Confessions of a noob

Quote from mgabriel01:

Well youre doing better than me so far
I have been at it for 2 months and have not concluded its a farce yet (Investools that is)


But we wont go down that path here. There is an existing thread for commentary on Investools (Investool Anyone?) on ET


The first book I bought (yesterday) is:
Technical Analysis of the Financial Markets - John Murphy


What was yours?
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Investools may not be a complete fake but I do not feel comfortable with their system because there seems to be so much more to know than what they give you and so many more factors that contribute than what they're telling you as well.

The first books I bought were:

Trading For a Living By Alexander Elder
Come into my Trading Room by Alexander Elder
Technical Analysis of the Financial Markets by John Murphy
Option Volatility & Pricing by Sheldon Natenberg
Options as a Strategic Investment by Larry McMillan

Options are extremely attractive to me right now as well. Once I kick through some of these books I may dive further into some of the concepts but, to me, this is a pretty good start for books to read. When I finally do become decent at paper trading options I will use real money but until then losing fake money is just fine with me as I am going to try to hold options for longer periods of time and possibly swing trade as well. My goal is to survive the first year and make some gains the second year. Looking for some good books on Risk & Money Management and something to kind of hit more on the programming aspect as my knowledge of programming is not extremely deep but have dabbled in it in a couple college courses and high school.

Trading For a Living by Alexander Elder
 
Lousy risk / return profile ?



Well,,,, see thats why I asked
I thought it was pretty good - essentially a 50% return on the money I have at risk



what kind of risk/return profile do you work with (if I may ask?)
 
Mgabriel01;

In regard to the invest tools method, as its been described thus far, I have serious doubts. The ‘what to buy’ section is redundant and irrelevant; at any given time, the impact of a company’s fundamental standing is already included in the current price, and the market is busy speculating as to the nature of future fundamental developments.

The ‘when to buy’ section is not technically sound; entrances are based on secondary filtered information, and they take place at totally arbitrary and often extended price levels… leaving them unsuited to accept proper stop and target prices within the parameters of acceptable money management strategies.

As for your Risk to Reward Ratio; you’re going to want a ratio of at most 1:2, and preferably 1:3. If you’re trading counter the trend you’re going to want a ratio even lower than that, its not worth it to trade against the trend otherwise.

These can be confusing, many traders end up changing around the wording or the math in order to make this sound more clear, so I’ll explain it a little better: A Risk to Reward Ratio of 1:2 translates to ½ or 0.5 - meaning the Risk is half as large as the Reward. A Risk to Reward Ratio of 1:3 means that the risk is one third the size of the reward. 1:3 is a lower ratio than 1:2, and the lower the better.

As for the BSC trade…

This is going to be a little hard to explain, because I would never consider taking a trade similar to this one, but I’ll do my best to explain things in a way relevant to this chart…

I hope by now you already see what is wrong with your Risk to Reward Ratio, so I’ll skip this one… but that’s a really good way to blow up your account by the way…

Your entry, stop, and target should all come from the chart - its not wise to just choose arbitrary numbers.

For example, your stop should be somewhere around the prior pivot low set on November 9th at $93.50. This is an area of support; if this area is broken, then you have a significant reason to exit the position.

Your target should also be an area of significance, such as just underneath the next area of overhead resistance, like the previous pivot high at $110.

Your entry is what really puzzles me; I really cant tell you where I would have put it because I don’t see a valid entry. However, I’m looking at the chart as of Friday November 16th. The only entry that I could possibly pretend to see would be to enter on Monday November 17th, but only as BSC traded above the daily high of $100.83 set on the 16th. In this case I would then put my stop below the daily low of $96.51 set on the 16th as well… target 110 area...

This is what I mean by look at the price, not at the indicators.





Snugglepuppy666,

Sure, ill take a look, throw out some symbols.

And in response to a few points you made…

The most dominant psychology in regard to the markets is that people have an emotional predisposition towards making money and not losing it. The price action itself is the oldest indicator of all time, as well as the most widely followed. Besides, like I said before, indicators are derived from price anyway, get right to the source, filtered and lagged data puts you at a disadvantage.

Swing trading is only suitable in certain market environments. I use a combination of day trading and swing trading; but I lean more towards one or the other depending on how the market is behaving. The swing trade concept is totally valid, but like anything else, poor application produces poor results.
 
WestWall -- thanks for your patience and excellent feedback. I really appreciate your taking the time to share your knowledge

Several questions/responses below under your quotes



Quote from WestWall:

Mgabriel01;

In regard to the invest tools method, as its been described thus far, I have serious doubts. The ‘what to buy’ section is redundant and irrelevant; at any given time, the impact of a company’s fundamental standing is already included in the current price, and the market is busy speculating as to the nature of future fundamental developments.

I have viewed the 'what to buy' portion as a quick way to find stocks with good fundamentals... would you say their collections of fundamentals information is 'inaccurate' or simply 'not useful'

if fundamentals is in the 'not useful' category --- I think that implies price action is the more useful information

Do I have that correct?






The ‘when to buy’ section is not technically sound; entrances are based on secondary filtered information, and they take place at totally arbitrary and often extended price levels… leaving them unsuited to accept proper stop and target prices within the parameters of acceptable money management strategies.

Is price action the primary unfiltered source?
Does 'time horizon' come into play here? It seems to me price action is the favored framework for day trading (at least from the posts I see on ET) --- is it equally applicable to a time horizon of leaving a position open for days or weeks in anticipation of a move?


Or do I simply have this wrong?



As for your Risk to Reward Ratio; you’re going to want a ratio of at most 1:2, and preferably 1:3. If you’re trading counter the trend you’re going to want a ratio even lower than that, its not worth it to trade against the trend otherwise.



These can be confusing, many traders end up changing around the wording or the math in order to make this sound more clear, so I’ll explain it a little better: A Risk to Reward Ratio of 1:2 translates to ½ or 0.5 - meaning the Risk is half as large as the Reward. A Risk to Reward Ratio of 1:3 means that the risk is one third the size of the reward. 1:3 is a lower ratio than 1:2, and the lower the better.

OK - thats pretty straight forward - and I guess that ratio is really a function of the the expected # of successful trades v failed trades --- i.e. I need to hit that reward % on my successes to still be profitable after I factored in my losers. Correct?



As for the BSC trade…

This is going to be a little hard to explain, because I would never consider taking a trade similar to this one, but I’ll do my best to explain things in a way relevant to this chart…

Yeah the BSC trade was a gut feel trade. Its not the right thing to do and I know it! Im sitting here knowing full well I have no idea what to expect from that trade ---- so it failed before I placed it

At this point I'm driven hard by my desire to 'learn by doing' (because thats the way I learn - and I know it) --- so I will take my lumps from it if necessary (it is far less than 1% of my portfolio)


I hope by now you already see what is wrong with your Risk to Reward Ratio, so I’ll skip this one… but that’s a really good way to blow up your account by the way…

Yeah - understood on the r/r part


Your entry, stop, and target should all come from the chart - its not wise to just choose arbitrary numbers.

For example, your stop should be somewhere around the prior pivot low set on November 9th at $93.50. This is an area of support; if this area is broken, then you have a significant reason to exit the position.

Yes - I understand the chart well enough already to see that. In fact I reset the stop loss at 93 this morning 'before' I read your post. I had been thinking about my reasoning for the 90 stop all night last night and concluded it had no basis.

Is there a quantitative method for determining an aread of support? I see 93 as a 'new support' area. But I am just eyeballing that (the murphy book has not arrived in the mail yet!)



Your target should also be an area of significance, such as just underneath the next area of overhead resistance, like the previous pivot high at $110.


Your entry is what really puzzles me; I really cant tell you where I would have put it because I don’t see a valid entry. However, I’m looking at the chart as of Friday November 16th. The only entry that I could possibly pretend to see would be to enter on Monday November 17th, but only as BSC traded above the daily high of $100.83 set on the 16th. In this case I would then put my stop below the daily low of $96.51 set on the 16th as well… target 110 area...

This is what I mean by look at the price, not at the indicators.

Ok -- Im gonna chew on this part for a while and hope the murphy book comes soon!


Thanks again for your kindness in sharing your knowledge. I truly appreciate it

I owe you a beer and cigar





Snugglepuppy666,

Sure, ill take a look, throw out some symbols.

And in response to a few points you made…

The most dominant psychology in regard to the markets is that people have an emotional predisposition towards making money and not losing it. The price action itself is the oldest indicator of all time, as well as the most widely followed. Besides, like I said before, indicators are derived from price anyway, get right to the source, filtered and lagged data puts you at a disadvantage.

Swing trading is only suitable in certain market environments. I use a combination of day trading and swing trading; but I lean more towards one or the other depending on how the market is behaving. The swing trade concept is totally valid, but like anything else, poor application produces poor results.
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Fundamental data is only historical information - but the market, on the other hand, is anticipatory in nature. Prices are moving now based on what the market expects is going to happen next. The fundamentals are just one of many possible contributing factors as to why the price is where its already at. So the answer to your question; fundamentals are just not very useful - and yes, price action is the only information you need.

Price action is equally applicable on any given time frame, and it is relevant to the time frame being observed. Its possible to use the same exact technical setups on any time frame; if I plan on holding a position for multiple weeks, then I base my decisions on the price action from weekly charts - where every “bar” represents a week’s worth of data.

As for the risk to reward ratio question; I think you’re still missing some key pieces of information. You need to determine your Risk Amount and Share Size.

Your Risk Amount is the amount of money you’re willing to lose each time your stop is hit. This should be a fixed amount of money, and it should be the same amount on every trade. Lets use $500 for our example.

In order to achieve this, you need to Share Size properly…

(Note: before you get confused; in this case, when I say Risk Amount, I’m not talking about the “Risk” from “Risk to Reward Ratio”)

Say for example; your entry is at $55 and your stop is at $50. This means you would lose $5 per share if your stop were to be hit. So, if your Risk Amount is $500, then you determine your Share Size by dividing $500 by $5 - and you get 100, this is your Share Size.. You buy 100 shares in this case.

Lets look at this again; if your entry is $37 and your stop is $33.50 - you would lose $3.50 per share if your stop were to be hit. So again, you would divide your $500 fixed risk amount by $3.50 and get a Share Size of 142 shares.

This way, every time a trade fails, you will always lose the same amount of money. Of course, there will be a little bit of slippage and commissions… but it will be the same general amount.

Now lets get back to the Risk to Reward Ratio; your Risk to Reward Ratio is the ratio of the distance between your Entry and Stop -vs- the distance between your Entry and Target …on the chart.

So if your Risk to Reward Ratio is 2:1, and your Risk Amount is $500, and you Share Size properly - then any failed trade costs you $500 dollars, and any successful trade earns you $1000 dollars.

With this type of money management, you can lose 2 out of 3 trades and still break even - which is only a 33% success rate. Which means 4 winning trades out of 10 is profitable.

Do the math yourself for a 1:3 RR… you’ll like what you find.

OK… Its very important that you pass on trades that are not suited well to proper money management. In my case, if I see a ‘Swing’ type of trade that is highly likely to work, but the move is too tight to provide a worthy Risk to Reward, I zoom down to a smaller time frame (like hourly or 5-minute charts) and ‘day trade’ the move. Otherwise, I avoid it completely.

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Basically, as your account grows, you should raise your Risk Amount. You should review all your trades at the end of every week, and certainly at the end of every month. If you feel you’re doing well, raise your Risk Amount. Its good to use a fixed percentage of your account - so as your account grows, reset your Risk Amount to a fixed percentage of the new balance in trading capital. This way your Risk Amount is raised accordingly and proportionately with your account size. The same goes for if you lose money, reset it to a fixed percentage of what ever you have left. This will keep you from blowing up your account until you become consistent. Don’t reset your Risk Amount after every trade though, wait for weekly or monthly reviews.

I only use one half of one percent of my total account size by the way, but I’m often in multiple positions.

Also, start on paper, and then moved up to a very small fixed risk amount like $50 until you feel you’re getting it… then, start adjusting it as you go based on changes to your account size once your confident.

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On a more psychological note, this will keep you out of many “Jack-Pot” trades. There will be times when you will look a completed trade and say “If I had bought as many shares as I could afford then I could have made *THIS* amount of money” with ‘this’ being some huge number.

However, those who go for the “Jack-Pot” are just as likely to get a Jack-Pot in REVERSE. The stock market is not the lottery, if you want to play the lottery, then play the damned lottery. If you want to trade like a professional, then do something similar to what I’ve described.
 
Quote from mgabriel01:


what kind of risk/return profile do you work with (if I may ask?)
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I prefer trades where the target return is larger than the stop loss. Otherwise you have to be right more than 50% of the time to break even.

In terms of my own equity trading, which is probably a bit atypical in the sense that I rarely use more than 50% of the cash available and trade only during times of distress. About 3/4 trades profitable, with average loss 1.4% and average gain 1.8%. Total return YTD slightly below 60%.
 
buybig said:
i rely MOSTLY on support/resistance and trend lines.

the other indicators are support and only support

feel free to crituqe
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Thank you. I felt like your indicator set was good, but rsi: i do not trust it. Both position and direction have to be agreeable, and by that time, you may be too late.
 
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