{"id":3946,"date":"2020-08-10T18:16:28","date_gmt":"2020-08-10T10:16:28","guid":{"rendered":"https:\/\/www.investagrams.com\/daily\/?p=3946"},"modified":"2020-08-10T18:29:08","modified_gmt":"2020-08-10T10:29:08","slug":"bubble-wrapped-trading-and-a-few-cliches","status":"publish","type":"post","link":"https:\/\/www.investagrams.com\/daily\/2020\/08\/bubble-wrapped-trading-and-a-few-cliches\/","title":{"rendered":"Bubble Wrapped Trading and a Few Clich\u00e9s"},"content":{"rendered":"

Growing up as kids we may have found ourselves playing with crosswords, and some other visual puzzles that challenge our cognitive skills. More often than not, we look for clues and cues from context and previous dots that we have already connected.<\/span><\/p>\n

This maze game for instance will surely keep most of us occupied for maybe more than a couple of minutes trying to solve and find our way out.\u00a0<\/span><\/p>\n

\"\"<\/p>\n

While we may have some fun at the beginning following the path laid out as shown, patience eventually finds its limits and we do one of two things.\u00a0 Either we quit;\u00a0 or move forward to find an easier way to solve it.\u00a0 Linear thinking as most of us tend to have tells us to do one simple thing – that is to start at the end and find the right path by process of elimination.\u00a0\u00a0<\/span><\/p>\n

And as many who have lived before us have done, which is also probably life\u2019s greatest hack, is to\u00a0 <\/span>BEGIN WITH THE END IN MIND<\/b>.\u00a0 The thought on its own may sound philosophical and perhaps even spiritual or esoteric, but the translation to practice is what we do all the time.\u00a0 Visualization is a powerful tool.\u00a0 And as Steve Jobs once famously said,\u00a0<\/span><\/p>\n

\u201cYou cannot connect the dots looking forward. You can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future.\u201d<\/span><\/i><\/p>\n

What we conceive is always what we achieve.\u00a0 Or at least try to.\u00a0 And unless you are of the belief that all in this world is totally RANDOM, our hopes, dreams and aspirations will usually begin with the VISION of <\/span>\u201cwhat ought to be\u201d<\/b>.\u00a0<\/span><\/p>\n

Thereafter we go back to reality, create a plan and find ways to make it happen.<\/span><\/p>\n

In the arena of trading and investment, a prudent participant will always make due diligence studies prior to engaging himself to a specific activity.\u00a0 Best effort projections, and\u00a0 calculations based on available information, for the most part is the end game in any feasibility study.\u00a0 And the basic thesis that needs to be formed and satisfied is the probability that it will be a \u201cpotentially gainful\u201d venture, before one will even take initial steps to proceed .<\/span><\/p>\n

To further relate and break this down for equities, forex, and commodities traders, it essentially applies to\u00a0 the most rudimentary idea of <\/span>finding proper ENTRIES and EXITS. <\/b>\u00a0\u00a0\u00a0And we all come to know that almost everything will not be always as what it seems.\u00a0<\/span><\/p>\n

Trading as many of us find out the hard way, may be as simple as it sounds but is easily the most difficult endeavor to be engaged in.\u00a0 <\/span>The investment is not only monetary.\u00a0 Many\u00a0 would eventually come to realize, they have to be emotionally and psychologically invested as well.<\/b><\/p>\n

SEATBELTS AND AIRBAGS<\/b><\/h2>\n

First mindset to instill before anything else is that TRADING is a business.\u00a0 We probably have seen a few who may regard it as more of a hobby, all because some friend or acquaintance egged him on.\u00a0 Nothing wrong with that.\u00a0 That\u2019s how most of us started anyway.\u00a0\u00a0<\/span><\/p>\n

Bear in mind though that while businesses are undertaken to EARN,\u00a0 a hobby will always COST. \u00a0 So if you\u2019re just in it for the thrill and\/or the novelty, you would be better off picking up some racquet sport or joining in some competitive event.<\/span><\/p>\n

And following the idea of beginning at the end,<\/span> a trader\u2019s primary rule is not only look at what he or she stands to gain but more importantly, FOCUS on what is at risk<\/b> or what the potential losses can be.\u00a0\u00a0<\/span><\/p>\n

As any sensible trader or investor will tell you, the result of any trade SHOULD and MUST always only END as any one of the following:<\/span><\/p>\n

    \n
  • A small win;<\/span><\/li>\n
  • A small loss \/ break even, or;<\/span><\/li>\n
  • A BIG win.<\/span><\/li>\n<\/ul>\n

    Recent events in our history amplified the importance of prudent actions. Without the need to further rationalize\u00a0 being knee-deep into this era of the pandemic, the words <\/span>\u201cSAFETY FIRST\u201d <\/b>\u00a0became ingrained in our consciousness and thrust\u00a0 itself to be of paramount importance.\u00a0\u00a0<\/span><\/p>\n

    In the investment realm we can equate this idea of instinctive survival to the all important concept of CAPITAL PRESERVATION.\u00a0\u00a0<\/span><\/p>\n

    Simply translated, the principles of risk management must ALWAYS be applied as all capital are limited.\u00a0 Although unlike the current protocols that we observe to avoid contracting and transmitting the virus, <\/span>total avoidance is not an option in trading. <\/b>\u00a0The dynamics is such that we have to be constantly aware and engaged – either in an active trade or in search of set ups for one.\u00a0\u00a0<\/span><\/p>\n

    With the enough technical motivation, involving ourselves in a particular trade we see as potentially profitable is what it is all about.\u00a0 \u00a0 Not taking any chance when opportunity presents itself is actually the greater failing.\u00a0 After all, RISKS are inherent in everything and will always be present in all aspects of our existence.\u00a0 The impetus should just then be on properly managing them.\u00a0\u00a0<\/span><\/p>\n

    That said, you of course need a\u00a0 proven and tested METHOD;\u00a0 and a process that gives you an edge over time.\u00a0 Having a certain degree of mental fortitude in executing an actionable idea should always be a step in the right direction.\u00a0 But for now, let those be topics for another time.<\/span><\/p>\n

    TAKING THE FALL is inevitable. But not all falls are equal. <\/b>\u00a0<\/span><\/p>\n

    A ten foot vertical drop onto a concrete pavement will definitely hurt more than if you just stepped and slipped on a banana peel while walking on grass. While not entirely unexpected, failures can and will happen from time to time.\u00a0 The trick is we have to train and prepare to endure them.<\/span><\/p>\n

    \"\"<\/p>\n

    Defense should always take the forefront in all beginner\u2019s lessons.\u00a0 In the Japanese art of Judo, your sensei would have likely started you off with the basics of falling.\u00a0 Simple roll offs from side to side, to dampening a fall after being thrown are almost always taught first to novices.\u00a0 The rationale is of course simple.\u00a0 As you cannot avoid hitting the ground for the most times you engage, the best you can do is not to get hurt.\u00a0 You have to be able to get back up for the next grapple.<\/span><\/p>\n

    To clarify the analogy, here are a few basic RISK MANAGEMENT concepts that should protect your portfolio and act as a bubble wrap for your trades:<\/span><\/p>\n

    1. Setting and executing STOPS.\u00a0<\/b><\/h3>\n

    Hands down it is the most important and basic component of any RISK management strategy.\u00a0 No trading plan should be without it.\u00a0 These identified and pre-planned price points for EXITS can be classified as any of the following:<\/span><\/p>\n

      \n
    1. Cut loss\u00a0<\/span><\/li>\n
    2. Trailing stop<\/span><\/li>\n
    3. Time stop<\/span><\/li>\n<\/ol>\n

      There are hundreds of references that a newbie trader can study up on to understand these generalized concepts and apply to their trades. While most active traders should already know this concept, the emphasis can never be undermined. \u00a0 Google is always our friend if you are still alien to the above terms.\u00a0 For now just believe me when I say that a<\/span> properly placed stop will make certain that you live to trade another day.<\/b><\/p>\n

      2. Knowing the CONTEXT of your trade.<\/b><\/h3>\n

      Almost anyone can become a trader of the equities market.\u00a0 It does not really matter if you have a small or large amount of capital in order to understand basic concepts of PRICE ACTION.\u00a0 And knowing the context of the trade you will be embarking on, is an input that is ever critical in order to be aligned with an acceptable MARGIN of SAFETY.<\/span><\/p>\n

      One of the first of the many cliches a newbie will hear is \u201cthe TREND is your FRIEND.\u201d Overused in many forum and opinion posts, it is perpetual wisdom.\u00a0 Being a long-only market, the PSE investors know only too well that to make gains you need to BUY LOW and SELL HIGH, or at least buy high then sell higher.\u00a0\u00a0<\/span><\/p>\n

      From a perspective of a prudent, and safety-conscious trader it<\/span> simply IMPLIES to take positions only in names that are trending UP.\u00a0\u00a0<\/b><\/p>\n

      As one of\u00a0 the not-so-few who had it good during the bull market that kicked off in circa 2009, it meant buying anything that moved. And because a \u201chigh tide lift all boats\u201d <\/span>(yes, another cliche\u2019)<\/span><\/i>, most of the time, entries in uptrending stocks did not play too much critical importance.\u00a0\u00a0<\/span><\/p>\n

      While a seemingly wrong entry might stall enthusiasm for a bit\u00a0 it should not matter for too long.\u00a0 In the end, the drawdowns (or negative portfolio values) as a result of PULLBACKS or corrections will cease to exist as the UPTREND resumes.\u00a0 Eventually it should conquer higher price levels\u00a0 the way we want them.\u00a0<\/span><\/p>\n

      But wait.\u00a0 There\u2019s more.<\/span><\/p>\n

      Even in an established trend (up or down), the trade context will alternate to the more time-consuming phase of price action, that we call a RANGE or consolidation.<\/span><\/p>\n

      \u00a0Simply put, it is an area where price settles for a while.\u00a0 This is also the zone where the previously identified SUPPORTS and RESISTANCES are either re-defined or re-established.<\/span><\/p>\n

      \"\"<\/p>\n

      Of course price action that constantly moves higher is what most of us desire to be locked onto. However as \u201cdivergences\u201d will occur as a result of relative rapid price expansion,\u00a0 we cannot disregard the fact that a transition to a \u201cboxed\u201d or ranging price action is inevitable.\u00a0<\/span><\/p>\n

      All depending on where you entered, a range more often seen as a correction may also viewed in a couple of other perspectives, namely:<\/span><\/p>\n

      a. An opportunity to enter or add to positions at a relatively lower \/ safer level<\/b> –\u00a0 range price action offer pullbacks and redefines support and resistance.\u00a0 This eventually evolves as either a FLAG or a PENNANT which are what we call CONTINUATION patterns.\u00a0 It allows other participants to come in while others liquidate for reasons of their own making (profit taking, cutloss, or time stopped).<\/span><\/p>\n

      b. Range trading idea<\/b> – on the transition to the RANGE context where a new \u201csupport\u201d is defined by way of the crowd buying or buying back into at specific price points, a RANGE TRADE may be initiated.\u00a0 Meaning, buying near said new range support then selling into or near the established resistance of the recent high.\u00a0 As mentioned, range context is more time-consuming as all correctives are.\u00a0 Typically they take <\/span>at least near twice<\/b> the time of the trending move. <\/span>\u00a0In Elliott Wave Principles, the idea is estimated by way of Fibonacci Time measurements.<\/span><\/i>\u00a0 What is implied here, is that a RANGE trade may also be considered where you buy near supports of the range and sell near the resistance of the range. <\/span><\/p>\n

      \"\"<\/p>\n

      As this can go on for more than a few times, it\u2019s a<\/span> WASH, RINSE, REPEAT<\/b> idea.\u00a0 And surely, it can also be most profitable.\u00a0 The important mindset to take here is that price action is only in a range – UNTIL IT IS NOT.<\/span><\/p>\n

      3. Knowing your REWARD TO RISK ratio.<\/b><\/h3>\n

      Not really a cliche but sounds like one is another primary rule for traders, \u201cBUY NEAR SUPPORTS, SELL NEAR RESISTANCE\u201d, is hands down\u00a0 the most important one to achieve profitable trading.\u00a0 Either in the context of the general trend or inside a range trade, this is a must know for everyone.\u00a0\u00a0<\/span><\/p>\n

      Necessarily of course, one should need to\u00a0 have properly identified the major price points that attract most buyers (supports), and the levels that entice holders to turn sellers (resistance) aiming to lock in profits.<\/span><\/p>\n

      \"\"<\/p>\n

      And the widely accepted rule of thumb is to take only trade positions with at least a 3:1 ratio.<\/span><\/p>\n

      This again simply means that for every one unit loss you are willing to take, you must at least have the prospect of gaining three (3) times that said amount.\u00a0 Another translation would be for every one peso you are willing to risk (as a loss),\u00a0 you should at least find that there is the potential of gaining three pesos (as profit).\u00a0 Naturally, a higher R\/R or reward to risk ratio is more desirable.<\/span><\/p>\n

      And the simple formula:<\/span><\/p>\n

      Target price minus BUY price \/ BUY price minus STOP.<\/b><\/p>\n

      For example:\u00a0\u00a0<\/span><\/p>\n

      If you bought XYZ stock at 0.95 and have a set stop at 0.85 with a target price of 1.25, your R\/R will be:<\/span><\/p>\n

      1.25 – 0.95 = 0.30<\/span><\/p>\n

      0.95 – 0.85 = 0.10\u00a0<\/span><\/p>\n

      =<\/span> 0.30\/0.10\u00a0<\/span><\/p>\n

      Reward to Risk ratio = <\/b> 3.0 x\u00a0<\/b><\/p>\n

      Again, this cannot be overemphasized.\u00a0 A good R\/R is ALWAYS the key to profitable trading.<\/span><\/p>\n

      4. PROPER POSITION SIZING<\/b><\/h3>\n

      Does the term \u201cALL IN\u201d\u00a0 sound familiar to you?\u00a0 If there is such a thing as a mortal sin in trading, it would have to be taking too big a position size upon entry.\u00a0<\/span><\/p>\n

      If you are doing some kind of project of entrepreneurial orientation, it would be highly unlikely that you will spend your entire budget for said venture in a single release or in a one time pre-payment term.\u00a0\u00a0<\/span><\/p>\n

      It does not matter how much of a sure thing you may think it is.\u00a0 Sound principles dictate that you may want to test the waters first, and perhaps give only a small down payment.\u00a0 And as the project goes forward, gradually increase your exposure as you gain more confidence in its ability to progress smoothly.<\/span><\/p>\n

      It is no different in investment or trading.\u00a0 Proper risk management necessarily involves proper position sizing and limiting risk of losses.\u00a0 Most experts opine that one should not risk more than 2% to 3% for every trade, and no more than 6% of your total portfolio.<\/span><\/p>\n

      A good practice is to buy in tranches of maybe 3 to 4 portions of your allocation.<\/b> It may be in equal portions or in certain percentages of your allocation for a certain stock.\u00a0 This way, exposure and risk will be limited to a small percentage especially at the beginning of a trade or in the initial entry.\u00a0 There is a lot of literature and on the topic of position sizing, and a good one you may come across with are the writings of Van K. Tharp. <\/span>\u00a0(as shown here).\u00a0 <\/span><\/i>It might be overwhelming at first but the ideas and concepts are well worth the nosebleed. <\/span><\/p>\n

      \"\"<\/p>\n

      The size of allocation for each stock in your portfolio must also be properly managed.\u00a0 Portfolio-based investors usually do periodic reviews based on their set metrics and will actively facilitate re-balancing on a regular basis.\u00a0 This practice assures that only winners are maintained and the laggards and losers are promptly removed.<\/span><\/p>\n

      As a simple measure and gauge that you are properly position sized, market veterans will only have this to say,\u00a0<\/span><\/p>\n

      \u201cYou must be able to sleep soundly at night.\u201d<\/b><\/p>\n

      And finally as a recap of how to best protect your investment as a trader, this image of a recent scene in the series of unfortunate events so far for 2020 should be fitting and will remind you of the best risk management practices that every one of us must adopt and embrace.<\/span><\/p>\n

      \"\"<\/p>\n

      I am pretty sure you get the picture.\u00a0\u00a0<\/span><\/p>\n

      \n

      Contributor:<\/strong><\/p>\n

      \"\"<\/a><\/p>\n

      Name:<\/strong> Jojo Gaston
      \nInvestagrams Username:<\/strong>       @JojoGaston0<\/a><\/p>\n

      About the Contributor:<\/strong><\/p>\n

      Jojo Gaston is a partner\/mentor at BoH Society, an online trading support group that provides traders\u2019 education, and data-driven trading format for local stocks, forex, and other foreign markets.<\/p>\n

      \n

      \"\"<\/a><\/p>\n

      <\/div>
      <\/div><\/span>","protected":false},"excerpt":{"rendered":"

      Growing up as kids we may have found ourselves playing with crosswords, and some other visual puzzles that challenge our cognitive skills. More often than not, we look for clues and cues from context and previous dots that we have already connected. This maze game for instance will surely keep most of us occupied for […]<\/p>\n","protected":false},"author":3,"featured_media":3956,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"cybocfi_hide_featured_image":"","footnotes":""},"categories":[42,36],"tags":[],"class_list":["post-3946","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured-3","category-how-to-advice"],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/posts\/3946","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/comments?post=3946"}],"version-history":[{"count":7,"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/posts\/3946\/revisions"}],"predecessor-version":[{"id":3962,"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/posts\/3946\/revisions\/3962"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/media\/3956"}],"wp:attachment":[{"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/media?parent=3946"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/categories?post=3946"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investagrams.com\/daily\/wp-json\/wp\/v2\/tags?post=3946"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}