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Percentiles & Z-ScoresMorning Report Feb 22nd

Darren Krett

Tuesday, 21 February 2023

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THE 10 GOLDEN RULES OF TRADING

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I've been in the option business for a very long time and you cannot learn the skill of trading overnight. To be a master it takes years and TBH, I certainly cannot claim to have mastered options, but I do know them. When you do progress to becoming a consistently profitable trader it can be a very rewarding experience and I have learned along the way that there are certain rules that need to be adhered to. Some, you may think are obvious but I can tell you, I have seen other people break every single one and everyone will likely have done at least one of them at one point, if you end up doing this long enough...

1. MAKE YOUR OWN DECISIONS!

Do not enter a trade just because someone else told you to! Do your own research, you need to know everything about the trade you are entering,

2. ALWAYS TRADE WITH A STOP LOSS OR MAX LOSS IN MIND.

Before you enter a trade , already KNOW what you are prepared to lose on it and it should ALWAYS be less than you are hoping to make. (I would suggest as a guide that your loss should be no more than 50% of what you are hoping to make. Your stop loss can either be set based on technical, events or based on your affordability. It should basically reflect the loss that you are willing to accept to lose on a position. Irrespective of whether you are trading on the long side or on the short side, always you need to have that level where the position is just wrong and you need to have that discipline to exit a loser. (The only addendum I would add to this is that with equities or futures, you can put in an electronic stop which once placed, takes out the emotion of having to exit yourself, however, I would advise not to put it (stop-loss) in on an electronic platform option strategy, because it will likely get triggered when it shouldn't have due to liquidity. In this instance, if you have a system that can evaluate your option position at any given time, you will be able to see where the value is, so just know where your stop-loss level is and if your theo value gets there then you have to have the discipline to get out.) Which brings me to...

3. DISCIPLINE!

Do not move your stop-loss. If it gets triggered, accept it and walk away. The same can be said for booking profits. Profit is what is booked; all else is book profits. Keep taking your money off the table at regular intervals. There is NOTHING WRONG with making a profit. YOu may see something go further afterward, but that's fine, you have MADE MONEY and that's all that counts. I personally would use a trailing stop, which moves up along with my profitable trade.

4. NEVER LET A WINNING TRADE TURN INTO A LOSING ONE.

As I mentioned above, I have used a stop that moves up with my winners (eg; I book the profit if it retraces 10% off any recent high if it hasn't got to my target) but once clear and in the money at the very least put in a stop that will get you out for no loss.

  1. NEVER CHASE/ADD TO A LOSER Do not add to your position if your position is losing and you cant bear to take a loss, this is not a winning strategy. If your strategy is to average into a trade over a price range then that is totally fine, but doubling down in the hope the market will turn will burn you to the ground eventually.

5. DON'T LOOK BACK AND RUE TRADES.

This is very important especially if you have had to book losses. Traders tend to look back and over analyse. Also, when traders book profits and the stock goes further up, they tend to look back at the notional losses. Both are not advisable as they tend to detract from your core trading strategy.

6. DONT OVER LEGERAGE IN A VOLATILIE MARKET.

It is one thing to leverage in a normal and tepid market. But that strategy cannot apply when we are in a volatile market. Leverage can hit your trades big time when markets are volatile. On such occasions try to keep your leverage to the bare minimum so that you can avoid burgeoning of losses.

7. DON'T OVERTRADE/TRADE OUT OF BOREDOM.

Not trading is also a strategy. This is something most traders tend to miss. Traders believe that trading strategy either means to buy or to sell in the market. But the most productive strategy can be to not do anything. This is very relevant when the market is very confusing and traders can get hit either way. Have your own plan and STICK TO IT!

8. COSTS SHOULD BE CALCULATED INTO YOUR STRATEGY

Remember, when you trade your cost is not just the brokerage you pay. There are statutory charges like STT, stamp duty, GST, turnover tax, exchange fees etc. If you take delivery of shares, there are also expenses related to your demat account. All these costs need to be factored in when you project your trading profits.

9. BE AWARE OF OVERNIGHT RISK

Decide on a strategy that you like and stick with it market. Positions are normally intraday or for a few days. One of the biggest risks you need to be conscious of if the overnight risk. When there is uncertainty on the economic or geopolitical risk or there is a major event coming up, it is always advisable to be as light in the market as possible.

10. STAY ON THE SIDE OF MOMENTUM

When you are a trader, trend is your friend. You are more likely to make money as a trader if you trade according to the momentum. Trying to short a bull market does not make sense. Similarly, trying to catch a falling knife is also not the right idea. You trading strategy should be aligned to the direction of the momentum

Remember that there is NO WISHING, HOPING OR PRAYING. This isnt a game, you are here to make money. Decide on a strategy that you like and stick with it. If you stick to rules, learn from your mistakes, be humble and respect the market and you will become a successful trader.

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Percentiles & Z-ScoresMorning Report Feb 22nd

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