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Hi RTs,
If you like this mail, keep it.
If you dislike this mail, delete it.
If you forward this mail to your friends, make sure that my name is on
it.
General Concepts for Trading:
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A. Essential Elements:
1. Preservation of capital. This means "Don't over-trade" and "Don't
put all eggs into one basket". It is very important that we learn how
to avoid losses before we learn how to make profits.
2. Consistency. i.e. Consistently profitable. This is very very
important. "Consistently profitable" will lead us onto a stage of
"exponential growth". The only way to have consistency is to minimize
losses. (i.e. Cut losers quick. )
3. Superior returns. ONLY after the first 2 goals were reached, we then
attempt to achieve superior returns. The key to building wealth is to
preserve capital and wait patiently for the right opportunity to make
the extraordinary gains. (i.e. Ride winners. )
4. A mathematical edge. We need a good trading method that provides a
high probability of winning. Then, if we do have a good method, we
shall play only the hands that had a mathematical advantage according to
the method. In trading, our profitability depends on our edge (good
method) and how many times we get to apply that edge.
5. Risk control. Even if we have a mathematical edge, there are going
to be periods of significant losses. When that happens, we have to cut
back our bet size in order to avoid the possibility of ruin.
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B. Psychological Factors:
1. Patience. If we don't have the patience, we cannot wait for the high
probability trades according to the method. Never trade for trading's
sake.
2. A plan. A plan that is well defined according to the method. Don't
worry about what the markets are going to do. Worry about what you are
going to do in response to the markets. If we have a plan before we put
in a trade, then we know exactly how to react in response to the market
actions. In other words, pre-determine your exit point before you get
into a trade.
3. Worst case scenario. We need that. So, we won't bet the ranch.
4. Discipline. No plan will work if you don't follow it.
5. Selective. Every trader is going to have tons of winners and
losers. You need to determine why the winners are winners and the
losers are losers. Once you can figure that out, you can become more
selective in your trading and avoid those trades that are more likely to
be losers. Sometimes the reason people lose is that they are not
sufficiently selective. Upon analysis, a trader may find that if he
only concentrates on the trades that do well and lets go of the other
types of trades, he might actually be successful.
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C. Fundamental Factors:
1. Revolution. Anyone who had predicted "personal computer is the
future" or "internet is the way to go" before it happened could make
tons of money. Sadly, few had the insight.
2. Positive feedback and far-from-equilibrium state. I used these
concepts to develop my Far-from-equilibrium Macro Economic Theory, or
FFEE. It works!
3. Change. Observe the world. The world is always changing. Be aware
of change. After the Shah of Iran was overthrown in 1979, traders who
bought oil stocks and defense stocks were rewarded handsomely.
4. Buy value. If you buy a very good value, you will not lose much even
if your timing is wrong. (Unfortunately, I don't know how to do that.
Warren Buffet knows how to buy value, so he is very rich. )
5. Wait for a catalyst. We knew that gold should go up fundamentally.
I have bought gold coins since Oct. 1998. But I was disappointed. Gold
continued to sink. Well, until the European central banks'
announcement, that is. After that, gold shot up, vertically. Now, all
my gold coins are "in the money"!
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D. Technical Factors:
1. Always follow the trend.
2. Consider every trend as a driven oscillation. If it is at
non-resonance, enter the positions during the retracements. (Risk:
Lowest)
3. If the trend is at non-resonant state AND no retracements occur, we
shall avoid trading it. The reasons: (1) This type of trends is rare;
(2) A non-resonant trend that doesn't retrace often retraces immediately
after we get in. Oh, I learned this lesson so painfully! Exception:
If a non-resonant trend that doesn't retrace is backed up by the
fundamentals, we can enter the position but remember, under-trade! The
risk is the highest for this type of trends. (Risk: Highest)
4. If the trend is at resonance, go with the breakout rule. (Risk:
Medium)
5. Use 7-day MA and 50-day MA to determine the state of the trend, but
not the spot to enter.
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E. Chart Patterns:
1. Time. The longer the pattern forms, the more significant it is. If
the price moves away from a 3 month range, it is more meaningful than
another one moving away from a half month range.
2. Space. The tighter the pattern, the better the breakout. A loose
triangle often has false breakouts. A breakout from a wide range is
less significant than one from a narrow range.
3. Platform. It is very rare for price to go up or go down non-stop.
Usually, the price will slowly climb to a platform before it blasts off
into the space. Opposite is also true: the price often slowly declines
to a platform before it suddenly descends into abyss.
4. Converge. If price starts converging, watch out. This is similar to
the stress-strain relationship for a metal. Beyond the yield point the
metal stretches with a small increase in the stress. However, a small
increase in the stress does NOT mean "everything is fine". Strain
continues to increase and the breaking point will not be far away. Is
it any wonder that sharp breakouts usually occur after converging
patterns?
5. Range expansion. If there is a sudden range expansion in a market
that has been trading narrowly, human nature is to try to fade that
price move. When we get a range expansion, the market is sending us a
very clear signal that the market is going to move in the direction of
that expansion.
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I learned the above through a lot of readings and a lot of losses. I
hope this will help our trading.
All the best!
Mervin
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