Here at Srilanka Share Market, we’re on a mission to provide first hand information to those who are willing to invest or trade in Colombo Stock Exchange. Also heading into share market could be scary, but we SriLanka Share Market turn that fear into fun by providing educational, research materials from respectable sources.
Price has memory – traders experienced pain, pleasure, and regret associated with a linear price level
Kahneman & Tversky found the reflection effect proved that people were risk-averse regarding choices involving prospects of gains and risk-seeking over prospects involving losses
We can NEVER know all the reasons why the market rose or why it fell, but we can develop various rules for entry, exit, and risk management based upon objective, mathematically derived technical formulas
Price Risk Management Methodologies
In higher volatility environments we need to place our stops further from our entry price so we can avoid being needlessly stopped out of trades; in lower volatility place stops closer to entry
Any idiot can take a profit. Professionals know how to take losses
Maintaining Unwavering Discipline
All humans have a psychological bias against taking losses -Kahneman & Tversky
We abandon discipline in risk management because we do not want to admit that we are wrong
Trader Tools and Techniques
Capitalizing on the Cyclical Nature of Volatility
Trading the Markets and Not the Money
That which is psychologically natural and comfortable leads to failure
We need to think about profits in terms of probabilities instead of personal monetary needs
Minimizing Trader Regret
Unrealized gains are your money and need to be treated in the same casino paradigm manner as all monies in your trading account
Regret minimization helps a trader be even-minded, take partial profits and move stops to break-even on the remainder
Never let a statistically significant unrealized gain turn into a statistically significant realized loss
How to Use Trading Models
Anticipating the Signal
Don’t anticipate, just participate
Transcending Common Trading Pitfalls
All market behaviour is multifaceted, uncertain, and ever changing.
“I am employing a robust, positive expectancy trading model and am appropriately managing risk on each and every trade. Losses are an inevitable and unavoidable aspect of executing all models. Consequently, I will confidently continue trading.”
Denial of loss and uncertainty is extremely destructive because it prevents us from thinking in terms of probabilities, planning for the possibility of loss, and consequently from the necessity of consistently managing risk.
If we view markets as adversarial we cut ourselves off from emotionally tempered, objective solutions to speculation (opportunities to profit)
Blind faith is no substitute for research, methodical planning, stringent risk management, playing the probabilities, and unwavering discipline
Depression is a suboptimal emotional state because it allows past losses or missed opportunities to limit our ability to perceive information about the markets in the present
We are not our trades; they are merely an activity in which we are engaged
Greed is linked to fear of regret, which is the greatest force impeding a trader’s performance outside of fear of loss
Market offers limitless opportunities for abundance
Trading biases prevent us from objectively perceiving reality, thereby limiting our ability to capitalize on various opportunities in the markets.
Do you have other professional time commitments?
What prevents you from giving up during draw downs or from becoming reckless during a winning streak?
Have you deviated from your methodologies and if so, why?
After deviating from your methodologies, what specific steps do you take to prevent deviation in the future?
What threshold of AUM will impede your ability to trade specific instruments?
How many strategies are you currently trading?
Did you develop these models?
Is your performance real or hypothetical?
What assets are currently traded?
Does typical number of trades executed change during winning or losing periods?
Describe your various methodologies?
Are the models always in or do they allow for neutrality?
Same methodologies in all markets?
Are trade entry and exit criteria different?
Do the methods work better on a specific time horizon?
Are the methods more robust in specific types of market environments?
What are the strengths and weaknesses of the methods used?
Do the methods use diversification?
How do you determine assets traded?
How do you determine entry, exits, and stops?
How do you determine position size and leverage?
Do you add to or reduce exposures on winning positions?
Is fundamental information used?
How do you deal with price shock events?
Describe indicators used and how they form your methodologies?
Long or short biases?
What is the rate of return and worst peak-to-valley equity drawdown objectives?
How do you account for correlations between assets traded?
Type of stops used?
Do you adjust position size following significant profits or losses?
What percentage draw down would result in closure of your account?