Pyramid caveats

...cont'd from yesterday...

Van provides three caveats about pyramiding.

First, decide what percentage of your entire portfolio value you’re willing to risk with your pyramid. For example, decide that you’ll only risk losing 5% of your entire portfolio value. Then pyramid only to the extent that if your stop loss is hit on all positions in the pyramid, only that figure (in this example, 5%) is lost.

Second, only pyramid if the last position added to the pyramid is profitable. In other words, the previous layers in the pyramid have to be profitable before you add the next layer.

Third, new layers in the pyramid should be smaller than the base. The next layer doesn’t have to be smaller than the immediately preceding layer. It just has to be smaller than all the previous layers added up.

…back next week, skipping out Friday…

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Cash from pyramids

...cont'd from yesterday...

One good way to buy without using money is to use accrued profits on a winning position to amplify profits by pyramiding.

A psychologist who has studied hundreds of successful and unsuccessful traders reports observing three types of pyramiding used by the successful group. See Peak Performance For Investors and Traders by Van K. Tharp.

Type one pyramiding involves adding half of the prior additional quantity of the instrument traded on each occasion that you add positions using accrued profits to meet margin requirements for them. For example, first you buy 12 contracts, then you buy 6 (half of the prior quantity of 12), then 3 (half of the prior quantity of 6) and then 1 (half of the prior quantity of 3, rounded down).

Type two pyramiding involves adding half of the total existing position for the instrument traded on each such occasion. For example, first you short sell 12 contracts, then you short sell 6 (which is half of 12) resulting in a total of 12 + 6 = 18 contracts, then you short sell 9 (half of 18) resulting in 12 + 6 + 9 = 27 contracts total, and then 13 (half of 27, rounded down) resulting in 12 + 6 + 9 + 13 = 40 contracts.

Type three pyramiding involves adding equal amounts of the instrument traded on each such occasion. For example, first you buy 5 contracts, then you buy another 5, and finally buy another 5.

...cont'd tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Buying without money

You can buy stocks and futures (especially futures) without using your own money.

Have you seen ad’s about buying real estate for no money down? It’s true, you can buy real estate with no money down. I know because in a previous life I worked as a lawyer and had done legal work for investors who bought real estate with no money down. In fact, I even had cases where the buyer got paid up-front to take the property!

The leading present-day authority on buying real estate with no money down is Robert Allen, author of numerous books including Nothing Down for the 2000s: Dynamic New Wealth Strategies in Real Estate

You can do something like this in trading stocks, futures and forex! That is, you can buy without using your own money.

That’s the topic of this week’s series of blogs.

...con't tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Tony's advice on common psychological issues

...cont'd discussion about How to Take Money from Wall Street: Learn to Profit in Bull and Bear Markets

Tony has advice on psychological matters including the following.

Supportive Environment. If you family opposes your engagement in trading, then you likely will fail at it.

Faith. You must believe that you can succeed at trading or else you won’t.

Attitude. Every day before you trade, you must check yourself to see if you have a positive attitude that day. If not, skip out on trading that day.

Patience. You must exercise patience in waiting for trades that fit your trading plan. Second, when you get into a trade, you must patiently hold on to it until you get an exit signal pursuant to your trading plan.

Losing is part of the job. If you can’t accept that, don’t trade.

Trade management. Manage each trade as if you’ve completely forgotten about what happened on past trades so those past trades don’t cause you to trade based on emotions.

Confidence. Trust yourself to make the right judgment call.

How to think the right way. Look for the positives when trades don’t turn out the way you wanted.

Discipline. Write out your trading plan so you know what it is you’re supposed to do.

Taking the blame. Consider what it is that is within your control to change when things don’t go the way you want. Things within your control are your own role in whatever went wrong.

Pressure. If you can’t handle it, quit.

Ego. Let your ego be your friend instead of your enemy. You need it to trade, but it can hurt your trading.

Comfort level. Trade in a way that feels comfortable.

Winning streaks. Use the same trading strategy throughout your winning streak.

Losing streaks. Take a break and come back later to trade. Make small profitable trades to regain your confidence.

Regrouping after a big loss. Take a break and come back later. Start your comeback with a trade in a longer time frame than usual.

You don’t have to trade everyday.

The stock market is not a battlefield.

The devils of stock trading. These are greed, fear and hindsight.

Finally, Tony says don’t bother trying to use news for finding stocks to trade. Instead, he says to find stocks to trade in the following way:

1. Your own watchlist composed of favorite stocks that you regularly trade.

2. Sector indicies.

3. Real-time scans based on above average intra-day volume.

Half the pages in the book is devoted to the third category of stock selection. Luckily, the first half of the book is valuable because the second half isn't.

...back next week...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Guidelines for discretionary stops and profits

...cont'd discussion about How to Take Money from Wall Street: Learn to Profit in Bull and Bear Markets

One exception to Tony’s practice of opening a new position in anticipation (instead of after completion) of a pattern is how Tony uses Head and Shoulder patterns. In those, he waits until after the Neckline is broken. After the Neckline breaks, if price retraces to a trendline connecting the Head and Right Shoulder, he enters at that trendline.

Tony says that after entering a new position, he uses any one of the following as his Initial Stop for long positions (presumably vice versa for short positions). He also uses them as Trailing Stops:

Below today’s low
Below yesterday’s low
Below entry day’s intraday support levels
Below multi-day intraday support levels
Below 50% retracement of last intraday rally
Below an index day’s low or intraday support level

Tony provides express guidelines for discretionary profit taking.

Tony’s Price Targets include (for long positions and vice versa for short positions):
Near previous tops/bottoms
Top of a trading channel
Upper Bollinger Band
Moving Average (20 day, 50 day or 200 day)
50% percentage of the last corrective phase.

Which of the many Price Targets that Tony will pick depends on what the stock has done already prior to entry into a position. If Tony believes that the stock has already had a “big run”, then he uses one of the foregoing that is a closer Price Target. If he believes that the stock is still trending and has more room to go, then he uses a larger Price Target. And if he believes that the stock has just broken out of a sideways range, he will use a very much larger Price Target. Those are his guidelines for exercising discretion in selecting a Price Target.

Additionally, the Price Target Tony picks depends further on the market overall environment, whether the overall environment is Bull, Bear or Sideways.

Furthermore, as price approaches his Price Target, he tightens his stop loss in a parabolic fashion. He provides a mathematical formula for tightening the stop based on what percentage of the move between entry and Price Target has been completed. As more and more of the distance between entry and Price Target is completed, the tighter the stop.

Here’s a hypothetical example that comes to mind (not in the book). Let’s say the Price Target is $5 away from entry. When $1 profit appears, use a breakeven stop. When $2 profit appears, use a $1 stop. When $3 profit appears, use a 90-cent stop. When $3 profit appears, use a 70-cent stop. When $4 profit appears, use a 35-cent stop. When $5 profit appears, use a 5-cent stop. The foregoing is an illustrative example and not based precisely on Tony's mathematical formula. Hope you get the general idea though.

These guidelines remind me of something I learned in law school -- "discretionary powers are not to be exercised whimsically, but on the contrary are to be exercised strictly in accordance with specific guidelines and rules of law". Whereas Tony's stops and profit taking strategies are of the discretionary genre, he uses specific guidelines and rules for applying them instead of whimsically applying them.

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Tony's breakout patterns

...cont'd discussion about How to Take Money from Wall Street: Learn to Profit in Bull and Bear Markets

Most other books on “how to trade” deal with setups for entries. Tony’s setups for entry into a new position are all breakouts from patterns. Patterns he looks for breakouts from include: Double Bottoms, Double Tops, Head and Shoulder, Reverse Head and Shoulder, Triangles, Flags, Hanners, Shooting Stars, and Doji’s. Tony says he always takes all or part of his new position in anticipation of the pattern completing and does not wait for the breakout. He says that he uses a stop loss order in the direction opposite of the breakout to abort the trade with a small loss if the the breakout doesn’t happen.

There's nothing new about the patterns that Tony uses. There's plenty of literature on them in other books and all over the Internet.

The book’s specific strategies are of the “Swing Trading” type where the time between exit and entry is a few days. Also, Tony likes to exit half his position when price reaches a predetermined target (as opposed to letting the entire position run with a trailing stop).

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

60 to 1 Reward Risk Ratio

...cont'd discussion about How to Take Money from Wall Street: Learn to Profit in Bull and Bear Markets

By superior money management, Tony means the following:

Limit the amount of money you put on any single trade to a fraction of your account balance, such as 12.5% or 25%. That’s to guard against loss due to a catastrophic gap down where the price of a stock is cut in half, a common occurrence following bad news.

Limit the amount of money you put on any single trade such that if your stop loss is hit, you lose only 1% of the value of your account balance.

The foregoing advice is information normally given out only at seminars costing about $3,000. Tony gives that information out in a book with a sticker price of less than $50! That's a 60 to 1 Reward to Risk ratio.

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Take money from Wall Street

How to Take Money from Wall Street: Learn to Profit in Bull and Bear Markets is a brief but valuable book for the price compared to other books on trading.

According to Tony Oz, the author, the Holy Grail of stock trading are superior money management and exceptional mindset.

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Enhancing trader performance

...cont'd from yesterday...

If you need or want to manually enter your stop loss orders, you’ll need to make it a reflex reaction. That is, as soon as you notice that you got a fill, your reflex reaction is to enter a stop loss order. Practicing that on a simulator will condition that reflex reaction in place.

In Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology, Brett N. Steenbarger reported observing that the top traders he has worked with spend time in front of a trading simulator.

To make practicing effective, a pleasant way that’s better than “discipline” is using the six step method mentioned in my new website page entitled ”Replace Discipline”.

...back next week...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Condition yourself to use automated stops

...continued from yesterday...

Many trading software programs allow you to couple a stop loss order with your order for a new position. That is, the software allow you to tell the computer what stop loss order you would like to be sent if and when your order for a new position is filled. Then when your order is filled, your stop loss order is automatically sent. If your trading software doesn’t have that feature, you’ll have to program yourself to react consistently to order fills with a manually entered stop loss order.

But even if your trading software has the foregoing feature, you still have to get yourself to use that program. That is you have to program yourself to consistently fill in the stop loss order portion of your order ticket for a new position. Otherwise, having that trading software feature won’t make any difference.

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Cancel-replace discipline

...continued from yesterday...

One way is to get yourself to execute stop-loss orders consistently in a reflex-like manner is to “discipline” yourself. Do you enjoy “discipline”? Or do you have an adverse reaction to that idea?

I’ve discovered something better and more pleasant than discipline. It’s described at my website’s new host on the page entitled Replace Discipline.

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Stop loss reflex action

...continued from yesterday...

Here’s an analogy for thinking about using stop loss orders.

Drop by your local judo or aikido school. You’ll notice that one of the first exercises in every class is practicing proper falling. In judo and aikido, you fall down a lot due to getting thrown on the ground frequently by your opponent in the fight. That’s like in trading where your trade goes the wrong way often. Therefore, in judo and aikido, you have to practice proper falling so that doing them becomes a reflex reaction to getting thrown on the ground. Likewise, in trading, you have to practice stop loss order entry so that doing them becomes a reflex reaction to a losing trade.

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Stop blowing up your account

Letting losses exceed your budgeted stop loss point is a good way to blow up your trading account. That’s well-know. However, it’s not well-done. This week’s series of blog articles will be about how to get yourself to do what you know you should do, namely executing a stop loss.

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Easy 10% per month profits, 5

...continuation of discussion about Trade Your Way to Financial Freedom

Van says that day traders can do even better, theoretically. Assuming 20 trades per day, 0.40 Expectancy, and taking 0.5% risk of Account Balance on each trade, then it’s theoretically possible to get 50% per month day trading. He says this would be easy.

Van says that position traders can also do well, but not as well as the more active traders. Assuming 50 trades per year, 1.30 Expectancy, and taking 1.0% risk of Account Balance on each trade, then it’s theoretically possible to get 75% per year position trading. He says this too would be easy.

...back next week...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Easy 10% per month profits, 4

...continuation of discussion about Trade Your Way to Financial Freedom

Note that with a system having a 30% win rate, you need the average win to be 4.32 times the size of your average loss to get the same results. With a system having a 70% win rate, you need the average win to be 1.28 times the size of your average loss to get the same results. In other words, the more accurate your system, the lower the win/loss ratio has to be to get these results. Also note that if your system is right almost all the time (90% win rate), you could lose more on average than you make and still get these results!

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Easy 10% per month profits, 3

...continuation of discussion about Trade Your Way to Financial Freedom

Using Van Tharp’s assumption of risking only 1% on each trade and making 20 trades per month with a system having an Expectancy of 0.60, here’s my calculation of the results assuming further that the account size is $100,000.

According to my calculations, if you have a random system where your average win is 2.2 times the size of your average loss, then you would have an Expectancy of 0.60. I’ve seen many such systems so that part is plausible. With that Expectancy, after 20 trades, you can expect 12% profits on your $100,000!

 

Somehow, the Table showing my calculations is far, far down this page with lots of blank space. You'll have to scroll down to see it. Tech support can't seem to figure out how to delete the blank space!

Av Win	% Win	Av Loss	% Loss	Exp	Trades	Net Profit	Profit/$100,000
15,000	10	1,000	90	0.60	20	12,000	0.12
7,000	20	1,000	80	0.60	20	12.000	0.12
4,320	30	1,000	70	0.60	20	11,920	0.12
3,000	40	1,000	60	0.60	20	12,000	0.12
2,200	50	1,000	50	0.60	20	12,000	0.12
1,670	60	1,000	40	0.60	20	12,040	0.12
1,280	70	1,000	30	0.60	20	11,920	0.12
1,000	80	1,000	20	0.60	20	12,000	0.12
780	90	1,000	10	0.60	20	12,040	0.12

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Easy 10% per month profits, 2

...continuation of discussion about Trade Your Way to Financial Freedom

The author did not illustrate how a trader could get the results he mentioned (50% per month for day traders, 10% per month for swing traders and 75% per year for position traders).

One way to test this is to run a test on a portfolio of stocks.

Instead, I decided to try some mathematical calculations to see if the claims were plausible.

I worked out the numbers using a definition of Expectancy where
Expectancy = (Average Win x %Win) – (Average Loss x % Loss) / (Average Loss)

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Easy 10% per month profits

There’s an exciting statement made in Van Tharp’s second edition of Trade Your Way to Financial Freedom

The statement does not appear in the first edition of the book, namely that “a swing trader who makes 20 trades per month could easily make 10 to 15 percent per month” (page 447, second edition). Van, the author, makes similar statements about day traders making 50% per month profits and long-term position traders making 75% per year.

...continued tomorrow...

Website Home has MOVED to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Hilary's trend detection, tip 9

...continued from yesterday...

…continuation of discussion about Hilary Kramer’s Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends

Trend Tip 9: Sometimes, you can make money going against the trend. This is kinda vague.

...back next week...

Website Home has moved to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments

Hilary's trend detection tips 7 & 8

...continued from yesterday...

…continuation of discussion about Hilary Kramer’s Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends

Trend Tip 7: Trends starting in other parts of the world, especially China and India, will arrive in a neighborhood near you soon.

Trend Tip 8: What you wish for could be the subject of the next big trend

...continued tomorrow...

WEBSITE HOME PAGE has moved to:
http://LeisurelyCashFlow.Googlepages.com

Copyright 2008 Raymond T. Lee. All rights reserved.
LeisurelyCashFlow
eMail me Comments