MP vs MoS : the lowdown on Trade-Entry

Margin of Safety (MoS)… 

… hmmm… 

… wasn’t that in investing? 

Well – surprise – it’s in trading too. 

You can enter a trade with MoS. 

How? 

Ok.

ID the trend. 

Wait for a minor reversal.

Let the reversal continue towards a pivot, or a support or a what have you. 

During this reversal, whenever you feel that you have considerable MoS, well – enter. 

Why shouldn’t you wait for the pivot to get touched? 

Things happen real fast at a pivot. Upon a pivot-touch, you can lose your comfort-zone even within minutes. 

Two vital things can happen at a pivot. 

Either there’s a quick bounce-back, or the pivot gets broken. 

Bounce-back means your trade is now in the money, and that you can go about managing your trade as per your trade-management rules. Wonderful. 

Pivot-break is not a worry for you. 

Why? 

Because you’ve placed your stop slightly below pivot, after the noise. 

Upon pivot-break, you get stopped out. You take the small hit and move on to your next trade. 

Eventually, things heat up. 

There is movement. 

Tops get taken out. 

Fast money can be made. 

How do you enter here? (Needless to say, for shorts, everything is to be understood reversed). 

Momentum play (MP)… 

… is the weapon of choice. 

You set up a trigger entry after a top or a resistance or a what have you, and wait for price to pierce, and for your entry to get triggered. Then you place your stop, below top or resistance or what have you. 

MP vs MoS is a matter of style. 

If you’re not comfortable changing your trading style to adapt to times, that’s fine too. Stick to one style.

If you’re conservative, stick to MoS. 

In a frenzy, however, MoS might almost never happen. 

In a frenzy, entry will be triggered exclusively through MP.

Take your pick. Adapt. Do both. Or don’t. Do one.

You call the shots. 

This is about you.

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Winning Marketplay, Anyone?

Two words. 

Psychology.

Strategy. 

That’s it. 

Prediction?

No. 

Prediction is not pivotal here. 

We’re getting psychology and strategy right. 

We want winning marketplay, right?

Prediction is for losing marketplay. Prediction might be wrong. That’s when strategy and psychology save you from big loss. A big loss can wipe you out. Thus, dependence upon sheer prediction brings a wipe-out into play. That’s why, prediction is almost always relegated to the bottom rank when one talks about winning marketplay.

We’ll travel with a hint of prediction, though. Just a hint. Doesn’t suffice for losing yet. 

For entry purposes. Only.

Even this hint of prediction is bias-giving, though. Once we enter, we need to quickly lose the bias. Yeah, once we enter, we only react to what we see. 

Our system has an edge. It helps us choose market direction. After that, psychology and strategy take over. 

Meaning, after we’ve entered, there’s no more prediction in play. 

So what’s in play then?

The raw trade. 

And you.

At this point, all your mental strength comes into play. 

Oh, and your strategy. 

You do have a strategy, right?

As in, if x happens, they y, and if a happens then b.

You need a stoploss too.

You don’t have to show it. It can be mental, provided you don’t fool yourself into not using it when the time comes.

You won’t execute your stop. 

Sure. 

Again and again. 

Till you teach yourself how to. 

Till you lose big. And are still left standing. To want to enter again. 

Learning to take a small hit, again and again and again – that’s winning marketplay. Requires huge psychological strength. You acquire this. You don’t have to be born with it. 

Now comes another punchline. 

That profit-sapling just emerging…see it? You will not nip it in the bud. 

You’ll still do it. 

And again. 

You’ll nip it in the bud. 

Again and again. 

Till you teach yourself not to. 

It’s not easy. 

95%+ of all market players continue to nip profits in the bud all their lives. 

To allow the sapling to grow into a tree is the most difficult of all market lessons. Learning to let profits run is winning market play. 

To want more profits, you have to risk some of your current profits. 

No more risk, no more gain. 

You want to quickly exit and post that 22% gain on your Excel sheet. Sure. Why can’t you let it grow into an 82% gain? God alone knows. That’s how the cookie crumbles. You nip the opportunity to make that 82%. 

What’s with 82?

Just a random number. 

Am trying to get a point across. There’s a run happening. In a direction. It’s crossing +22%. Fast. Momentum could see it to +102%, to then backtrack and settle at +82%. It’s a probable scenario. 

Anyways, there are some smarties that risk 12 of the 22% and stay in the trade. Soon the 22 can even go beyond 82. Lets say it does. What do you do?

Nip?

No. 

Not yet. 

You let it travel. Momentum is to be allowed free leeway, till it halts. Let’s say it halts at 102. You say to yourself that the winds might change if 102 goes back to 82, and tell your broker to exit if 82 is hit intraday.

That and that alone is the proper way to exit a winning trade. You exit it with the taste of loss. You let the market throw you out. For all you know, the market might be in the mood for 152. You want to give the trade that chance. Thus, a momentum target exit while the move is still on would be less lucrative for you in the long run, or so I think. 

Why?

Statistics are defined by big wins. These matter. Big-time. Allow them to happen. Again and again and again. 

Now add position-sizing into your strategy. The ideology of position-sizing has been discovered and fantastically developed by Dr. Van Tharp. 

In a nutshell, position-sizing means that an increasing trading corpus due to winning should result in an increasing level risked. Also, correspondingly, a decreasing trading corpus due to losing should result in a decreasing level risked.

With position-sizing added to your arsenal, no one will be able to hinder your progress.

Psychological strength that comes from experiencing first-hand and digesting learning from varied market scenarios, coupled with a stoploss/profitrun position-sizing strategy – that’s a winning combination.

Wishing you happy and lucrative trading!

🙂 

Who’s Responsible for that Last Technical Bit?

Planning a technical trade?

You’ve got your chart open. Scrip’s been falling.

You plan to initiate a buy on that last support. Still a few percentage points to go. 

Your buy point seems a bit off, right? 

Scrip might not reach it, huh?

It might just take off before reaching your buy point, hmmm?

What you need to understand is this – for nothing comes nothing.

You don’t want to risk a buy at current market price. That’s a fact. An acceptable one. Fine … as long as you are willing to pay the price for this fact. 

The price is that you might not be in the trade as the scrip might take off without your stop-type trigger entry price being hit. 

The up-side is that the scrip might correct to your buy price, triggering your entry, and thereby giving you a perfect technical entry point, along with a great margin of safety, since you’ll then have bought low as compared to current market price. 

Yeah, that’s the trade-off.

Is this trade-off acceptable to you?

Yes?

Fine. In my opinion, you would not be doing anything wrong in going ahead with your planned course of action, as long as you have mentally accepted the trade-off. 

What’s the other guy at? You know, the fellow who’s entering at current market price. Well, he’s taking a risk. He’s buying a little high, without margin of safety. What’s his trade-off? For starters, he’s in the trade. Scrip can take off immediately for all he cares, leaving you behind. He’ll be most happy. What’s his down-side? Scrip can correct to technical support, your buy-point. He’ll already be in a losing trade, and you’ll be just entering. In his worst-case scenario, his stop will already be hit as you are just entering. If the scrip takes off on him now, he’ll probably be puking. Yeah, that’s his trade-off. He’s accepted it mentally. After such acceptance, in my opinion, he’s doing nothing wrong by entering at current market price. 

What’s going to happen?

No one knows. Either of the outlined scenarios can play out.

Who’s that last technical correction left for? Yeah, who or what exactly will be responsible for that last technical correction?

An event. A negative one.

At this point, a negative event can happen. On the other hand, it may not happen. 

If it happens, the scrip will very probably open at the technical buy point the next day, and your buy will be triggered. 

If there’s no negative event, and buying pressure goes up, the scrip will take off without you.

Why is that last bit left to an event?

Events give prices a push or a pull, depending upon their positivity or negativity. 

That last support was made a bit low, right? You were wondering how the scrip reached so low, huh? In high probability, an event pushed it low for a few hours, and a low was made. If this low coincided with a past low, one started to speak of a lowish support, which was a little low considering current market price, and for which the scrip needed a pull-back to reach. 

Like this morning’s pull-back. The US decides to allow air-strikes in Iraq. Japan opens 3% down. India opens 1% down. 

A lot of scrips open really down this morning. 

Some of them even open at lowish supports they were not (at all) intending to touch yesterday.