it is the easiest way of losing money. There is an old Wall Street adage, that “the easiest way of making a small fortune in the markets is having a large fortune.”
I discuss below eight ways of undisciplined trading which lead to losses. Guard against them, or the market will wipe you out. I am qualified to speak on this subject because I was myself an undisciplined trader for a long time and the market hammered me into line and forced me to change my approach.
I discuss below eight ways of undisciplined trading which lead to losses. Guard against them, or the market will wipe you out. I am qualified to speak on this subject because I was myself an undisciplined trader for a long time and the market hammered me into line and forced me to change my approach.
1. Trading during the first half-hour of the session
The first half-hour of the trading day is driven by emotion, affected by overnight movements in the global markets, and hangover of the previous day’s trading. Also, this is the period used by the market to entice novice traders into taking a position which might be contrary to the real trend which emerges only later in the day.
Most experienced traders simply watch the markets for the first half of the day for intraday patterns and any subsequent trading breakouts.
The first half-hour of the trading day is driven by emotion, affected by overnight movements in the global markets, and hangover of the previous day’s trading. Also, this is the period used by the market to entice novice traders into taking a position which might be contrary to the real trend which emerges only later in the day.
Most experienced traders simply watch the markets for the first half of the day for intraday patterns and any subsequent trading breakouts.
2. Failing to hear the market’s message
Personally, I try to hear the message of the markets and then try to confirm it with the charts. During the trading day, I like to watch if the market is able to hold certain levels or not.
I like to go long around the end of the day if supported by patterns, and if the prices are consistently holding on to higher levels. I like to go short if the market is giving up higher levels, unable to sustain them and the patterns support a down move of the market.
This technique is called tape watching and all full-time traders practice it in some shape or form. If the markets are choppy and oscillate within a small range, then the market’s message is to keep out.
Personally, I try to hear the message of the markets and then try to confirm it with the charts. During the trading day, I like to watch if the market is able to hold certain levels or not.
I like to go long around the end of the day if supported by patterns, and if the prices are consistently holding on to higher levels. I like to go short if the market is giving up higher levels, unable to sustain them and the patterns support a down move of the market.
This technique is called tape watching and all full-time traders practice it in some shape or form. If the markets are choppy and oscillate within a small range, then the market’s message is to keep out.
Hearing the message of the market can be particularly important in times of significant news. The market generally reacts in a fashion contrary to most peoples’ expectation. Let us consider two recent Indian events of significance.
One was the Gujarat earthquake that took place on 26 January 2001 and the other the 13 December 2001 terrorist attack on the Indian parliament. Both these events appeared catastrophic at first glance. TV channels suggested that the earthquake would devastate the country’s economy because Gujarat has the largest number of investors and their confidence would be shattered, making the stock market plunge.
Tragic as both the events were, the market reacted in a different way to each by the end of the day. In both cases the markets plunged around 170 points when it opened, in both cases it tried to recover and while it managed a full recovery in the case of the Gujarat earthquake, it could not do so in the Parliament attack case.
The market was proven correct on both counts. The Gujarat earthquake actually held the possibility of boosting the economy as reconstruction had to be taken up, and also because most of the big installations, including the Jamnagar Refinery, escaped damage. In the case of the attack on parliament, although traders assessed that terrorist attacks were nothing new in the country but the market did not recover because it could see some kind of military build-up ahead from both India and Pakistan. And markets hate war and uncertainty.
In both these cases what helped the cause of the traders were the charts. If the charts say that the market is acting in a certain way, go ahead and accept it. The market is right all the time. This is probably even truer than the more common wisdom about the customer being the king. If you can accept the market as king, you will end up as a very rich trader, indeed.
Herein lies one reason why people who think they are very educated and smart often get trashed by the market because this market doesn’t care who you are and it’s certainly not there to help you. So expect no mercy from it; in fact, think of it as something that is there to take away your money, unless you take steps to protect yourself.
One was the Gujarat earthquake that took place on 26 January 2001 and the other the 13 December 2001 terrorist attack on the Indian parliament. Both these events appeared catastrophic at first glance. TV channels suggested that the earthquake would devastate the country’s economy because Gujarat has the largest number of investors and their confidence would be shattered, making the stock market plunge.
Tragic as both the events were, the market reacted in a different way to each by the end of the day. In both cases the markets plunged around 170 points when it opened, in both cases it tried to recover and while it managed a full recovery in the case of the Gujarat earthquake, it could not do so in the Parliament attack case.
The market was proven correct on both counts. The Gujarat earthquake actually held the possibility of boosting the economy as reconstruction had to be taken up, and also because most of the big installations, including the Jamnagar Refinery, escaped damage. In the case of the attack on parliament, although traders assessed that terrorist attacks were nothing new in the country but the market did not recover because it could see some kind of military build-up ahead from both India and Pakistan. And markets hate war and uncertainty.
In both these cases what helped the cause of the traders were the charts. If the charts say that the market is acting in a certain way, go ahead and accept it. The market is right all the time. This is probably even truer than the more common wisdom about the customer being the king. If you can accept the market as king, you will end up as a very rich trader, indeed.
Herein lies one reason why people who think they are very educated and smart often get trashed by the market because this market doesn’t care who you are and it’s certainly not there to help you. So expect no mercy from it; in fact, think of it as something that is there to take away your money, unless you take steps to protect yourself.
3. Ignoring which phase the market is in
It is important to know what phase the market is in — whether it’s in a trending or a trading phase. In a trending phase, you go and buy/sell breakouts, but in a trading phase you buy weakness and sell strength.
Traders who do not understand the mood of the market often end up using the wrong indicators in the wrong market conditions. This is an area where humility comes in. Trading in the market is like blind man walking with the help of a stick.
You need to be extremely flexible in changing positions and in trying to develop a feel for the market. This feel is then backed by the various technical indicators in confirming the phase of the market. Undisciplined traders, driven by their ego, often ignore the phase the market is in.
It is important to know what phase the market is in — whether it’s in a trending or a trading phase. In a trending phase, you go and buy/sell breakouts, but in a trading phase you buy weakness and sell strength.
Traders who do not understand the mood of the market often end up using the wrong indicators in the wrong market conditions. This is an area where humility comes in. Trading in the market is like blind man walking with the help of a stick.
You need to be extremely flexible in changing positions and in trying to develop a feel for the market. This feel is then backed by the various technical indicators in confirming the phase of the market. Undisciplined traders, driven by their ego, often ignore the phase the market is in.
4. Failing to reduce position size when warranted
Traders should be flexible in reducing their position size whenever the market is not giving clear signals. For example, if you take an average position of 3,000 shares in Nifty futures, you should be ready to reduce it to 1,000 shares.
This can happen either when trading counter trend or when the market is not displaying a strong trend. Your exposure to the market should depend on the market’s mood at any given point in the market. You should book partial profits as soon as the trade starts earning two to three times the average risk taken.
Traders should be flexible in reducing their position size whenever the market is not giving clear signals. For example, if you take an average position of 3,000 shares in Nifty futures, you should be ready to reduce it to 1,000 shares.
This can happen either when trading counter trend or when the market is not displaying a strong trend. Your exposure to the market should depend on the market’s mood at any given point in the market. You should book partial profits as soon as the trade starts earning two to three times the average risk taken.
. Failing to treat every trade as just another trade
Undisciplined traders often think that a particular situation is sure to give profits and sometimes take risk several times their normal level. This can lead to a heavy drawdown as such situations often do not work out.
Every trade is just another trade and only normal profits should be expected every time. Supernormal profits are a bonus when they — rarely! — occur but should not be expected. The risk should not be increased unless your account equity grows enough to service that risk.
Undisciplined traders often think that a particular situation is sure to give profits and sometimes take risk several times their normal level. This can lead to a heavy drawdown as such situations often do not work out.
Every trade is just another trade and only normal profits should be expected every time. Supernormal profits are a bonus when they — rarely! — occur but should not be expected. The risk should not be increased unless your account equity grows enough to service that risk.
6. Over-eagerness in booking profits
Profits in any trading account are often skewed to only a few trades. Traders should not be over-eager to book profits so long the market is acting right. Most traders tend to book profits too early in order to enjoy the winning feeling, thereby letting go substantial trends even when they have got a good entry into the market.
If at all, profit booking should be done in stages, always keeping some position open to take advantage of the rest of the move. Remember trading should consist of small profits, small losses, and big profits. Big losses are what must be avoided. The purpose of trading should be to get a position substantially into money, and then maintain trailing stop losses to protect profits.
Most trading is breakeven trading. Accounts sizes and income from trading are enhanced only when you make eight to ten times your risk. If you can make this happens once a month or even once in two months, you would be fine. The important point here is to not get shaken by the daily noise of the market and to see the market through to its logical target.
Remember, most money is made not by brilliant entries but by sitting on profitable positions long enough. It’s boring to do nothing once a position is taken but the maturity of a trader is known not by the number of trades he makes but the amount of time he sits on profitable trades and hence the quantum of profits that he generates.
Profits in any trading account are often skewed to only a few trades. Traders should not be over-eager to book profits so long the market is acting right. Most traders tend to book profits too early in order to enjoy the winning feeling, thereby letting go substantial trends even when they have got a good entry into the market.
If at all, profit booking should be done in stages, always keeping some position open to take advantage of the rest of the move. Remember trading should consist of small profits, small losses, and big profits. Big losses are what must be avoided. The purpose of trading should be to get a position substantially into money, and then maintain trailing stop losses to protect profits.
Most trading is breakeven trading. Accounts sizes and income from trading are enhanced only when you make eight to ten times your risk. If you can make this happens once a month or even once in two months, you would be fine. The important point here is to not get shaken by the daily noise of the market and to see the market through to its logical target.
Remember, most money is made not by brilliant entries but by sitting on profitable positions long enough. It’s boring to do nothing once a position is taken but the maturity of a trader is known not by the number of trades he makes but the amount of time he sits on profitable trades and hence the quantum of profits that he generates.
7. Trading for emotional highs
Trading is an expensive place to get emotional excitement or to be treated as an adventure sport. Traders need to keep a high degree of emotional balance to trade successfully. If you are stressed because of some unrelated events, there is no need to add trading stress to it. Trading should be avoided in periods of high emotional stress.
Trading is an expensive place to get emotional excitement or to be treated as an adventure sport. Traders need to keep a high degree of emotional balance to trade successfully. If you are stressed because of some unrelated events, there is no need to add trading stress to it. Trading should be avoided in periods of high emotional stress.
8. Failing to realise that trading decisions are not about consensus building
Our training since childhood often hampers the behaviour necessary for successful trading. We are always taught that whenever we take a decision, we should consult a number of people, and then do what the majority thinks is right. The truth of this market is that it never does what the majority thinks it will do.
Trading is a loner’s job. Traders should not talk to a lot of people during trading hours. They can talk to experienced traders after market hours but more on methodology than on what the other trader thinks about the market.
If a trader has to ask someone else about his trade then he should not be in it. Traders should constantly try to improve their trading skills and by trading skills I mean not only charting skills but also position sizing and money management skills. Successful traders recognise that money cannot be made equally easily all the time in the market. They back off for a while if the market is too volatile or choppy.
Our training since childhood often hampers the behaviour necessary for successful trading. We are always taught that whenever we take a decision, we should consult a number of people, and then do what the majority thinks is right. The truth of this market is that it never does what the majority thinks it will do.
Trading is a loner’s job. Traders should not talk to a lot of people during trading hours. They can talk to experienced traders after market hours but more on methodology than on what the other trader thinks about the market.
If a trader has to ask someone else about his trade then he should not be in it. Traders should constantly try to improve their trading skills and by trading skills I mean not only charting skills but also position sizing and money management skills. Successful traders recognise that money cannot be made equally easily all the time in the market. They back off for a while if the market is too volatile or choppy.
The 10 Rules for Technical Trading in Stock Market
Following 10 Trading Rules can be used for Trading Future,Margin Trading and Trading using Technical s.
1. Map the Trends
Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you’re trading in the same direction as the intermediate and longer term trends.
2. Spot the Trend and Go with It
Determine the trend and follow it. Market trends come in many sizes long-term, intermediate-term and short-term. First, determine which one you’re going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you’re trading the intermediate trend, use daily and weekly charts. If you’re day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.
3. Find the Low and High of It
Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old “high” becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies – the old “low” can become the new “high.”
4. Know How Far to Backtrack
Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.
5. Draw the Line
Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.
6. Follow that Average
Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4- and 9-day moving averages, 9- and 18-day, 5- and 20-day. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.
7. Learn the Turns
Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastic. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastic are 80 and 20. Most traders use 14-days or weeks for stochastic and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.
8. Know the Warning Signs
Trade MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It’s called a “histogram” because vertical bars are used to show the difference between the two lines on the chart.
9. Trend or Not a Trend
Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.
10. Know the Confirming Signs
Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It’s important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.
How to place Stop Loss in Trading?
When markets are
- Volatile
- Overbought in Short Term
- May Reverse from the current trend as per technical
Most common term used by traders/analyst is
Tighten your Stop Loss/Use Trailing Stop Loss
Stop loss order is an order to close position if/when losses reaches a particular point. In other words this is an order by which you can decide the maximum loss that you are ready to accept. Here we are going to discuss only Stop Loss Order regarding Day Trading, but the same principle can be used for Swing Trading or Long Term Trading.
How should one implement to ‘Use Trailing Stop Loss ‘ ?
The is to reduce the risk and/or lock-in profits. As we hold a position over time and the paper profits begin to build, we periodically adjust the Stops to lock a larger percentage of our gains as time passes by. By tightening the Stops, we reduce the risk of incurring losses – reduce the risk of allowing profits to slip away.
Implementation
If you have a Buy (long) position
1. Identify the nearest support level. This can be a Pivot Low, or a consolidation. Put your stop just below the support.
2. Calculate the 5 period Exponential moving average. Your stop should be moved just below the average.
3. Locate a Fibonacci retracement of the nearest up swing. Keep a stop at 50% retracement of this up move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.
2. Calculate the 5 period Exponential moving average. Your stop should be moved just below the average.
3. Locate a Fibonacci retracement of the nearest up swing. Keep a stop at 50% retracement of this up move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.
4. Keep an eye on volumes if it is not huge on correction you can hold the stock.
If you have a Sell (short) position
1. Identify the nearest resistance level. This can be a Pivot High, or a consolidation. Put your stop just above the resistance.
2. Calculate the 8 or 13 period moving average. Your stop should be moved just above the average. If you really want to tighten, then use a 5 period average.
3. Locate a Fibonacci retracement of the nearest down swing. Keep a stop at 50% retracement of this dowbn move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.
2. Calculate the 8 or 13 period moving average. Your stop should be moved just above the average. If you really want to tighten, then use a 5 period average.
3. Locate a Fibonacci retracement of the nearest down swing. Keep a stop at 50% retracement of this dowbn move. If the 50% is far away, then use the 38% retracement, or even 23% if neccessary.
4. Keep an eye on volumes on upside.
Discipline
Once a stop is installed, it cannot be moved lower for a buy and higher for a sell. Stops for buy positions can only be moved higher, while stops for short positions can only be moved lower.
How to limit the trading losses in Stock Market?
It is simply not possible for any trader–whether amateur, professional or anywhere in between–to avoid every single loss. The disciplined trader is fully cognizant of the inevitability of losing hard-earned profits and, as such, is able to accept losses without emotional upheaval. At the same time, however, there are systematic methods by which you can ensure that losses are kept to a minimum.
The System
Every trader should employ a loss-limit system whereby he or she limits losses to a fixed percentage of assets, or a fixed percentage loss from capital employed in a single trade. Think of such a system as a circuit breaker, or collar, on the trade. After a certain percentage has been lost from his or her trading account or principal traded, the trader may very well stop trading entirely or may immediately exit the losing position. With this system, exiting a losing position is a single, unemotional decision that is not affected byany hopes that “the market is sure to turn around any minute now.”
A 2% Limit of Loss
A common level of acceptable loss for one’s trading account is 2% of equity in the trading account. The capital in your trading account is your risk capital, the capital that you employ (that you risk) on a day-to-day basis to try to garner profits for your enterprise.
The loss-limit system can even be implemented before entering a trade. When you are deciding how much of a particular trading instrument to purchase, you would simultaneously calculate how much in losses you could sustain on that trade without breaching your 2% rule. When establishing your position,you would also place a stop order within a maximum of 2% loss of the total equity in your account. Of course, your stop can be anywhere from a 0% to 2% total loss. A lower level of risk is perfectly acceptable if the individual trade or philosophy demands it. Every trader has a different reaction to the 2% rule of thumb. Many traders think that a 2% risk limit is too small and that it stifles their ability to engage in riskier trading decisions with a larger portion of their trading accounts. On the other hand, most professionals think that 2% is a ridiculously high level of risk and prefer losses to be limited to around half or one-quarter of a percent of their portfolios. Granted, the pros would naturally be more risk averse than those with smaller accounts–a 2% loss on a large portfolio is a devastating blow. Regardless of the size of your capital, it is wise to be conservative rather than aggressive when first devising your trading strategy.
Monthly Loss Limit of 6%
So, you have now established a system whereby your loss from each individual trade is limited to 2% of your risk capital. But it doesn’t take a rocket scientist to realize that even losing a moderate 1% of your account’s value in ten days within a month results in a rather devastating 10% of your account’s value within that month (notwithstanding any profits that you might have made in the other twelve-odd trading days within the month). In addition to limiting losses from individual trades, we must establish a circuit breaker that prevents extensive overall losses during a period of time. A useful rule of thumb for overall monthly losses is a maximum of 6% of your portfolio. As soon as your account equity dips to 6% below that which it registered on the last day of the previous month, stop trading! Yes, you heard me correctly. When you have hit your 6% loss limit, cease trading entirely for the rest of the month. In fact, when your 6% circuit breaker is tripped, go even further and close all of your outstanding positions, and spend the rest of the month on the sidelines. Take the last days of the month to regroup, analyze the problems, observe the markets, and prepare for re-entry when you are confident that you can prevent a similar occurrence in the following month.
How do you go about instituting the 6% loss-limiting system?
You have to calculate your equity each and every day. This includes all of the cash in your trading account, cash equivalents, and the current market value of all open positions in your account. Compare this daily total with your equity total on the last trading day of the previous month and, if you are approaching the 6% threshold, prepare to cease trading. Employing a 6% monthly loss limit allows the trader to hold three open positions with potential for 2% losses each, or six open positions with a potential for 1% losses each, and so forth.
Making Necessary Adjustments
Of course, the fluid nature of both the 2% single trade limit and the 6% monthly loss limit means that you must re-calibrate your trading positions every month. If, for example, you enter a new month having realized significant profits the previous month, you will adjust your stops and the sizes of your orders so that no more than 2% of the newly calculated total equity is exposed to a risk of losses. At the same time, when your account rises in value by the end of the month, the 6% rule of thumb will allow you to trade with larger positions the following month. Unfortunately, the reverse is also true: if you lose money in a month, the smaller capital base the following month will ensure that your trading positions are smaller.
Both the 2% and the 6% rule allow you to pyramid, or add to your winning positions when you are on a roll. If your position runs into positive territory, you can move your stop above break-even and then buy more of the same stock–as long as the risk on the new aggregate position is no more than 2% of your account equity, and your total account risk is less than 6%. Adding a system of pyramiding into the equation allows you to extend profitable positions with absolutely no commensurate increase in your risk thresholds.
Conclusion
The 2% and the 6% rules of thumb are highly recommended for all traders, especially those who are prone to the emotional pain of experienced losses. If you are more risk averse, by all means, adjust the percentage loss limiters to lower numbers than 2% and 6%. It is not recommended, however, that you increase your thresholds– the pros rarely stray above such potential for losses, so do think twice before you increase your risk thresholds.
Until next time, all the very best in your trading endeavors!
Why Traders loose money while trading stocks?
Over the years, I have seen several people (including myself) lose fortunes while trading stocks, and I’ve found that invariably, it would be for the same reasons. Such reasons appear mostly psychological and occur often in the trading scene.
It is a known fact 80% of traders lose money and 20% makes profits on the expense of 80% traders going well verse with
Pareto principle
So what exactly is the reasons behind that the misery of traders losing money.
It is a known fact 80% of traders lose money and 20% makes profits on the expense of 80% traders going well verse with
Pareto principle
So what exactly is the reasons behind that the misery of traders losing money.
Trade without plan: Most of traders enter the market based on there intuition. They just want to trade as soon as market opens without having any knowledge of volumes, support and Resistances. They just trade coz they want to trade.
Over Leverage: Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.
Over Trade: if suppose a trader make 10K in a day he will not stop and electrified with the winning streak bet more and end up losing all the money earned.
No Stop Loss: No trading plan means no specific risk is defined and hence Stop Loss is a BIG NO.I AM ALWAYS RIGHT ATTITUDE.
Directional Bias: Traders make up their mind that I want to be either long/short and fail to take position on what market is signaling and hence make losses.
No Discipline: Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.
No Holding power: Traders take large positions at one shot and are unable to bear the shakedown which market gives in extreme cases and are forced to square off the positions.
GREED: It allows traders to lose profitable positions to move into loss while they hope for large and unrealistic targets.
No Patience: Losing Traders do not have patience for price level to come and take positions; they just want to enter as soon as they start trading.
No Money Management: Due to no trading plan, Traders have no money management plan and are wiped out of market.
No Shorting: It has been observed that most of losing traders fail to take shorts when market is falling, they thinking shorting as a taboo and always go along with long trades only.
Traders believe what please them to believe and are blindfolded by their own vision they fail to recognize warning what market is throwing at them
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Bucking the trend: Market is falling let’s take a contra trader kind of attitude wipe out a trader from market.
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Bucking the trend: Market is falling let’s take a contra trader kind of attitude wipe out a trader from market.
Traders plan to buy at lows and sell at highs and get stuck with a losing position 90% of the time.
Beginner’s Luck: A novice trader will always make money in first few trades and get overconfident and does mistake which make him surrender all profits and in many cases start making losses on all trades.
Averaging a Losing trade is biggest blunder a trader can do.
Most of traders are under capitalized and trade position to large as compared to there actual trading capital.
Unable to accept small losses and turn those losses in big one which wipe out there entire trading capital.
Trading on Tips and market rumor.
Trading with emotion and heart instead of mind.
Get out of a profitable position at an early stage and holding a losing position till it gets squared off.
EGO EGO EGO EGO
Failing to digest the fact that market is supreme and we are just a drop in a large swarm of people.
Getting whipsawed by volatility.
I hope reader will try to overcome the common losing mistake by going through this article and make there way with 20% of profit making traders.
I would request readers to add few points which i might have missed or happened with them in there trading career.
How to be a profitable trader in Stock Market
Trading is a profession which requires a person to be disciplined, control over his emotion, risk management.
So what makes trading so difficult?
I have compiled few rules which you should adhere with and read it daily when you had a bad day.
These are some of the trading rules which are universally valid for stock/commodity trading.
Take a print out and nail it on your trading desk.
- Never risk more than 10% of your trading capital in a single trade:Try to distribute your trading capital in different trades. Do not risk it in single trade .
- Always use stop loss orders: Never keep mental stop loss because as soon as your SL will hit your emotions will take over you and will never exit the position.
- Never do overtrading. Do not overtrade if you are doing extremely good to make more money or extremely bad to recover your losses. Either you will lose all your profits or will add more losses to your existing losses.
- Never let a profit run into a loss: Most of traders will let your profit turn into loss because of GREED.
- Don’t enter a trade if you are unsure of the trend.
- When in doubt, get out, and don’t get in when in doubt: It’s your money at stake so if you are in Doubt never trade.
- Only trade active stocks: Trade in Stocks having liquidity.
- Never average a loss: Loss should never ever be averaged. If you are in Loss means you did not made a right trading bet.Exit the losing trade asap.
- Never get out of the market because you have lost patience, or get in because you are anxiously waiting.
- Avoid taking small profits and large losses:90% of traders who loses will exit when Stocks moves 1% in their favor and if it moves even 5% down from purchase exit is out of sight.
- Never cancel a stop loss after you have placed it.
- Avoid getting in and out of the market too soon.
- Be willing to make money from both sides of the market: Do not have one sided mentality. As a trader your job is to earn money, It does not matter you trade long side or short side.
- Never buy or sell just because the price is low or high: Unitech went down 10% lets buy it. Nifty went up 200 points lets SELL it. Well if things were so easy everyone will make money. Trading never works in this way.
- Never hedge a losing position.
- Avoid trading after long periods of success or failure.
- Don’t try to guess tops or bottoms.
- Don’t follow a blind man’s advice.
- When you lose don’t blame it on luck.
Most of traders buy because they feel like buying and sell because they feel like selling. If one follows this approach you will never earn in stock market.
I have developed few trading system which will help traders to go with an organized approach with market and will be able to do a disciplined and organized trading which will have a profitable outcome.
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