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Trading Lessons

Money Management

MONEY MANAGEMENT RULESMONEY MANAGEMENT RULES

Money management refers to a set of rules that aims to minimise your losses in the short-term and maximize your profits in the long-term.

 

■ Balancing your Decisions Between Reward, Time, and Risk

At any given time, the market offers a great number of risk/reward trade combinations.

  • Asset A has the potential to move to Price X+5, but also the risk to go to the Price X-5, in N days
  • Asset B has the potential to move to Price X+12, but also the risk to go to the Price X-10, in 2N days
  • Asset C has the potential to move to Price X+32, but also the risk to go to the Price X-20, in 4N days

When you select a trade, you must consider all these variables:

  • Reward
  • Risk
  • Time

Carefully balance every trading decision between these three variables. Don’t underestimate risk and don’t underestimate time.

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Market Sentiment

Market sentiment refers to the prevailing attitude of investors in a particular market.THE MARKET SENTIMENT

Market sentiment refers to the prevailing attitude of investors in a particular market.

 

■ Always Consider Whether Your Idea is Already Discounted by the Market

You must always consider whether the market has already discounted your trading idea. If your idea is based on news, consider that at least 90% of news is already incorporated in the prices.

Michael Marcus says that you must always ask yourself: "How many people are left to act on this particular idea? -You can evaluate that by using the classic momentum-type indicators and observing market tone. How many days has the market been down or up in a row? What is the reading on the sentiment indexes?” 

 

■ Make Sure There are a lot of People Who are Going to be Wrong

As mentioned before, trading is a zero-sum game where the great majority of traders lose money. Therefore, if you want to prove correct on a trade, make sure there are a lot of people who are going to be wrong.

As Bruce Kovner argues: “If you see that most of the members on your guru list are bullish at a time when the market is not moving up, and you have some fundamental reason to be bearish, you feel stronger about the short-trade. I like to know that there are a lot of people who are going to be wrong.”

Ray Dalio says: The average man tends to be much more reactive if you look at the purchases and sales that they make. When something goes up, they're more likely to buy it. They think, ah, that's a good investment. They don't know how to measure that in terms of, oh, is that a much more expensive investment that's more likely to go down?

-That's what they're attracted to. They tend to buy high and sell low, and so an average man should not be playing this game in that way”.

Read more: Market Sentiment

Trading Rules

TRADING RULESKEY TRADING RULES

Trading is a zero-sum game, and as there are a few people making a lot of money, there must be a lot of others who lose. That means that basically you should trade against the crowd.

 

■ Your Trading Style must Match your Personality

Your character and personality play a major role in your decision-making process. Fear and greed can lead to weak hands and catastrophic decisions. It is important that our trading style matches 100% our personality, in a way that our hands will always be strong no matter the market conditions.

  • If you are a risk-averse person avoid trading intraday and don’t use capital leverage
  • If you are a beginner, start by using a demo account to test your skills before trading for real money

 

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Market Analysis

MARKET ANALYSISMARKET ANALYSIS RULES

Market analysis refers to the process of studying market fundamental data and measuring the dynamics of future demand and supply in order to identify risks and spot trading opportunities.

 

■ Think Long-Term and Invest in the Future

Invest in the future, not in the present. Focus on the big things coming in the future and ignore the small things happening today. As Larry Hite suggests you may not know what will happen tomorrow, however, you can have a very good idea of what will happen over the long-run.

Your decision-making should be based on events that will take place in the next semester, not on events that take place today and are already discounted by the market.

Read more: Market Analysis

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