Let’s think logically, how many times would a reversal in trend happen? 10% or 15% right? Then why are we always placing a bet for trend reversals?
The probability of success is not naturally in favour. The thrust of being able to catch the top/bottom often leaves back with the significant loss of capital. Trade the trend rather than contradicting the largest force around i.e. Mr. Market.
- Tweak your stop losses with stock volatility : Static trading disciplines have some pitfall, I’ll explain this with an example. Let’s assume you have a strong money management discipline to not lose more than 1% in each trade and that’s your fixed stop loss.
Did you know you should not be trading all stocks? Yes, you heard it right. All stocks have different characteristics & some have the average volatility of 0.5% a day & some range to 5% average volatility per day. Trading stocks with 5% volatility with a 1% stop loss may be statistically un-viable and chances of you getting triggered are quite high. You need to filter stocks that fit your money management or tweak your money management to a variable depending on stocks behavior.
- Greed: Short-term pullbacks within overall trend : The greed overrules when a small reversal in trend is visible in a long-term trending stock. For instance, a stock which has been going down for some time now witnessed a pullback for a couple of days and often to make money from those short-term pullbacks investors gets trapped in bad quality stocks.
Recall your trading history, I’m sure there have been many.
- Lose Small : I know the secret of your losses. Have you lost a large amount of money in few trades? Yes, that’s a common mistake trader do. A bad money management leads to large losses in a couple of trades.
As a trader, it’s important to lose small and gain big but often it is reverse. Remember, you still have a probability of winning big if you have chips but if you run out of chips, you are out of the game.
- Patience : Let me clarify, with patience I don’t mean holding on to a losing trade. Instead, it’s all about making the most when you are right. The market prices will reward you for your right research; don’t let it go for small profits, trail stop losses to ride it to the maximum possible.
You need positive outliers to sustain the game which is otherwise negatively skewed due to transaction charges, taxes, impact cost, etc. The positive skew will come from gaining large in few trades.
- Inverse Pyramiding : Often investors average their losing trades also known as pyramiding. Let’s take an example, what would you do if you have a cut in your hand a) seek first aid and stop the bleeding b) cut your hand more at a different place?
Of course, it’s option a, but why do we create more cuts when we know things are going wrong? Inverse pyramiding has worked well. Buy a decent tranche at entry with a defined small stop loss and reduce your cost by booking a few upwards & once comfortable stay with rest of the quantity till you make most of the trend.
- Respect when the market says, it’s not your day today: Knowing when not to trade can contribute big time to the PnL. It’s not necessary to trade every day. Some days will be beyond your understanding or beyond any rationality.
The market will indicate you that it’s a bad day for you with a series of weird movements and stop losses. Shut the screen for the day and give yourself a break.
- Defined Exits: You cannot dig a well after the fire breaks out. Define your exits before you enter in a trade, this will help you overcome your emotions and behave rationally. Remember any loss beyond this defined point only & only is the barometer of your emotions & not rationality.
