Saturday, July 17, 2010

Last Bar

Alright we have seen how some add ons such as the rejection rule can improve the 55-20 trade. We are going to introduce another technique, that is the Last Bar.

This Last Bar technique is very simple, and it is also based on the instant gratification rule. Ok first what is a last bar? A Last Bar is defined as the last bar that has some of the bar prior to breakout; or the last bar that has any part below the breakout level.

So how to use the last bar? This technique is a technique that can help you increase profitability. Move the stop loss to the bottom of the last bar whenever this senario arises, instead of having a stop at the 20day line. This way, your stop loss is less and you can hold a larger initial position based on our risk management basics. The Last Bar increases the profits, yet cuts the risk.

So there are a couple of exit/stop loss rules with the 55-20, which order do we follow, where do we place our stop loss or exit? Right, the order goes like this, follow the Rejection Rule first, Last Bar second, then the 20 day low.

Hope with this you will gain more confidence in trading. We have ended the technical analysis portion of our techniques, next we will look at trend analysis to further boast our profitability.

Monday, July 12, 2010

Rejection Rule

Ok, we have talked about channel breakouts in our previous post and how to profit from them. Now as we constantly trade, we also constantly make improvements. Today we are going to be talking about Rejection Rule.

Rejection rule is basically an exit strategy. It helps to filter out trades that have a higher chance of being not profitable. This strategy often allows us to double our entry with the same risk.

So how and when do we apply the rejection rule? First we have to understand how the rejection rule comes about. The rejection rule is built on the principle of instant gratificaton; enter a trade and expect to win right from the start, if it struggles, it is most likely not profitable. Winning trades mostly win right from the start.

The only condition for applying the rejection rule is the 5 day condition. Only use the rejection rule if only the 55day highs have the same highs for the past 5 days prior to breakout. And the rule states that - Exit 55-20 trade on the day or 1 day after breakout if the close for the day is lower/higer than the breakout/breakdown.

For example a long position, if the day closes below the breakout level, right after a 5day same high, we know based on instant gratification rule that the trade is not instantly profitable hence we exit the trade. Remember all good trades, you expect to win right from the start.

Saturday, July 10, 2010

Risk Management

For a system to work, the psychology, discipline is very important, the most important. Next after psychology, risk management comes next. A bad risk mangaement can create stress that affects the psychology. A bad risk management can kill a perfectly good system.

In a fair game, let's say you flip a coin 1000 times and you were to bet $10 per flip on heads or tails, with a starting capital of $100, what is the amount you expect to end up with after 1000 flips? What are your chances of winning?

The answer to the above, you may think you will end up with $100 still for a fair game, no win no lose, 50%-50%. However this is not true. You will have over 90% chance that you will end up with $0, claypot.

This is simply because out of a 1000 flips, as long as you lose 10 consecutive times, $100 is gone. And out of a 1000 flips, the chances are pretty high that you might lose 10 or 20 in a roll.

This is where risk management comes in. Betting $10 per flip or 10% per flip is too high. If you apply proper risk management, and use 1% per flip, your chances to claypot is less than 1%. With the law of large numbers, in the long run, you can always expect the result you are looking at, so you have to stay in it for the long run and not go to ruin after the 10th attempt.

So the recomended strategy to use for risk anagement is the fixed fractional method. Bet a % of the total money you have in your account. This is the best method for blance between risk and rewards.

For beginners, start small, say 0.5% per position. Then as you gain experience and confidence, gradually increase to 1% or 2%.

Now with this, you can start trading without fear of ruins.

Sunday, June 27, 2010

Channel Breakout II

In my last post, we talked about channel breakouts, using the 20 day high/low. With this method, you will always be in the market, because once you hit your stop loss, it would automatically means you had a breakout/breakdown on the other side.

In a improved method, we use the 55 day high/low as entry points when it breaks, but keeping the 20 day low/high as our stop loss. This method reduces noise in the market. When using this method, there will also be periods when we are in no trade, when the market is flat. This is because you do not go in the trade till you break the next 55 day high/low, after you are stopped out by the 20 day low/high.

Techniques and methods are constantly being tried and test, put on the battle field and new improvments always being made to make the system more efficient and/or reduce risk while increasing profitablity.

P.S: Courtney Smith is indeed a great teacher.

Channel Breakout

This is a technical analysis that is around for well over half a century, and it had been profitable year in and year out ever since. This techniques keeps you in the market at all times, either in the short position or the long position. You do not flat the market with this.

Basically the channel breakout analysis is able to capture all the big moves in the market, so you might lose a little on some trades, but once the market conditions is right, you will capture the big moves and make alot from the rally.

For channel breakout, you can use it for any market, such as futures, stocks, forex etc. The basic priciple it follows is the 4 week rule. In simple words, first plot 2 lines, the 20 day high and the 20 day low on the chart; and if the market moves above the last 20 day high, take a long position and if the market moves below the 20 day low, take the short position. The stop loses are at either the 20 day high or 20 day low, for short position and long position respectively. So at all times, you are in the market in either a long or short position.

After some improvements and tweaks to the technique, the channel breakout now uses the 55 day high/low as one of the indicators. More on that in the next post.

Tuesday, June 22, 2010


Discipline cannot be taught, you have to do it yourself. However, there are steps and ways that can help you along the way to master discipline.

In trading, always have a trading plan. A trading plan is writing down your analysis, both technical and fundamental, and then your action to take. Next step is to execute your trading plan once it is done without making any unnessesary changes to it. Having a trading plan first also helps to reduce the emotions and psychological effects on your trading.

Other than having a trading plan, always do post mortem of your trades when you close them. Find out if you could have done better or anything wrong with your analysis, or if you did not have discipline in following your trading plan. When doing your post mortem, this is where your written trading plan comes in handy as you always have a record of your thought process and action.

P.S: All information in this post and some that follows are taken from Courtney Smith's teaching. I hope to blog it down to reinforce my learning and for sharing.

Monday, June 21, 2010

Psychology of Investing

Today is the first day of starting my course in maxfuturesprofits. Just want to share some things which I learnt.

The most important factor in investing is (to have) correct psychology, which can be affected by:

-Adequate Capital
-Adequate Time

We want to achieve stress free investing and we can achieve that by:

- Using scientifically proven and battle tested strategies

- Becoming the casino

- Having proper Risk Management (the 2nd most important factor for trading)

P.S: Making a start is the first step. Taking Courtney Smith's maxfuturesprofit course is one of my best action step.

Invest and Cheer

At the World Cup, when a soccer player scores a goal, his team mates cheer, his country cheers.

When something happy happens to you, you cheer out in joy.

When you make lots of money, you cheer.

Everyone loves cheer.

Who wants to know how to make investments that allow them to cheer, investments that makes them money? I do.

I am not able to teach you how to, yet. But in the course of my pursuit for it, I will be sharing some things I learnt and some of my thoughts here.

P.S: All things have a higher purpose, this is my higher purpose.