Category: How to & Advice

Understanding the myths will help you avoid finding unnecessary information that will be just be a waste of your time and may lead you down to the wrong path in trading. This article will help and guide you about why believing and following these myths can harm your trading journey. It is important to understand the art of trading rather than blindly accepting the facts that these myths exist. Here are the four myths and the reality about it.

Trading is gambling

Blackjack, poker, roulette, slot machines and many more are the real gambling. However, the misconception of people when they heard the word “trading” is that gambling will come to their mind. Why? Because they think that trading is all about getting rich quick and betting your trades; if it will win or not without using risk management and without using analysis.

You see, many people like to gamble; new beginners have this gambling mentality at first, otherwise understood. This will result in getting whipsawed by the market. As a good trader, having risk management will prevent you from having this gambling mentality. Therefore, you must always trade with what you are willing to lose.

Trading is get-rich-quick scheme

Most people think that when they enter trading after a day, week or even a month, they will have a huge pile of cash in their account. Unfortunately, that is not the reality.

In trading, you must treat it like a business, not just any kind of hobby that you will trade anytime you want. Yes. We all want to get rich, but getting rich in just a short period of time? You are not in the track of a successful trader. A profitable trader is consistently learning from the market and it takes time to get rich once they have an edge on the market.

The more indicators, the better

Wow! I have plenty of indicators on my charts! I will become a successful trader.

Sadly, you’re not going to become a successful trader if you don’t know how to use your indicators on your chart. Each indicator has its own functions and has certain market conditions to begin with.

If you just place the indicators because you just heard from someone or see it on the article that you read or watch it from the YouTube without knowing its real functions, then these indicators will be just useless. Think again and educate yourself about the market and this will result in you to become a successful trader.

Perfect Strategy

Holy grail strategy? 100% win rate? This doesn’t even exist in the market even the greatest traders on the planet don’t have a 100%-win rate. What is the key to become a successful trader? Trade with edge.

Trading with edge will help you in your trading journey. Once you find your own edge, stick to it, follow it and stay consistent with your strategy. If you trade according to what works, in the long run, you will be a profitable trader.

Recently there has been an increase in volatile plays in the market with stocks going up 50% in one day as well as 20% down in one day. Aside from this, we’ve also seen a number of parabolic plays which entails straight green candles with the Relative Strength Index (RSI) staying above 70. Naturally, the increase in volatility also causes an increase in “hype”.

Hype refers to the stock recommendations that we see on social media websites as well as from our friends. Despite the negative connotation, hype is not always bad. There are posts that show actual analysis but most of the time, we see posts such as “buy this stock now” without any actual analysis. In the trading community, the term for this type of trading is “Facebook Analysis.” The idea is to go on facebook, look at the posts, and buy stocks without due diligence. This sounds reckless right? That’s because it is.

What can go wrong with Facebook Analysis? On the one hand, you can lose a little bit of money. On the other hand, the worst thing that can happen to you is to profit multiple times through facebook analysis only to lose a lot of money when you oversize your trades because of position sizing. The second scenario is worse because aside from reinforcing bad habits, you will also have the urge to “revenge trade”. Revenge trading is basically taking riskier trades in the hopes of making back your losses. This starts a vicious cycle that is ultimately characteristic of gambling. So what can we do? Should we avoid hyped stocks all together?

Create a Trading Plan

The easiest way to protect yourself from hype is to create a trading plan complete with a trading thesis, entry signals, exit signals, position sizing, and tranching. To clarify some unfamiliar terms, a trading thesis is basically your theory for a stock. Is it a breakout play? Is the stock driven by some catalyst? Whatever it is, the rest of your trading plan should be based on your thesis. Meanwhile, tranching refers to buying (and selling) the stock multiple times as opposed to buying (and selling) your shares all at once. This might reduce the potential upside from a stock, but it also protects you from unexpected market activity. At the end of the day, there is nothing wrong with reading hype posts as long as you make your own objective analysis of the stock.

Listen to the Market

There might be some of you thinking that hyped stocks aren’t worth the risk. The reality is, you should not ignore hype posts because in order to be profitable, you need to follow the big money. The “big money” includes institutional traders that basically run the market. These institutional traders do not trade all types of stocks at once. Instead, they put their money in specific sectors such as mining, telcos, and services. This is where the expression “a rising tide lifts all boats” comes from. If one stock goes up 30%, stocks in the same sector will most likely rise up as well. If you miss out on the big market moves, chances are, you won’t be able to beat the market.

Conclusion
Taking advantage of hyped stocks all comes down to doing your analysis. No matter how many recommendations you see about a stock, you should never buy the stock right away, but at the same time, you also shouldn’t dismiss hyped stocks right away. Always remember to follow the big money but do your own analysis. Hopefully, through this article, you will never buy (and dismiss) a hyped stock right away.

Click here to download the RCBC Securities Stock Market Daily Guide for November 6, 2020:

The main goal of trading is to achieve financial freedom. However, profiting from trading does not necessarily equate to financial freedom. There are significant metrics that should be taken into account in order to determine whether your trading system is actually helping you get closer and closer to that dream of financial freedom. This article provides insight on what to look out for when measuring your performance. 

Returns

An easy way to visualize your actual returns is to divide your total profits over the total hours(days) you have spent on trading. Are you making more money than you do on your regular job/business or are you earning way below minimum wage?

Of course, we should also take into account that trading is a lifelong journey and past performance is not an indicator of future results. However, figuring out how much money you make per hour on trading will help you determine whether or not your system is profitable. You do not necessarily have to quit trading but maybe you have to reevaluate your system. 

The key takeaway is to determine whether or not active trading is truly for you. Perhaps it would be more profitable to just passively invest and work on a different project (e.g. an online business). This is called opportunity cost.

In this scenario, the computation for opportunity cost goes as follows: profits that you could have made from doing something else (e.g. online business) minus the profits that you actually make from trading.. Ultimately, the decision is up to you but this is an important metric to determine whether or not trading is actually making you money.

Composition of your Day

How much time do you spend trading every day? Picture this, if you are trading for 4 hours everyday and you sleep for 8 hours everyday, you are effectively spending a quarter of your time awake on trading. It is easy to get caught up in stocks during market hours but putting things into proportion really puts things into perspective.

Do your returns match the proportion that trading takes up in your day? If it doesn’t, then you can do two things: spend less time trading or get greater returns. The former action is passive while the latter requires more dedication. This choice is dependent on how much time and effort you are willing to put into trading.

Efficiency

Assuming that you spend 4 hours every day trading, do you really need the whole four hours? In most cases, it is worth exploring trading tools such as screeners and price alerts. This will reduce the time that you spend actually trading without having to sacrifice potential returns. Remember, sticking to your trading plan is key to success. If you have a trading plan, there is no real need to monitor the markets yourself!

Conclusion

Ultimately, we should accept the fact that the key to financial success is to capitalize on our individual strengths. Some people are simply good at trading while others might be even better at something else.

With this said, trading can be for everyone but we should always take into consideration the amount of time and effort that we are willing to put into it. It is important to devote our time to things that we are actually good at in order to increase our impact not just to ourselves but our impact to the world as well.

Along with a multitude of factors to consider before properly trading the markets, correct position sizing and tranching parameters are imperative. These two aspects are within the spectrum of the Risk Management System where it is factors that a market participant can control.

It is a fact that there are matters that we cannot control in the financial markets, such as the price movement, black swan events, errors in the trader’s end (e.g. internet connection), among others. Instead, we can direct our focus to aspects that we can control, such as our management with risk, our trade plan, our trading psychology, among others.

The importance of proper position sizing and tranching is to mitigate our risk of depleting our portfolio drastically. Going all-in on one trade is as risky as jumping on a body of water without assuring whether it contains toxic chemicals, a shark, or whatnot.

A market participant must test the waters first, then scale or pyramid their position on the way up to increase their value-wise profits. This is the polar opposite to that of averaging down, where an individual would increase their position as the stock decreases. The problem with this is that there is an inevitable risk that the said name would go lower, which would decrease their value-wise losses drastically. As Jesse Livermore exclaims, thou shall not average down. 

To deploy a proper position size on an individual’s trades, the trader must assess their desired number of stock positions. Initially, holding four to six names is ideal. However, there is a multitude of traders who owns ten stocks at a time. Mark Minervini would hold 20-25 positions at a time. As they say, to each their own. 

The advantage of having multiple positions is that there is a high chance that you could possess a potential leader given that the scope is larger than that of a trader who wishes to acquire or maintain, for example, five positions. The problem with this approach is that you will be spread too thin. 

You could apply any approach with your trades if, in the end, your winning stocks are substantially scaled on the way up. This is to fully take advantage of the direction of the trend. For example, although Mark Minervini holds that many positions, he eventually ends up with at least 10 positions as time progresses. Wherein the 20-25 positions will be cut in 10 based on the individual performances of a stock. Essentially, the laggards in his portfolio are thrown away. Mark’s leading stocks are incrementally scaled on the upside. Pluck the weeds and water the flowers, as they say.

It is best to test the waters before purchasing a said stock. If you want to hold five stock positions at a time, the trader can deploy 10% of his portfolio to a name with 1VAR. As the trade goes in your favor, the trader can add another tranche or a new trade incrementally for the said stock, so on and so forth, until their position encompasses 20% of their portfolio. This will enable the trader to maximize the movement of the said stock, wherein their value-gains will incrementally increase. 

It is only applicable to scale your positions on the upside if an opportunity represents itself. Therefore, you must not force the tranche trade if there is no deemed opportunity at all. Every trade should have a basis. Always remember that patience is the key to navigate the trading landscape. 

Again, you can do any approach if you apply proper risk management in all your trades. Always make sure to properly allocate our positions in a trade to maximize the opportunity at hand. Our goal as traders is to survive and prolong our journey as a market participant. Focusing on the bigger picture is of the essence to open one’s mind in this endeavor. The goal of a trader should be lifelong sustenance of the profits that they earn.  

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As there are different types of people that you will meet in your journey in life, the same principle applies at the beginning of your respective phase towards success in trading the markets. An aspiring market participant will ultimately submit themselves with a conscious choice of selecting what type of trader should they be.

These kinds of traders are separated into four categories, namely Day Traders, Momentum Traders, Swing Traders, and Position Traders. Each category is distinctive to that of its counterparties in terms of its timeframe and its style of approach towards a certain name.

Day Traders

These are are market participants who get in and out of a stock or any asset class within a few minutes to a few hours. These types of traders do not hold any position overnight wherein they would sell all their existing positions before the market closes. Most day traders use leverage to further amplify their percentage gains and losses from incremental price movements. 

Momentum Traders

These people focus on bigger moves such as a breakout or a breakdown for long and short trades respectively. Ideally, these types of traders latch on to price movement that is supported with massive volume until the trend bends. The timeframe for such traders may last for a few hours to several days. 

Swing Traders

These traders are similar to Momentum Traders. This type also latches on to the prevailing trend until it bends. The timeframe for such traders typically lasts from a few days to numerous weeks. Both Momentum and Swing Traders focus on daily moves rather than intraday fluctuations, which is most applicable for traders who are also working a day job. 

Position Traders

Lastly, Position traders focus more on the bigger picture moves in a stock or any asset class. This type of trading is the exact opposite of Day Trading. Position Traders typically anticipate explosive moves that they deem to last in the longer term. Also, they are not concerned with daily fluctuations as they naturally hold their positions within a few weeks to numerous months. 

It is possible to mix these types depending on your personality and your goal towards the financial markets. For example, an individual could both be a mix of Swing and Position trading as they wish. To further aid an aspiring market participant on what type of trader do they belong, they may ask these questions amongst themselves.

What is my time horizon? Do I want to hold names in the short-term, medium-term, or long-term?

How much time could I spend in trading the markets? Do I have a day job? Can I trade the markets while I am working or only whenever I am free?

Do I want to see results quickly? Is it okay for me to execute trades every time or sometimes? 

Whichever type of trader that an individual may decide to be, it all comes down to their commitment to this craft. This endeavor requires patience, discipline, and hard work. An aspiring market participant should dedicate their deliberate practice or one’s 10,000+ hours to succeed in the markets. 

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