Authors Trader knight
// What are trend-lines?
Trend-lines are support and resistance lines which are formed by connecting Important swing points.
The beauty of using them is that We can use them when stock is not Respecting the Horizontal S&R zones, they can indicate us when the trend may change.
// Things To consider while Making trendlines?
• A trendline formed by using 3 Major-Swing points is a potential trendline, But we will also use 2 points to form a trendline, will discuss how, as you read further.
• Trendline can be formed by two ways-
In this method we only connect the wicks to make a trendline, this is a precise way of making a trendline.
// Why only connect the wicks?
There are two type of levels - Precise and Less precise (Which we call zones).
So what we are doing is by only connecting the wicks we are making a precise level where we can take trades, either Mean reversion or Breakout trades.
What is pyramiding?
In pyramiding we add on to a position when it is going in our direction. Its basically opposite of averaging down.
MOMENTUM - Success of a pyramiding trade depend on this ingredient, the more the momentum the better pyramiding.
There are many way to enter and exit in a stock-
1. ALL IN - ALL OUT
2. ALL IN - SCALE OUT
3. SCALE IN - SCALE OUT
4. SCALE IN - ALL OUT ( I use this one)
Why traders use Pyramiding ?
More than anything what pyramiding do is keep your losers small and your winners - Big.
Pyramiding in my view keeps your dd smaller as your losers are very small because you enters with only a fraction of what you would have entered Normally.
BUT, not necessarily it should be more profitable than ALL IN- ALL OUT, Where one enters all at once and sell all at once.
HOW TO DO PYRAMIDING-
There are various methods which are used by traders for pyramiding ,while keeping the basic concept of adding onto the strength.
1. PYRAMIDING AND TRAILING BASED UPON STRUCTURE-
In this method we scale in or pyramid the qty when the stock breaks above
Many traders face the issue of Not entering in trades because of fear.
A thread on How to pull the trigger when the opportunity knocks.
Lets First start from knowing the cause of this "FEAR" of pulling the trigger.
A traders goes through many phases before becoming Profitable.
The first phase is the " APUN HI BHAGWAN HAI" phase-
When we first begin Trading, we don’t know any concepts, we don’t know about the risks , the dangers.
So we start trading, and like most guys by beginners luck we start making good, we start to calculate how much money we will make in next 1yr, 5 yrs, Greed start to Hop in.
We get introduced to Various instruments, F&O, LEVERAGE.
We take big positions as we don’t have any FEAR cause we haven't seen those bad phases yet.
Now we get the Big blow, account down -50%, or in many cases wiped out.
The first phase ends here.
Now we know How the market can kick our ass, we now know the risk that comes with those big positions.
"THE LEARNING PHASE"-
Now we know that we were just lucky initially and now we have to learn why we get those losses, so we start learning concepts , fundamental, Technicals.
Holy grail- A strategy Which can make money all the time.
After going through two phases of a traders journey, the initial success phase, and Only why do i get loss phase, Traders enter the third phase -
THE SEARCH FOR THE HOLY GRAIL PHASE.
This phase has no limits, It can end in 1 month and it may not end till lifetime.
What exactly is this phase?
When a trader covers all the basics, they know how to lower their losses, they know the power of risk management.
And few of them may even develop their edges and systems over time.
But after some time, they feel that they are doing something wrong and there is more to trading than what they know.
THEN COMES THE HOLY GRAIL PART-
Few of them start to Read more books about trading,finding articles about “How to win 100% of the time” and listening to Youtube videos of few big traders who make big in trading.
Thanks for reading :)
Don't change your trading
"Don't change the trading rules after every trade."— Trader knight (@Traderknight007) November 29, 2020
If you do change them frequently then this thread is for you.
Let's talk about the law of large numbers and how it benefits traders to be profitable.
What is scaling in - out?
1. Scaling in is adding on to the positions when they move in our favor (Pyramiding).
2. Scaling - out is exiting the portion of the position when the trade moves in our favor.
I have explained about pyramiding in previous tweets.
// Why use scaling out instead of exiting all position at once ?
When you are using ALL - out method where you exit positions at once, mostly you use wider Trail SL as you want to capture big moves and exit all when trail sl hits.
The problem with this method is that either you make too big or many times your medium size winners turns out to become Scratch trades.
So, when we use the scaling out method, we are trying to capture most of our medium size trades , so that they do not turn into scratch trades.
// How to use scaling out method -
Say we have to got a signal to enter in a trade, and we have to buy 1200 qty according to our Position sizing.
So, we have to divide this 1200 qty into parts, how much? It depends on you.
We can divide into 3 parts, each part 400 qty.
A thread on Nature of stocks and how it can help you to improve your trading results.
First start with what is the nature of stocks ?
I broadly categorize stocks in two categories-
1. The momentum stocks-
These are the stocks where most of the moves are swift in nature, or we can say that the pullbacks in a trend are smaller.
2. The AKBC stocks-
These are the stocks where most of the trending moves comes with deep pullbacks.
So the purpose of categorizing these stocks, is that we Trade those stocks/instruments which are more suited to our style.
Say if you are a mean reversion player and you are trading in the momentum stocks category then you are more bound to lose over large number of trades.
Trader X -
Net-worth - 5 Cr
Trading capital - 25 lakh
Trader Y -
Net-worth - 30 lakh
Trading capital - 25 lakh
Trader X take risk of 2% per trade and he makes about 30-40 % Return on trading capital per month,
Whereas Trader Y only risk 0.25% per trade and he makes about 3-4 % on Trading capital per month.
Trader Y saw how much trader X is making with the same amount of capital that he has.
He is frustrated with his mediocre results as compared to Trader X, though he don’t know the fact that Trader X Is only trading with 5 % of his total net worth.
Trader X has much more risk taking ability in Rupee terms as compared to the Trader Y because he has higher net-worth.
Trader X will not have much impact when he goes into deep Drawdowns , 40-50% where as if the Trader Y goes below 15% DD , it will have deep psychological impact on him.
Even if the Trader X makes 100% return on his trading capital , turns 25 lakh into 50 lakhs ,
1. Clarity- When the mind is free from fear and ego
The first step to successful trading is to be clear about everything you do.
BUT, the reality is that most traders don't even know what they are doing.
And because of this-
They don't have any goals.
They don't have any Trading plan
They don't know what is suitable for them
And the list goes, on and on.
If you are among the people as described above, don't worry, There is nothing wrong with you, almost 90% of Traders are like that.
So, what do you have to do to get CLARITY in your Trading-
Find one style that is suitable to your personality and double down on it.
In this world where we have plethora of information just one click away, most people are distracted and see a Glowy thing every time they go over the social media.
They Find something new every now and then, jumping from one strategy to another, searching for Holy grail.
A thread on how loss Aversion causes us to take irrational decisions-
An experiment by professor Bazerman of Harvard.
On the first day of class, Professor Bazerman announces a game that seems innocuous enough. Waving a twenty-dollar bill in the air, he offers it up for auction.
Everybody is free to bid; there are only two rules. The first is that bids are to be made in $1 increments. The second rule 30 The Swamp of Commitment is a little trickier.
The winner of the auction, of course, wins the bill. But the runner-up must still honor his or her bid,
while receiving nothing in return.
In other words,this is a situation where second best finishes last. Indeed, at the beginning of the auction, as people sniff out an opportunity to get a $20 bill for a bargain, the hands quickly shoot up, and the auction is officially under way
A flurry of bids follows. As Bazerman described it, "The pattern is always the same. The bidding starts out fast and furious until it reaches the $12 to $16 range." At this point,
Most of them do make money, its just that they give it all back.
Lets analyze why and how a trader makes and loses money
Below is the equity curve which is most traders dream.
This is equity curve of an average trader:
Most traders do make money, but they give it back to the markets .
Because of trading errors.
What are trading errors?
Trading errors are those errors which happen because of wrong Position sizing, Leverage , etc.
I am not making this up, check your P&L, 90 % of your losses would have come from less then 10% trades.
Most of these happen because of No knowledge, No plan, bad position sizing .
Now, we know what's the problem, lets talk about the solution.
1. Learn the Basics first-
If you don’t get the basics clear then how can you make money?
Learn How to use Support and resistances
Learn How to use trend lines
Learn about trend, it will solve 90% of your problem
Has this ever happened to you, That you are up 10% on the month and you feel crazy, but the next morning you give it all back to the markets?
What Causes You to Give It All Back?
It is the state of mind in which we can not perceive risk, In state of euphoria nothing can go wrong.
So when you are in this state of mind, you feel invincible and there is nothing in the world which can stop you from making money.
That’s why when most of the traders after a winning streak put a Huge position and then Boom, all the luck goes for a toss.
Think about it why most of the traders loose big money when the market starts to go in bear mode from bullish mode, because
when the markets are in a bull market, even if you take trades based on your neighbor recommendation most of them will be right
"Felling too good is not good for your trading"
Winning gives you dopamine rush, And when you trading to get right often you are just feeding your ego
The evolved trader recognizes that winning simply means that you landed on the right side of probability. That’s all. There is no reason to get excited.
It’s just probability and you have an edge that gives you an advantage in the randomness of probability.
Casinos make consistent profits day after day and year after year, doing something random
At the same time, most traders believe that the outcome of the market's behavior is not random,yet can't produce consistent profits
What casino owners ,professional traders know is that probable outcomes can also produce consistent results if you " Have an edge" and trade on a large enough sample size.
The best traders treat trading like a numbers game.
1. To illustrate, let's look at the game of blackjack-
In blackjack, the casinos have approximately a 4.5-percent edge over the player.
This means that casinos will make profit over a large enough sample size, even after several winning streaks and big profits of many players.
At the end of the day, week, month, or year, the casino always ends up with approximately 4.5 percent of the total amount wagered.
That 4.5 percent might not sound like a lot, but let's put it in perspective.
Suppose a total of $100 million dollars is wagered collectively at all of a casino's blackjack tables over the course of a year. The casino will net $4.5 million.
What casino owners and pro traders understand about the nature of probabilities is that each individual hand played
A thread on Trend (Market structure)-
A trend is a path of least resistance, basically the side where the smart money is betting upon.
And our work is to be on their side, to make some money.
Why do we use trend?
In an uptrend, the sum of the rallies will always be greater than the sum of the declines.
In a downtrend, the sum of the declines will always be greater than the sum of the rallies.
How to Find the trend?
There are 3 methods which one can use-
1. Swing points method.
2. Moving averages.
3. Trend lines, channels.
1. Trend identification by using swing points-
• UPTREND in simple words - Higher highs, higher lows
• DOWNTREND in simple words - lower lows, lower highs.
• Flat trend - The price stays in a range
WHERE TO PUT THE SL-
1. NEAREST PIVOT/SWING POINTS-
Normally I use this method for placing sl, In this method we use swing point for placing the SL.
As normally the stock would not try to go below previous swing point if it is to go in our direction.
2. ATR method-
Sometimes the Stock do not have any nearest pivot at time of buy, So we use this method as it gives us a level on basis of current volatility of the stock.
I use 1.5 ATR away sl , say the ATR at point of entry is 30, so I place sl
1.5 X, or 45 rs away from entry
In below example the entry is 120, ATR=5, SL= 1.5X ATR= 7.5 OR 113.
Nearest pivot was too far away, that’s why this method is used in these cases.
4. Anchor candles-
Anchor bars are those which have extreme Volume, gaps or wide Ranges.
Here, we place our sl below those candles which has the above characteristics.
Thread on How Over-analysis leads to decision Paralysis-
What is Analysis paralysis?
In simple terms, analysis paralysis is a person's tendency to over-analyze or over-think upon a decision to such an extent that he/she fails to make a choice resulting in a paralyzed state of inaction.
How a retail trader trades-
A trader named Rahul, He know all the basics of markets, He also has made a system which gives signals on nifty, he has also encorporated good Risk management and Position sizing into his system.
One day he gets a signal to buy Nifty at 13500 with stop at 13450, he wanted to take the trade, but he wanted to get sure that the trade he has take should be a winner.
So he says just let me check the RSI if its above this level I will buy , he checks it and it was above his
level, then again he wants to check another indicator named MACD, he wanted to get sure man, Now he do the most intelligent thing to get sure he gets right.
He goes to twitter and ask his twitter Friend Trader knight he ask him that should I buy nifty at 13500,
Ever faced stress and strong emotions after having loss day and under-performance for a long time after that?
Thread on Emotion and how to control them with help of trading journal
Poker players calls it TILT.
Tilt is pretty much any reason for you to trade sub-optimally.
Greed and fear are tilts in trading.
When normally you have a stressful day (not in trading) and you go to bed with a bad mood, the next day you wake up fine without much stress .
So where did the emotion go?
The brain absorbs and digests all the emotions.
But, when you have a big emotional and loss day , and then a sleepless night, the brain cant digest those emotions as easily.
The next day you wake up to trade , you don’t feel quite right, you feel fear.
So, now you are not starting with an empty cup.
Now your tilt threshold level ( the level where your decision making ability reduces and you take bad decisions ) decreases.
Now, you will be angry a little faster then normally and feel fear more then you do.
So,how to empty your mind after having a bad or even a good day?
By using a Trading journal.
In simple words Volume climax is the last "AHA" movement for the public before the stock make a top or bottom.
What is Volume climax?
• Volume climax appears at the extreme of a trend, or when top or bottoms are formed.
• Most of the time volume climax appears when breakouts happens after a long extending move, and then fails to hold at higher levels.
• In this, at time of breakout we see big volumes (atleast 2-3X more then normal volume) coming in stock when the stock is already extended.
• More volume is not always good, though retail traders doesn’t distinguish between them.
• After the Volume climax we may see a top/bottom or at-least the trend becomes sideways.
• The best setups are those in which we see full reversal candles with big range.
Example of volume climax-
1. The stock was in Uptrend, And has give a quite good run , Stock was giving a big move as you can see in last 2 candles, they were super extended.
2. But at the top candle, the bulls lost the control and the stock closes with a weak candle,
What is objective Trading?
Trading in which decisions are taken on pre-decide rules, decisions in objective trading are not decided by Feelings or opinions.
What is subjective trading?
It is discretionary trading, in which one uses his intuitions and Analysis to take trading decisions.
Is one superior to other?
The rules in a mechanical system are going to be decided by you, the plan is going to be made by you,
the positions sizing and all other aspects are going to be made by you.
So your psychology is going to filter the information coming towards you, even in a mechanical system as well as in discretion.
WHATS THE USE OF OBJECTIVITY-
I am a Discretionary - Rule based trader.
So, I take trades based on my analysis, my entries are discretion based, but the exits , position sizing and Risk management rules are pre decided.
WHY USE SUBJECTIVE TRADING?
The biggest benefit that objective trading do is that it makes the chances of you thinking less during the time of taking an execution decision.
As a beginner trader you will not have much experience, and you will inevitably do a lot of mistakes.
In trading one of the important things we learn is that we should cut our losses short and hold on to the profits.
Most of us plan to implement the same from the next trade.
When we take the trade, If the trade goes in profit we panic more then we would have panicked if the trade would have gone wrong.
Strange right, why would someone panic if the trade is going in profit.
New traders may not go through this emotion as they may have not gone through the Fear which a little more experienced (still not profitable) trader goes through.
Let’s name this little experienced trader Rahul.
So, lets say Rahul takes a trade, he buys Reliance at 2000, with SL at 1980.
He is ready to “ FOLLOW THE PLAN” of holding the profit and exit if trade goes wrong.
Now, Reliance goes to 2010, Rahul is happy, panicked, Feared.