Saturday, October 15, 2011

essence of day trading


like millions of others
i have been
and am
the fan of mike tyson
former undisputed heavyweight world champion.

he won his first 19 professional bouts by knockout
12 before the end of the first round.
in 1988, he knocked out michael spinks in the 91 seconds.

but when the fight lasted 10 rounds
in a fight with james "buster" douglas in 1990
mike himself got knocked out.

--

a fight worth a few million dollars
lasting a few seconds
makes every second quite pricey!!!

--

now here is the beautiful question -
should the bout be short or long?

well,
from the audience and tv channels and sponsorers point of view
it should last quite a few rounds.

from tyson's point of view
it should be over as fast as possible.
the more time it takes
the harder it may get to beat the opponent.

after all,
a career and hell lot of money is at stakes.

longer fights have more entertainment value
but increase risk of losing!

--

now lets extend the scope of this question
to trading!

should the day trade "bout" be short or long?

while longer trades have high "entertainment" value
they don't necessarily have higher "prize" value for the trader!

rather it is often the opposite.
the longer it takes to be profitable in a day trade after getting into the trade
the lesser the chance of making profit
and more the chance of one being in the wrong trade.

as art simpson said in his famous "phantom of the pits" rules
- if a trader waits for the markets to prove his trading position wrong
it might be too late! it is wiser to assume oneself wrong if not proven right in reasonable time!

coming back to the question
'should the day trading bout be short or long?'

-

every day trader starts the day with a dream of making 50 points from nifty!

what a paradox that he/she misses out a simple mathematics option.
there are a few alternative ways to make those 50 points
- make 50 point in one lot!
- make 25 points in 2 lots!!
- making 17 points in 3 lots!!!

how many 50 point movements are there in a week?
and how many 25 or 17 point moves?

you know the answer....
while 50 point intraday moves generally happen 3-4 days in a week
25 point moves happen 2-3 times a day
while 17-point moves happen once every 30minutes or an hour!!!

getting a trade right has nothing to do with the number of points that trade may give.
so success ratio of getting the trade right is same
for a small or medium or large ride.

so, why don't day traders go for multiple lot - short rides?

what a paradox
that traders fear double or triple or multiple lots
but do not fear single lot for a 50-point ride which comes so rarely
(assuming they actually recognize, catch and ride it full!)

- no wonder the failure rate in day trading so high.

the reason is not far to be found.

traders feel less pain in bleeding to death
than facing the fear of a fast fight.

but herein lies the second and bigger paradox
- if you are not so sure of your method
and want to trade single or small lot
why even lose that??

and if you are reasonably sure of your method
and ready to put one lot at stake
why not trade with two?

it is a mindset issue
a habit trap.

a 17point high volume trade
has high probability of success.

all you need is
a reliable method
strong risk management
and a fighter-pilot mind.

never trade to an audience.

day trading is a guerilla warfare -
wait behind the bush for the opportunity
pounce on one
and get lost with the booty!!!

the longer you stay in sight
more the chances that "they" will get you down.

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