Crash - You Win Some, You Lose Some

On Monday I got the short trigger but it got filtered out. Tuesday was a messy day. Yesterday I was short but closed my trade when market went back up in the range. And today, a big gap down! I could not get entry today so I lost the opportunity. Anyway, you win some, you lose some.

Expectancy Simulator

I used the Excel RAND function to simulate 100 trades. Every win gets 40 points. Every loss drops 20 points. Column F shows where you stand after 100 trades. Press F9 to get a new set of readings. The point is you don't need to be 90% accurate to end up in the green. As long as you win more than you lose, you will come out a winner. You can download the file here.

Btw, the formula for Expectancy is

E = (PW*AW) - (PL*AL)

where PW = Probability of a Win, AW = Average Win, PL = Probability of a loss and AL = Average loss.  Here we are assuming average win is of 40 points and average loss is of 20 points.

Shorts Trapped

The day began as an "inside day" and after a lot of chop the PDL broke down in the late afternoon. But here the critical mass was short I guess and it reversed and went back up in the range trapping all the shorts. Tomorrow the trade is on the long side. 

Why Most Traders Lose : Under - Capitalization / Position Sizing

Trader A has Rs 40,000/- capital and he wants to trade one lot of Nifty. He thinks that this money is sufficient as it meets the margin requirements. ok! so far so good! Now comes the interesting part. One should not lose more than 1% of the capital on one trade. So the risk is 400 bucks. Suppose this trader keeps a stop of 20 rupees then the position size becomes 400/20 or just 20 shares of Nifty. Can you trade 20 shares of Nifty? No! The minimum ticket is 50 shares! So what does this mean?  This simply means that traders trading 1 lot of Nifty with an initial capital of 40,000/- are never ever going to make it.

Suppose you have a capital of 100,000/- Again you don't want to lose more than 1% of your capital on a single trade. Like before, your stop is 20 rupees. So now your position size is 1000/20 or 50 shares. So with a capital of 100,000 you can just trade one lot of Nifty. If the first few trades go against you then you are busted. That means you need more than 100 k capital to trade one lot. 

Now let's increase the capital to 200,000/- with 1% risk and 20 bucks stop. So now the position size becomes 2000/20 or 100 shares or 2 lots. Now here you have a buffer. The idea is to trade only one lot and keep the rest as your buffer. 

Why should one lose  only 1% of the capital on a single trade? The reason is recovering a small % of your initial capital is possible. If you lose 50% of your capital then you are busted as it needs a 100%  gain to break even.

See the table below:

Messy Day

As I filtered out yesterdays short trigger I had no position today morning. Prices drifted down in a slow grind and I tried a short at the yellow circle but closed after 1 hour. Prices suddenly flared up and I decided to jump and was in at 6156 with a stop at 6145. It went beyond the IRH and it was holding well around 6175 and I thought it will continue up and since my stop was just 10 points I decided to hold. But the thing got sold off taking my stop. Now, tomorrow I have two plans. Plan A is to go short if it fails to move up above the white circle otherwise I will switch to Plan B - wait for a long trigger.

Sell Off, Exit Trigger, Filtered Out Short Trigger

The gap up open went up for a few candles and got sold off. I did not like the price action inside the white oval above so I booked out my Friday's long at 6229 for a 39 point profit. After this it chopped around and got sold off around 6225. The pink arrow shows you the actual rule long exit by this system. A short was triggered but since it appeared at previous days low I did not take it. This is the way filters can help you. If you'd blindly taken this short trigger then you would have been trapped! See the previous post Location

KISS!

I've been getting a lot of mails off late about the 3 ema method. Most of the guys want to know whether I use any indicators along with the trigger and my answer is NO!

The more information you add, the more confusing it can get. Besides, the extra information is often redundant and is called Multicollinearity. Do not make your trading like they make a bowl of soup! Keep it simple stupid!

Pluraritas non est ponenda sine necessitate

Location, Location, Location

The location of the trigger can be important. Suppose a long is triggered and the price is at point C. Will you buy? Maybe the price is too far up the averages and may pullback, so you may wait and watch. What if the price is at B?  Hmmm, maybe you can buy, put a stop below the ema cross and hope for the best. What about point A? This looks like the best case scenario - buy immediately!  Similar for short triggers.

A long trigger appearing near low of the day or the previous day low has more probability of working than if it appears at the high of the day or near the previous days high. 

Similarly, a short trigger appearing at the high of the day or near the previous days high has a better chance of working than if it appears at near low of the day or near the previous days low. 

These are some of the filters I'm using. You may do your own research and come up with similar ones which may suit your trading. 

Fresh Long Triggered

For almost the whole day, Nifty chopped around in the 6157 - 6180 range. A short trigger was almost done at A (Brown arrow above) but was filtered out as there was a support zone below (brown circles). Finally a long was triggered and taken at 6190 with a stop at 6165 and the trade is being carried over the weekend.

Blast