USEFUL TIPS

There is a series of free trading lessons, which consists of 10 topics that traders, both beginners and experienced traders, should find them very useful.

The 10 Free Trading Lessons will cover the following topics:

(1) The importance of psychology in price movement.
(2) How to spot mega trends.
(3) Understanding of technical price objectives.
(4) How to picture price objectives.
(5) How to trade with moving averages.
(6) How to use point and figure trading techniques.
(7) How to use the RSI indicator.
(8) How to correctly use stochastics in your trading.
(9) How to use the ADX indicator to capture trends.
(10) How to capitalize on natural market cycles.

On top of the above, you will learn all about Fibonacci retracements, MACD, Bollinger Bands, and much more.

These 10 free trading lessons will be sent via email.

In order to get this, just fill out the form here. Then you should be able to get it started right away. Hope this info can be useful to you.

Tuesday, April 15, 2014

The IMPORTANCE of Money Management / Position Sizing

The main reason why money management / position sizing is extremely important is capital preservation ….. to avoid the risk of ruin from a losing streak.
So long as you have the money / capital to trade, you would still have a chance to recover your losses. However, if your capital is gone, you would have no chance at all to recover, as you have no more money for trading.

You may have a high probability trading system that gives you 70% probability of winning. But without sound money management system, you might still get wiped out of the game after unfortunate losing streaks.
A 70% win in 100 trades does not necessarily mean you would win 7 out of every 10. You will not know which 70 out of the 100 trades will be the winners. It is possible that you lose the first 30 trades consecutively and then win the remaining 70, which still gives you a 70% winning system. However, when that happens, will you be still in the game if you lost 30 trades in a row?

This is the reason why money management is very important. No matter how good your trading system is, you could still be facing a losing streak. Hence, you need to set a sound money management system, which will still allow you to stay in the game even if you go through a horrible losing streak.

In view of the above, there are at least a few basic things that you should consider when setting Money Management rules:
1) Draw downs.
2) Considering your Risk Tolerance.
3) How long your capital can last.

In the next posts, we’ll discuss the above topics further.

Continue to: Things To Consider in Setting Money Management Rules - Part 1: DRAW DOWN.

Go back to: OBJECTIVES of Money Management or Position Sizing.


To view the list of all the series on this topic, please refer to:
Money Management / Position Sizing

Other Learning Resources:
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Wednesday, February 19, 2014

Money Management or Position Sizing – Part 2: OBJECTIVES

Basically, there are two main objectives of Money Management or Position Sizing:

1) Preserve Capital
Preserving your capital should be the first and the most important objective of Money Management / Position Sizing for a trader.
In order to be able to trade, you’ll need capital. As long as you have the money / capital to trade, you would still have a chance to make a recovery from your losses. However, if your capital is gone, you would have no chance at all to recover, as you have no more money for trading.

In order to be successful in trading, it's not about making the big wins on every single trade, but rather, how to minimize the losses in order to live another day to trade.
For example, you may have a very good month and make 200-300% on every trade. Each time, you are putting 70% - 80% of your total capital/account balance into each trade. However, it is possible that all your gains, or perhaps even your whole capital, get wiped out by just one losing trade. That is why proper money management is extremely important!

No doubt, losses are always part of trading. However, if you are only risking a small percentage of your account in one trade, then that is the most you can lose on any one trade.
Therefore, Money Management / Position Sizing can also be considered as “Risk Management”, because it’s basically also about managing your risk for every trade by limiting how much you put into each trade, so that you won’t get wiped out so easily just after a few trades.

Why do we need that? Doesn’t putting a Stop Loss serve the same purpose of limiting our risk in a trade as well?
Yes, putting a Stop Loss can protect your trade. Nevertheless, there is always a risk that a position may go bust even before your stop loss can be executed.
For example:
A stock can significantly gap down at the market opening due to sudden negative news (e.g. lower than expected earnings, fraud / lawsuit cases, etc.). When this happens, the price may go down way below the Stop Price.

As Dr Alexander Elder suggested in his book, Come Into My Trading Room:

Technical analysis helps you decide where to place a stop, limiting your loss per share.
Money management rules help you protect your account as a whole.
The single most important rule is to limit your loss on any trade to a small fraction of your account.

2) Grow Capital
Other than just preserving your capital, Money Management / Position Sizing has another objective: to grow your capital at a steady pace.

With Position Sizing, you can improve your gains during winning streaks, while you can limit your losses during losing streaks.
How this can be done will be discussed further in the future articles.

Basically, the Position Sizing seeks to balance between the two objectives: preserving vs. growing your capital.
If you risk too little per trade, you win little, and hence it will take much longer time to grow your account. If you risk too much, it will put your account into danger. Ideally, it should be somewhere in between.

Continue to: The IMPORTANCE of Money Management or Position Sizing.

Go back to: WHAT is Money Management or Position Sizing?

To view the list of all the series on this topic, please refer to:
Money Management / Position Sizing

Other Learning Resources:
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Saturday, January 18, 2014

Money Management or Position Sizing – Part 1: WHAT IS IT?

As frequently mentioned earlier, Money Management is one of are the most important aspects of a trading system, along with positive expectancy and self management (trading psychology), which many professionals even believe that these aspects are the “holy grails” of trading.

While Money Management is extremely crucial, it is important to note that having a trading system that gives you a positive expectancy should be in the top priority when you are developing a trading plan. Because if your trading system has a negative expectancy, no matter how well your money management strategy is, you’ll still lose money in the long term.

This is like what Alexander Elder said in his book, Come Into My Trading Room:

A good trading system gives you an edge in the market.
To use a technical term, it provides a positive expectation over a long series of trials.
A good system ensures that winning is more likely than losing over a long series of trades.
If your system can do that, you need money management.
But if you have no positive expectation, no amount of money management will save you from losing.

What is Money Management?
In his book “Trade Your Way to Financial Freedom”, Dr. Van K. Tharp define “Money Management” as the part of your trading system that answer the question of “how much?” throughout the course of a trade.
How much essentially means how big a position you should have at any given time throughout the course of a trade.
Therefore, he refers to Money Management as “Position Sizing”.



The purpose of Position Sizing is to limit the size of what you are prepared to lose / risk in any single trade to a percentage of your total trading capital.

Some people may also call this as “Bet Size”.
Hence, Money Management, Position Sizing, and Bet Size are basically referring to the same thing, which is to answer “how much” in your trading system, as discussed in this post: Trading System: What Is It and Is It Important?

To be continued to: OBJECTIVES of Money Management or Position Sizing.

To view the list of all the series on this topic, please refer to:
Money Management / Position Sizing

Other Learning Resources:
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Money Management / Position Sizing

Money Management is a very important component in trading.
In his book, Come Into My Trading Room, Alexander Elder emphasized the importance of Money Management to be successful in trading:

Every winner needs three essential components of trading: a sound individual psychology, a logical trading system and a good money management.

These essentials are three legs of a stool – remove one and the stool will fall together with the person who sits on it.

Losers try to build a stool with only one leg, or two at the most. They usually focus exclusively on trading systems.

Your trade must be based on clearly defined rules.
You have to analyze your feelings as you trade, to make sure that your decisions are intellectually sound.
You have to structure your money management so that no string of losses can kick you out of the game.

Therefore, here I am trying to summarize and share with you what I learnt about this topic.

The following is the list of articles (to be published) in this Money Management series:
(Click the link below to read each post – The link will be up once the post has been published.)

1) WHAT is Money Management / Position Sizing? (Definition)
2) OBJECTIVES of Money Management / Position Sizing
3) The IMPORTANCE of Money Management / Position Sizing

4) Things to Consider in Setting Money Management Rules:
a) Part 1: Draw Down
b) Part 2: Risk Tolerance
c) Part 3: How Long Your Capital Can Last

5) Avoiding the Risk of Ruin from a Draw Down

6) Example of RULES of Money Management / Position Sizing (By Dr Alexander Elder):
a) Part 1 – Introduction
b) Part 2- The 2% Rule
c) Part 3- How The 2% Rule Works
d) Part 4 - The 6% Rule
e) Part 5 – How The 6% Rule Works
f) Part 6 – Recalculation After Moving Your Stop Prices
g) Part 7 - Recalculation At Every Beginning Of The Month
h) Step By Step Of Money Management Rules: Summary

7) How To Calculate POSITION SIZING:
a) Part 1: Steps Of Calculation
b) Part 2: Example #1
c) Part 3: Example #2

Other Learning Resources:
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Sunday, April 7, 2013

Effects of IMPLIED VOLATILITY (IV) on Option Greek VEGA – With Past DATA and CHARTS

The following is the behavior of Vega in relation to Implied Volatility (IV) changes:

Vega is higher when volatility increases, particularly for ITM and OTM options.
However, Vega is relatively stable / unchanged for ATM option.

We’ll use the same past actual data as shown in the previous post on the behavior of Delta, namely:
Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78 and Implied Volatility (IV) is 54.05, for expiration month of Sep 2010 (10 days to expiration), October 2010 (38 days to expiration) and Dec 2010 (101 days to expiration).

Here is the summary of Vega values for different IV:


 From the table, we can see that for ITM options (e.g. option’s strike price $35 and $37.5) and OTM options (e.g. option’s strike price $55 and $52.5), Vega increases as IV increases , i.e. as it moves from the left (IV = 25, the lowest IV in this example) to the right (IV = 85, the highest IV in this example).

On the other hand, for near ATM options (i.e. the option’s strike price $45.00, because the stock price is $44.78), Vega is relatively unchanged with the change in IV.

Hence, these observations are in line with the statement above.

Now, let’s study the behavior of Vega of different IV at various strike prices (as shown in the chart below).


As can be seen in the chart:

For all the three options with different IV, Vega always behaves the same way, i.e. Vega of ATM options is always higher, and it gets lower as it moves towards deep ITM and deep OTM options.
However, the decrease in Vega as the option moves from ATM towards deep ITM/OTM will be greater for options with lower IV as compared to options with higher IV.

For deep ITM and deep OTM options, Vega is very small (close to zero) when IV is low. 


To view the list of all the series of articles in this topic, please refer to: 

Other Learning Resources:

Related Topics: