you have to bet

 in trading you can never sure of the outcome of the trade. never. there is always some uncertainty. 

but you can't be indecisive and shaky.... fearing, vibrating, panicking all the time, fiddling with the trade direction.

you have to bet. and have guts to stick to it. 

you have to be ok with losing. only that will give you the guts to be worthy claimant of profit, handsome profit.

and since you have to be ok with loss, you have to manage the risk. can't be foolish gambler.

forget about profit

forget about profit or loss of money

is your system prediction in profit or loss, that's the point

who wins if system is wrong

and who loses if system is right

if you are happy at profit, you will be sad at loss. 

if you are in indifferent or nonchalant about profit, you will be understanding of the loss.

being conscious of profit makes you fearful of losing it

being conscious of loss makes you more fearful of losing more.

being conscious of the process is important

look at the mental stability of the shooters in olympics... calm and stable...

standard advisory : trade 3 times less than what u can afford to lose.

simple way to book profit without closing trade

 one way to book profit without coming out of the position (eg when trend is likely to continue but you want to take some profit off the table to feel comfortable and secure)

replace the costlier option with cheaper one.... 

eg assume you bought a BN call of 500 points...it becomes 800 or 900 or 1000.... it would be wise to book it and replace it with current BN call around 500 points. 

no doubt, current 500 point call may rise slower than 1000 point call but profits will still keep trickling in if trend continues. the slight reduction in profit may be considered as the cost of insurance for peace and profit booking. 

this tactic is like climbing a mountain cliff with progressively hooking oneself to higher harness.

this tactic has 2 more advantages

1. you now have money (out of thin air) to buy more positions if market steps back before resuming the trend.

2. if at all market reverses, you have your initial deployment safe.

of course, this tactic is valid for options only. which i anyways consider best for amateur traders because it is affordable for them and has inbuilt stop loss unlike futures. 

also, to add that standard advise, trade with 3 times smaller trade size than you can easily afford. if you trade with small quantity (3 times less than what you can easily afford), you can become fearless trader who doesn't chicken out amid volatility, and who can trade the method till the end of trade's logic.

if your method is right even small trade size will make you rich, sooner than you think. and if your method is wrong, even larger bet size won't help. that will make you poor, that too, sooner than you think....

i know most old traders knew this, even better than this....just thought i should share for new traders. besides, when i write it  down, it helps in revision.

stop loss vs stop profit

if we have the habit of not having Stop Losses (SL), why do we  have habit of taking Stop Profits (SP)....we should be indisciplined both sides...

that's one of the key reasons why even traders with 50% success rate end up losing 90% money

unfortunately, fear works both side....instead of fear on the loss side, and greed on the long side....

ironically, traders have fear on profit side and greed on loss side...

trading is 90% psychology and risk control

risk control = the warrior who knows he can't die can fight much better and win more frequently....self talk

the bad ATM dilemma

I am once again amused by the unwillingness of overwhelming number of traders to accept the long rally in the market. they are repeatedly taking anti trend positions and being bleeded.

This reminds me of a very interesting psychological phenomenon...

Suppose you are standing in front of an atm machine late evening and swipe card for 1000rs. Now let's consider a scenario that the atm machine goes bad and keeps vending currency note after note after note and doesn't stop. It counts 1000 and throws them out. Then again counts 1000 more and throws out...

What will be your reaction? What will you do?

Chances are you'll soon call someone and point it out to authorities instead of just collecting all and vanishing. Because that's the way you are groomed. Both fear of punishment and moral hand brakes will keep you in check. 

Same mindset and habit spills over to trading. When market whipsaws and beats you, you accept it like a victim accepts his torment. But when a trending market gives you profit and keeps giving you profit with insanity of a bad atm machine, you feel guilty in your subconscious and don't believe it. You feel so uncomfortable that in hearts of hearts wish that it ends.

how i conquered my fear of losing the profit

 i once coined a phrase to soothe myself and protect against the fear of losing the profit even when my system was reasonably green on the trade.

i would often fear that the market would eat away my profit already earned. i would often face increasingly strong butterflies in my stomach. people often complain about having sleepless nights because of adverse market movements leading to unbooked losses. but hardly anyone talks about having sleepless nights with unbooked profits.

i would check my trading system again and again. but despite my system assuring me a v high probability of trade going eventually my way (and often it did, with or without me), i would still feel so fearful of losing the much-valued profit that i would feel comfort only after booking the profit, partially, if not wholly.

eventually, that comfort would turn out to be salt on my wounds if not short-lived. the market would in my direction without me.

occasional market reversals only strengthened my fear.

"this can't go on forever", i said to myself.

one fine day, i was so fed up that my alter ego slapped me with the following line

"market is not after you! market can't see you. you as an individual are invisible to it. you yourself are conscious and coming in the way!"

it was like a thunderbolt of relief. i suddenly felt better.

it was only my fear and imagination - i thought.

that day my trading changed. i still had some reversals and loss of profits but those were much much less than what i gained. i had never stomached big profits till that day.

even a single massive profit often more than covers dozens of small losses.

recently, i realizedthat the above line is true beyond trading. it works amazingly well in almost every aspect of life.

why not all in one go?

Murliji: Dear JS. Just out of curiosity. You are fully confident of your system developed after years of hard work. Why book profit in few or some lots bullets. Why not at one go once you get trend reversal or end of rally feelers.

Js: excellent question Murliji. lemme give an example to justify partial booking. my system is reasonably confident of going from say 1000 to 2000.but markets are unpredictable in the route they take. they may go like 1000 to 1250 to 1075 to 1389 to 1215 to 1666 to 1444 to 1701 to 1506 to 1888 to 1666 to 2100.....why not milk all folds and pull backs.

: besides, nerves stay cool

: my system hints the direction and extent of rally but not the exact path, zig zag or straight. so I moulded and designed my system to comply with this uncertainty and unpredictability. my system is probabilistic wonder with deterministic handicap.

: the market had gone my expected direction and extent but I was never sure of the speed and exact route

: I can never be. none except operators can be

: I guess even operators ate not sure about exact path they will be taking. its something like a chess game. so many permutations combinations are the. even a single unexpected move or happening may force or lure operators to alter the course.

: for example, my system is telling me rally only half over, and that we are in sell on rise, and that some relief really is inevitable, and that relief really has to come stealthily, and that everyone is waiting for it etc etc. ...but when and how system doesn't tell me. I can only align and be ready and keep milking till then besides keeping plan b,c,d ready

trading light

"travel light"....thus goes a maxim

this aptly should be translated as "trade light" in trading!

eg. lets say u short nifty at 8150 and it falls all the way down to 8000! u r sitting on a profit of 150 points. u start fearing the loss of the accumulated profit. so, how does this effect ur trading behavior? u start bearing the burden of this fear, magnified if their is volatility and chicken out of the trade even if u know that there was no need to do that, on the basis of the technical indicators.

had u not been carrying the weight of those 150 points, u would have probably checked and obeyed the technicals without any pre-conception, without any influence, without any stress. u might have taken a fresh short position happily!

the beauty of the situation is that the market doesn't know whether u r carrying a profit or loss and how much! it is you yourself who is conscious of the "profit" you have stolen!!!

drop that burden and trade light!!!

"hone ko to bahut kuchh ho sakta hai?"

"hone ko to bahut kuchh ho sakta hai?"
(as it is, anything can happen)

market can rise unexpectedly, market can collapse.....

that u can come to know only once it has happened! u can ofcourse wait to see what happens and then come in the trade. but then what's use? what was to happen has happened? u were not in the contention for the possible rewards.

trading and fishing are rarely meant for those who intend to keep sitting at the shore waiting for the absolutely calm sea......which anyhow, as they say, never makes a skillful sailor!

"hone ko to kuchh bhi ho sakta hai!"

but u can't make a living out of trading like that! u can't realise ur dreams like that!

here, probability comes into play.

trading, as i always say, is probabilistic and not deterministic.

there are times when the market's move in a particular direction high probability and then there are times when the said probability is low.

a good trading method + trading judgement is the one which can segregate the low prob opportunities from high prob ones.

a trade can never be assured. otherwise, all trader universe will jump in that direction and there will be no buyers for sellers or sellers for buyers! market will vanish!

probability is the sister of opportunity.
sensing the probability is like spotting the opportunity.

with time, practice, experience and learning, probability picking skills can be astonishingly honed!

and the beauty of the probability going wrong (mostly initially, rarely later) is that a trader anyhow always has the brakes and steering in his/her hands.....isn't it?

u can always stop and turn!!!

indecision is dangerous in trading. doubt freezes ur ability to act.

it is the indecision which causes loss in trading.

never try to recover the loss

dear A

u are holding 8000pe lots @ 95
right now, it is around 33 (loss of 62)

now, u have to recover 62 points, that's obviously ur first aim

well, here is my first, off-the-cuff frank advise

"never try to recover loss, try to gain if there is a possibility

that gain will automatically bridge/erase/cover the loss

but never trade with negative mindset

that fills u with nervousness/fear/anger/frustration leading to wrong decision and lot of stress

if a loss has come, it won't go away just because u need it to

prayers don't work in the market because god's men are on both side of the trade, including those of operators!

while a loss can't be erased per se, profit can definitely come

assume u were not in loss, then what would u have done?

if u knew it might fall, u might take fresh short position
or if u knew it is likely to rise, u might take fresh long position

--

so, if i were in your situation
i would square 8000pe's straightaway (money saved is money gained)
tomorrow morning i might get atleast 30 bucks for it.

putting 35 bucks more, i would have bought 8100pe lots

right now
8000pe=33+
8100pe=62+
8200pe=111

if (and everything depends on this if)
the market falls another 100 points

8000pe will become=30+ (surprising)
8100pe will become=100+
8200pe will become=170+

ur loss of 62 can be recovered only by 8200pe
that comes with condition of "risking"/putting more money on the table!!!

alas, there is nothing called free lunch!

sorry, for ur loss. take it, as of now, as price u pay for learning (i  used to assume losses as fees for my MBA (Trading) from the University of Operators!

pardon my language!

best wishes!!!

---

alternatively,

if market opens gap down tomorrow, or slipss too fast at opening, u gain some crucial points

i expect market to be volatile thereafter till expiry, which is quite away

u will get opportunities to make money

just need to keep ur calm

such experiences help in thickening of skin (which lady traders can't avoid) which helps u gain with less pain

winning is not a big thing

so many times i see traders jump at small or big profits which they themselves know was more of a fluke or stroke of luck.

one way to know whether any profit was a fluke or pre-conceived is to ask oneself - will i fear in the similar trade next time? would i enter another trade with the same logic/method/reason? did i have one?

if u r fearful, in most likelihood, u were lucky. it was  chance that trade went right.

if it is not repeatable, it is a fluke, or to put in more respectfully, a lucky trade.

this is precisely the reason why we see traders make money in a trade and lose it all (if not more) in the very next.

winning an occasional trade is good enough motivation for amateur traders to keep losing!

many times we don't even come to know that the winning trader has lost it all, because while the winning trader is a "news" and hence visible, the same trader doesn't hit the limelight when he/she loses. rather, he/she consciously goes off the radar (not for hiding, probably, but to recuperate)

so, winning is not a big thing (certainly losing is neither) but winning repeatedly is! in other words, knowing that you are going to win is a sign of having made it!

when winning is surprise, it is surely not a surprise!

this is precisely the reason why i repeatedly felt bad at making money because in heart of hearts, i knew the reality!

losing, for a learning trader is an honest friend! it tells the truth.....in face.....and leaves no false images (misconceptions) in one's head!

winning, if not with a solid foundation, is a treacherous friend! never believe it! never be befooled by it!

booking profit and trailing stoploss

i have this standard profit booking rule for intraday or overnight nifty trades with in-the-money options:

one third lots booking@25 points,

one third lots @40 points

and balance flexible.

once a target is crossed, previous target becomes trailing stop loss for the balance lots.

trailing stop loss for balance lots after crossing first target is the entry point.

discussion on "diamond rule of booking profit"

thank u all for the healthy and enriched discussion (http://www.mudraa.com/trading/104685/0/diamond-rule-of-booking-profit-js.html) which sometimes i desperately miss despite knowing that we have a lot of sharp, experienced and fiercely talented minds in mudraa

==========

i would like to share my views one by one on what has been opined here

dear mr.arora,
u said


"Dear JS
I have tried this method several times.It does not work well.What if the market is struck in a range for next few days or reverses.Suppose you square a call at 200 with a put at 100 and in next few days both become half,your profit will shrink to half as mostly happens.You cannot decide optimum point at which you will book your call as Nifty has its own ways.
suppose your call at 200 becomes 150 next day and languishes there for a long time ,as sson as it touches 180 you would be tempted to book and curtail your loss,and lo it would soon touch 250 leaving you repentful."
---

dear mr.arora,
u r right
but i think i need to clarify a few things about this rule.
1. if the market gets stuck in a range after we "book profit" the way i shared above? = well, if you see the rally pausing, why not square off totally!
"don't catch a falling knife" we say during bear runs or sell-offs.
similarly, we can say "don't catch a rising spike"
but what if the knife has stopped falling and the spike stopped rising?
there is no harm in that case.
as u said, if the market enters range after we take reverse option position, then who stops us from winding up everything especially when we are sure that the rally has stopped or ended or paused for the time being and that we will not lose potential profit by squaring-off prematurely!
2. if the market reverses, the reverse option position will soon gain as much as u will lose - the only condition being that u buy at-the-money or in-the-money option and not out-of-money option. i have noticed that majority of the opinions shared in this thread are based on fears caused by "out-of-money" positions.
3. as far as judging the appropriate time to "book-profit" is concerned, i beg to state that while it may not be possible to exactly pinpoint the moment, it will be suffice to judge it approximately. this rule is actually a strategy which can take care of the gaps in timing. no timing is better than rough timing.

==========


dear hvm
u said

"I feel if the underlying secuirty is volatile than these strategy would work.
Further, taking JS example, when gain from Call value exceeds the Put premium than one sell off the Call Option and wait for Put option to sell when Bank nifty comes down."

--

hvm, u r right, this rule helps when the rocket is still moving but we have fear or indication of it falling.
but i somehow don't agree ur second line (or i have not got u) = e.g. during upmoves, when the call still keeps moving up and the benefit from its rise exceeds the loss from the put's decline (with which we "booked profit"), even then don't square-off the call. this rule applied then also. this is a multiple stage rule. who knows it may be a big big rally and may continue to go. at that time we should again buy a at-the-money put of new cmp.
i think everyone still remembers the rally of may 2010 when the nifty went 1000+ points in a single rally. had we known this rule we could have minted money.


===========

alkaji
u said
"sir insted of buying an option...can we short sell option.... consider... if i bought 4900ce when nifty was trading at 4925 n when it came to 5000..insted of buying 5000pe ..wouldn't be it better to write 5000ce insted... coz if mkt remain range bound..  value of option will become less day by day.....hence we will gain anyway.... 
also u mention that operators do short sell but with proper hedging...... just my view... plz gide!!"

--

alkaji, i don't agree that we should short sell option.....................the reason = if the rally continues further, we would lose in the short sell. the beauty of the reverse option is that if the rally continues, the reverse options evaporates soon.
we can counter the fear of losing premium in case of range-bound market by actually winding up everything (as i said while replying to mr.arora)

===========

dear sv
u said"Future of this month long and next month short/ this month short and next month long?
Can also be used as hedging straregy.
Comments please."

--

dear sv,
hedging future with future is a "rahul dravid" patience strategy and one is likely to get it wrong many times. also, it is recommended only during down runs.
otherwise, hedging future with future is like writing ur own cheque in your name. we want others' cheques in our name.
future against future is a safe game but it goes nowhere......it is too safe. why not square-off actually if we are to do this.
if at all u do that u need to pitch a different future (stock or index) against original future........but it is complicated and slippery."

===========

dear sim,
u saidthis rule I tried, but in reverse order, when my SL Hit I hedge it with another one at the money,,,,  BUT now the Loss is fixed and the profit on one can be booked at the swing"what we end up is we book the profit leg and wait for opportunity on the loss leg holding it,, we should have a mind set to close both together!"

--

dear sim,
in reverse, an "ON" will become "NO". this rule is only for "booking profit" but not for "booking loss". may be i will chalk out one for that condition.
when u book loss with a reverse option, ur original option is already in-the-money. in that case, if things still go in the same direction, ur profit with new option will be less than ur loss with the original one.
if u see this rule with opposite lens, it will give opposite inference.

===========

diamond rule of booking profit

never book profit by squaring off

book profit by taking reverse at-the-money option.

whether your decision turns right or wrong, you will profit.




let me give an example which is the reason behind my coming out with this rule
i bought 9000call of bank nifty.
bank nifty came to 9330 and as indicated my my trading method, i booked profit by squaring off the call.
had i waited i would have profited as the bank nifty went to 9500.
but instead of squaring off the call had i taken an at-the-money put option (9300 put) and held on to 9000call, i would have lost 50 points in 9300put and got 140+ points more in 9000call - a clean profit of 90+ points.
i have figured out the reverse scenario as well.
i am thrilled with this rule, this rule is my take-away for the day. it has costed my just 1250 per lot.
this rule has many applications with profound practical implications.

consistency

you can't be 

consistently profitable

in trading!

but you can

definitely be

consistently net-profitable

in trading!!!

and that

should be

your aim.

trading essentials - I

"being wrong is acceptable.

but staying wrong is totally unacceptable.

being wrong isn’t a choice,

but staying wrong is.

to play any game successfully,

you have to have some skill,

an edge,

but beyond that it is money management.

good traders manage the downside;

they don’t worry the upside."


- mark minervini

the art of booking loss & profit!

traders are great athletes as well as great spectators!

when they run

they are a treat to watch........running like an obsessed creature....full of fear!

like a fugitive involved in a hit and run case!



and when they are not running

they are great spectators

cursing themselves as to why they are not in the race!



there are 4 types of trade athletes!



1. those who cut short their profitable runs but don't honour the stop loss hits

= typical newcomer unevolved trainee trader driven by 'fear of booked loss' and 'fear of loss of profit'. still, a good, necessary and inevitable phase for any new citizen of the market.

2. those who cut short their profitable runs but also honour the stop loss hits

= the first conscious effort of the budding trader. though he still can't overcome the fear of loss of profit, he definitely doesn't fear booking the loss. they keep ringing their piggy bank with coins till one mistake gets the better of them. such traders are less as this is more of an ideal state of a trainee mind.

3. those who not only let their profitable trades run but also don't honour their stop loss hits

= a wealthy newcomer who has got skin thick enough to bear the loss of accrued profit but not thick enough to accept that his calculation can go wrong. they win big and lose it all.....and finally blame the market.

4. those who let their profitable trades run till indication of trend reversal but honour their stop loss hits.

= matured seasoned silent emotionless egoless boring money machines. this stage comes with time but does come.

pitcher of profit!

a successful trader was very upset with himself
and his friends and fellow traders didn't know why!

"you are much more successful in trading than we are
then why are you always melancholic?" they asked him

"today, the market moved up and down three times
and covered a total distance of 85 points.
and look what i got.....just 34!
i missed 51 points!!
yesterday also the same thing happened.
i could get only 23 points out of 47 possible!
don't you think this is enough reason to be unhappy about!"
explained the sad trader.

--

day after day
week after week
the trader kept gaining points
but the worry lines on his forehead kept getting deeper and darker!

--

one friday
after trading hours
he packed his bag
kicked start his bike
and rode straight out of the town
to his native village
on the bank of river dausa.

--

his grandparents noted the tension
written all over once-radiant face of their grand child!
"what's the matter, son!" asked his grandfather who had himself been
a successful fruit trader in his life!

the trader shared his dilemma.

"don't worry about it! everything gonnabe ok!"
the grandfather consoled him.

--

next morning
the grandpa woke up early
went to his grandson's room
and asked
"would you like to come with me for a walk to the river!"

the trader was not interested
"no, grandpa, i don't wish to!"

"you will feel better, son!"
the grandpa tried again.

the trader desperately wanted to feel better.
so, this logic appealed to him.

he reluctantly got out of the bed
freshened up
and joined his grandpa.

both walked all the way to the river.

it was very early in the morning
and the view was breath-taking.

the cool breeze by the river had a soothing effect on the young prodigal trader!

and then

suddenly

the youngman saw something
which shook him big!

he saw the village ladies
go to the river bank,
fill their earthern pitchers with water
put the pitchers on their head
and walk away
smiling and singing!

what struck him was
that the ladies
had not insisted on
or worried about
carrying the entire river
alongwith them.

the ladies knew that river was gushing with huge discharge of water
but they knew their own storing capacity
they knew their carrying capacity
they knew their requirement!

they were happy with pitcher-ful of water!
every lady was carrying a pitcher they could afford
small, big, very big
but none was carrying a pitcher which could suck in the entire river

besides, they also knew that
river will not stop running
and that
they will be back
the next day!

the trader got the message.

"it is not important whether you take home the entire rive of profits

whats important is whether you have filled your pitcher of ability!"

his face suddenly got lit with the radiance
which he once had!

he looked towards his grandfather
the old man knew what his talented grandson had learnt!

both smiled
held each others' hands
and walked back home....

with the trader anxious to hear the opening bell ring on monday!

What do you do when....?

What do you do when you win an unexpected but handsome profit?

If you pack-up and leave to enjoy the booty then nothing wrong with you

but

If you dare to bet it all or most of it on the next trade

ADVISED by the method

and supported by the just-won profit

then you have in you what makes a professional trader!

On the other hand,

What do you do when you lose unexpected and rather big?

If you fight back instead of surrendering then nothing wrong with you

but

If you dare to accept the unexpected adverse situation and decide to stay away till you regain your sense of understanding of the winds

then you again have in you what makes a professional trader!

In the words of Pat Holland in his dazzling book

"The 35 rules of Gambling that all investors should know"

Rule 4 : Never chase your losses!

Rule 6: Gamble your early winnings!