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4/15/2008
HOW TO
CONTROL
YOUR
EMOTIONS IN TRADING By Benny Lee
For ATIC 2008 KUALA LUMPUR
How to CONTROL your EMOTIONS in trading INTRODUCTION 1996 : • Got into the stock market frenzy while in college • Started attending some technical analysis seminar • Got first charting software, MetaStock 1997 : • Started trading the futures market in 1997. • Was against the trend, Lost heavily 1997 – 1999 : • Worked in a Recruitment Agency (Need to pay back debts!). • Started to study about trading. Discovered and learned mistakes • Developed trading strategies and traded lightly. • Learned about Automated Trading Strategies
Benny Lee
1999 • Started trading privately. Stocks and Futures, Malaysia and Singapore. • Started learning TradeStation and Omnitrader. • Training Consultant to a Software Company. (This was when my training experience started) Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
1
4/15/2008
How to CONTROL your EMOTIONS in trading INTRODUCTION 2004 till present: • Still trading privately • Joined NextView Group as Regional Trainer, later as Chief Market Strategist
Training/Coaching Experience (More than 8 years): Professionals and Retail Investors in Malaysia, Singapore, Thailand, Vietnam, Pakistan and Hong Kong Speaking Engagements (More than 6 years): Malaysia, Singapore, India, Indonesia and Thailand Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading INTRODUCTION
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
2
4/15/2008
How to CONTROL your EMOTIONS in trading INTRODUCTION
WHY DO TRADERS FAIL? NO PLAN • Becomes emotional… • Gets Confused… • Be at the mercy of others…
To Buy or not to Buy
• Lack of Discipline… • Leads to FEAR…
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading INTRODUCTION
WHY DO TRADERS FAIL? NO RISK MANAGEMENT • Does not know the risks… • Becomes a gambler… • Afraid to lose… • Leads to FEAR…
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
3
4/15/2008
How to CONTROL your EMOTIONS in trading INTRODUCTION
WHY DO TRADERS FAIL? NO MONEY MANAGEMENT Bad reward to risk ratio Have huge drawdowns… Becomes over greedy Leads to FEAR…
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading INTRODUCTION
FEAR! Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
4
4/15/2008
How to CONTROL your EMOTIONS in trading INTRODUCTION
INGREDIENTS OF TRADING CONFIDENTLY
Money Management
Risk Management STRATEGY
Trading Plan
Risk and Money Management relates to trader’s psychology
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading TRADING PLAN THOSE WHO FAIL TO PLAN, PLAN TO FAIL… What is a Trading Plan? A Trading plan is a set of ideas or rules to make trading decisions (entry and exit), often known as trading set ups.
We make trading decisions through: Quantifiable information – fundamental and price information
Unquantifiable information (Second hand information) – news, rumors, tips, recommendations
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
5
4/15/2008
How to CONTROL your EMOTIONS in trading TRADING PLAN
Fundamental vs Technical Analysis Are you an INVESTOR or a TRADER? Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading TRADING PLAN
Discretionary vs Mechanical Trading Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
6
4/15/2008
How to CONTROL your EMOTIONS in trading TRADING PLAN 1. ENTRY: Mechanical or discretionary
2. STOP LOSS: Money Management / Technical Stop
3. EXIT: Mechanical or discretionary
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading TRADING PLAN POTENTIAL REWARDS TO RISK RATIO Mechanical Average Win to Average Loss ratio
Discretionary Potential Profit Target to Stop Loss
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
7
4/15/2008
How to CONTROL your EMOTIONS in trading RISK MANAGEMENT There are 2 types of RISKS in trading: i) Information/Analytical Risk How much information did you get for this trade? Are your analysis good? Do you have enough experience? What is the hit rate of your mechanical system?...etc ii) Monetary Risk (Position size) How much money are you willing to risk for this trade?
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading MONEY MANAGEMENT A SIMPLE yet IMPORTANT MONEY MANAGEMENT QUIZ: Trader A has $100,000 capital Trader B has $10,000 capital
Both Traders uses the same method and enters the market at the same price and at the same time. Both traders enters the market with a position size of $10,000.
Which trader has more pressure? Are both traders maximizing their capital?
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
8
4/15/2008
How to CONTROL your EMOTIONS in trading POSITION SIZING RISKING MAXIMUM OF X% OF TOTAL TRADING CAPITAL THE MAXIMUM RISK DEPENDS ON YOUR RISK APPETITE / PROFILE
EXAMPLE : (RISKING 2% of CAPITAL) TRADING CAPITAL (A) = $100,000 HOW MUCH CAN I BUY IF THE TRADING RISK (STOP LOSS) IS (B) 5% ?
MAXIMUM RISK (2% (C) OF $100,000) = $2,000
THEREFORE 5% RISK = $2,000 (2% from CAPITAL) POSITIONS SIZE THAT I CAN TAKE =$2,000 / 5 X 100 = $ 40,000
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading POSITION SIZING A = TRADING CAPITAL B = MAXIMUM RISK OF CAPITAL % C = RISK FROM A TRADING DECISION %
AxB C
EXAMPLE 2 : Trading Capital = $100,000 Max Risk = 2% Trading Risk = 4% (Stop Loss) Position Size = $100,000 x 2 / 4 = $50,000 EXAMPLE 3 : Trading Capital = $100,000 Max Risk = 3% Trading Risk = 5% (Stop Loss) Position Size = $100,000 x 3 / 5 = $60,000 Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
9
4/15/2008
How to CONTROL your EMOTIONS in trading CONCLUSION EXAMPLE 1:
INDICATORS: MAJOR TREND : UP TREND (100 DAY MOVING AVERAGE INCREASING) MOMENTUM OF TREND: STRONG (RSI +VE DIVERGENCE) CURRENT PRICE ACTION: PULLBACK IN THE UP TREND SUPPORT AND RESISTANCE : PRICE NEAR SUPPORT LEVEL (TREND LINE) REVERSAL PATTERNS: CANDLESTICKS ENGULFING BULL PATTERN COMPANY FUNDAMENTALS: GOOD
INFORMATION RISK = LOW
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading CONCLUSION EXAMPLE 1: ENTRY PRICE = $ 5.00 STOP LOSS PRICE = $4.50 TRADING RISK (STOP LOSS) = $0.50 (10%) TRADING CAPITAL = $100,000 MAXIMUM RISK = 4% TRADING RISK = 10%
POSITION SIZE = $100,000 X 4 / 10 = $ 40,000 = $40,000 / $5.00 (8,000 shares)
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
10
4/15/2008
How to CONTROL your EMOTIONS in trading CONCLUSION EXAMPLE 2:
INDICATORS: MAJOR TREND : UP TREND (100 DAY MOVING AVERAGE INCREASING) MOMENTUM OF TREND: WEAK (RSI +VE DIVERGENCE) CURRENT PRICE ACTION: PULLBACK IN THE UP TREND SUPPORT AND RESISTANCE : PRICE BETWEEN LEVEL (TREND LINE) REVERSAL PATTERNS: N/A COMPANY FUNDAMENTALS: GOOD
INFORMATION RISK = MEDIUM
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading CONCLUSION EXAMPLE 2: ENTRY PRICE = $ 5.00 STOP LOSS PRICE = $4.50 TRADING RISK (STOP LOSS) = $0.50 (10%) TRADING CAPITAL = $100,000 MAXIMUM RISK = 2% TRADING RISK = 10%
POSITION SIZE = $100,000 X 2 / 10 = $ 20,000 = $20,000 / $5.00 (4,000 shares)
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
11
4/15/2008
How to CONTROL your EMOTIONS in trading CONCLUSION HOW TO CONTROL YOUR EMOTIONS IN TRADING 1. A PLAN WITH AN EDGE A MECHANICAL OR DISCRETIONERY METHOD THAT YOU ARE COMFORTABLE WITH AND ABLE TO ACHIEVE YOUR TRADING OBJECTIVE .
2. EFFECTIVE RISK MANAGEMENT POTENTIAL REWARDS > RISK (STOP LOSS)
3. MONEY MANAGEMENT POSITION SIZE DEPENDS ON INFORMATION RISK AND YOUR RISK PROFILE
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading
THANK YOU Email: [email protected] Courses Website: www.thenextview.com Forum Website: www.investasiaonline.com Blog: www.tradinglobby.com Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
12
HOW TO
CONTROL
YOUR
EMOTIONS IN TRADING By Benny Lee
For ATIC 2008 KUALA LUMPUR
How to CONTROL your EMOTIONS in trading INTRODUCTION 1996 : • Got into the stock market frenzy while in college • Started attending some technical analysis seminar • Got first charting software, MetaStock 1997 : • Started trading the futures market in 1997. • Was against the trend, Lost heavily 1997 – 1999 : • Worked in a Recruitment Agency (Need to pay back debts!). • Started to study about trading. Discovered and learned mistakes • Developed trading strategies and traded lightly. • Learned about Automated Trading Strategies
Benny Lee
1999 • Started trading privately. Stocks and Futures, Malaysia and Singapore. • Started learning TradeStation and Omnitrader. • Training Consultant to a Software Company. (This was when my training experience started) Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
1
4/15/2008
How to CONTROL your EMOTIONS in trading INTRODUCTION 2004 till present: • Still trading privately • Joined NextView Group as Regional Trainer, later as Chief Market Strategist
Training/Coaching Experience (More than 8 years): Professionals and Retail Investors in Malaysia, Singapore, Thailand, Vietnam, Pakistan and Hong Kong Speaking Engagements (More than 6 years): Malaysia, Singapore, India, Indonesia and Thailand Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading INTRODUCTION
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
2
4/15/2008
How to CONTROL your EMOTIONS in trading INTRODUCTION
WHY DO TRADERS FAIL? NO PLAN • Becomes emotional… • Gets Confused… • Be at the mercy of others…
To Buy or not to Buy
• Lack of Discipline… • Leads to FEAR…
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading INTRODUCTION
WHY DO TRADERS FAIL? NO RISK MANAGEMENT • Does not know the risks… • Becomes a gambler… • Afraid to lose… • Leads to FEAR…
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
3
4/15/2008
How to CONTROL your EMOTIONS in trading INTRODUCTION
WHY DO TRADERS FAIL? NO MONEY MANAGEMENT Bad reward to risk ratio Have huge drawdowns… Becomes over greedy Leads to FEAR…
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading INTRODUCTION
FEAR! Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
4
4/15/2008
How to CONTROL your EMOTIONS in trading INTRODUCTION
INGREDIENTS OF TRADING CONFIDENTLY
Money Management
Risk Management STRATEGY
Trading Plan
Risk and Money Management relates to trader’s psychology
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading TRADING PLAN THOSE WHO FAIL TO PLAN, PLAN TO FAIL… What is a Trading Plan? A Trading plan is a set of ideas or rules to make trading decisions (entry and exit), often known as trading set ups.
We make trading decisions through: Quantifiable information – fundamental and price information
Unquantifiable information (Second hand information) – news, rumors, tips, recommendations
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
5
4/15/2008
How to CONTROL your EMOTIONS in trading TRADING PLAN
Fundamental vs Technical Analysis Are you an INVESTOR or a TRADER? Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading TRADING PLAN
Discretionary vs Mechanical Trading Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
6
4/15/2008
How to CONTROL your EMOTIONS in trading TRADING PLAN 1. ENTRY: Mechanical or discretionary
2. STOP LOSS: Money Management / Technical Stop
3. EXIT: Mechanical or discretionary
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading TRADING PLAN POTENTIAL REWARDS TO RISK RATIO Mechanical Average Win to Average Loss ratio
Discretionary Potential Profit Target to Stop Loss
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
7
4/15/2008
How to CONTROL your EMOTIONS in trading RISK MANAGEMENT There are 2 types of RISKS in trading: i) Information/Analytical Risk How much information did you get for this trade? Are your analysis good? Do you have enough experience? What is the hit rate of your mechanical system?...etc ii) Monetary Risk (Position size) How much money are you willing to risk for this trade?
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading MONEY MANAGEMENT A SIMPLE yet IMPORTANT MONEY MANAGEMENT QUIZ: Trader A has $100,000 capital Trader B has $10,000 capital
Both Traders uses the same method and enters the market at the same price and at the same time. Both traders enters the market with a position size of $10,000.
Which trader has more pressure? Are both traders maximizing their capital?
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
8
4/15/2008
How to CONTROL your EMOTIONS in trading POSITION SIZING RISKING MAXIMUM OF X% OF TOTAL TRADING CAPITAL THE MAXIMUM RISK DEPENDS ON YOUR RISK APPETITE / PROFILE
EXAMPLE : (RISKING 2% of CAPITAL) TRADING CAPITAL (A) = $100,000 HOW MUCH CAN I BUY IF THE TRADING RISK (STOP LOSS) IS (B) 5% ?
MAXIMUM RISK (2% (C) OF $100,000) = $2,000
THEREFORE 5% RISK = $2,000 (2% from CAPITAL) POSITIONS SIZE THAT I CAN TAKE =$2,000 / 5 X 100 = $ 40,000
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading POSITION SIZING A = TRADING CAPITAL B = MAXIMUM RISK OF CAPITAL % C = RISK FROM A TRADING DECISION %
AxB C
EXAMPLE 2 : Trading Capital = $100,000 Max Risk = 2% Trading Risk = 4% (Stop Loss) Position Size = $100,000 x 2 / 4 = $50,000 EXAMPLE 3 : Trading Capital = $100,000 Max Risk = 3% Trading Risk = 5% (Stop Loss) Position Size = $100,000 x 3 / 5 = $60,000 Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
9
4/15/2008
How to CONTROL your EMOTIONS in trading CONCLUSION EXAMPLE 1:
INDICATORS: MAJOR TREND : UP TREND (100 DAY MOVING AVERAGE INCREASING) MOMENTUM OF TREND: STRONG (RSI +VE DIVERGENCE) CURRENT PRICE ACTION: PULLBACK IN THE UP TREND SUPPORT AND RESISTANCE : PRICE NEAR SUPPORT LEVEL (TREND LINE) REVERSAL PATTERNS: CANDLESTICKS ENGULFING BULL PATTERN COMPANY FUNDAMENTALS: GOOD
INFORMATION RISK = LOW
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading CONCLUSION EXAMPLE 1: ENTRY PRICE = $ 5.00 STOP LOSS PRICE = $4.50 TRADING RISK (STOP LOSS) = $0.50 (10%) TRADING CAPITAL = $100,000 MAXIMUM RISK = 4% TRADING RISK = 10%
POSITION SIZE = $100,000 X 4 / 10 = $ 40,000 = $40,000 / $5.00 (8,000 shares)
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
10
4/15/2008
How to CONTROL your EMOTIONS in trading CONCLUSION EXAMPLE 2:
INDICATORS: MAJOR TREND : UP TREND (100 DAY MOVING AVERAGE INCREASING) MOMENTUM OF TREND: WEAK (RSI +VE DIVERGENCE) CURRENT PRICE ACTION: PULLBACK IN THE UP TREND SUPPORT AND RESISTANCE : PRICE BETWEEN LEVEL (TREND LINE) REVERSAL PATTERNS: N/A COMPANY FUNDAMENTALS: GOOD
INFORMATION RISK = MEDIUM
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading CONCLUSION EXAMPLE 2: ENTRY PRICE = $ 5.00 STOP LOSS PRICE = $4.50 TRADING RISK (STOP LOSS) = $0.50 (10%) TRADING CAPITAL = $100,000 MAXIMUM RISK = 2% TRADING RISK = 10%
POSITION SIZE = $100,000 X 2 / 10 = $ 20,000 = $20,000 / $5.00 (4,000 shares)
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
11
4/15/2008
How to CONTROL your EMOTIONS in trading CONCLUSION HOW TO CONTROL YOUR EMOTIONS IN TRADING 1. A PLAN WITH AN EDGE A MECHANICAL OR DISCRETIONERY METHOD THAT YOU ARE COMFORTABLE WITH AND ABLE TO ACHIEVE YOUR TRADING OBJECTIVE .
2. EFFECTIVE RISK MANAGEMENT POTENTIAL REWARDS > RISK (STOP LOSS)
3. MONEY MANAGEMENT POSITION SIZE DEPENDS ON INFORMATION RISK AND YOUR RISK PROFILE
Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
How to CONTROL your EMOTIONS in trading
THANK YOU Email: [email protected] Courses Website: www.thenextview.com Forum Website: www.investasiaonline.com Blog: www.tradinglobby.com Copyright © 2008 by NextVIEW Investor Education (www.thenextview.com)
12
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