TaiChi Price Action - Intraday Trading Strategy

[anilnegi]

Proper Money Management Plan

1. Defining Trade Risk

Once you accept that trading is just a game of probability, and with every trade there is this factor of risk to our own pocket, then its always better to think about your own safety first before going in to the battlefield. The greatest warrior also first wears the armour plate and then picks up the bow and arrow. So we need to ensure our own survival first. And also this is the reason for which there are so many blown away accounts in initial years. I have blown out my account twice before learning this fact and calculating the risk associated with every trades.

So your trade risk is actually the amount of money that you are willing (in other word, you are comfortable) to loose if the trade goes against you. A nice analogy can be made here from my own experience.

"One day, I and one of my friend was coming out of a restaurant after having lunch, and outside there was a beggar, asking for some money. When I gave him a 10rs note, my friend was carried away that day, and gave him a 100 rs note, and told him to go and have some food. Though I appreciated him and his act, but that made me think and ask this question to myself. "How many days can I give a 100 rs note to a beggar and be comfortable" ?

I asked the same question to my friend also, and he told its only a matter of once. He can give a 10 rs everyday and can get away with it. But 100 rupees everyday is definitely a NO. So I realized even I am not comfortable in risking 100 rupees everyday and give it to someone just like that. But everyday I am doing intra-day trading and risking much higher money. Where as my true risk - comfort level stays below 100 rs. !!!"

So if I can bring down my risk per trade factor to such a level where the negative outcome of trade (loss) wont bother me at a personal level, and I can again come to trade next day comfortably letting go the previous trade's outcome. No loss can throw me out of the game as long as I am comfortable with it. And then I realized that one of the key secret to success in the business is to let go of the loosing trades. And knowing the trade risk is the first step here.

Regards
Taiki

Very good example Taiki brother with 10 Rs note, but how much risking in trade is considered a risk of 10 Rupees and how much is 100 Rupees.

anil negi

 

[Taiki]

Very good example Taiki brother with 10 Rs note, but how much risking in trade is considered a risk of 10 Rupees and how much is 100 Rupees.

anil negi

Dear Anil,

This is completely a factor of personal preference of how much we are willing to loose without being psychologically disturbed, and can still be in the game.

The example was just to show you how sometime we are not even ready to risk a 100 rs per day, but still bet on much more than we can afford in a trade. When the trades goes against us, we start blaming the market, the system, and every other things as we can not stand the loss, and the loss bothers us as we are not comfortable with it. But rarely we look with in ourself and our approach. I always believe that market can not take a single penny from your if you wont allow it.

Sometimes we think we are comfortable with something, but deep down there is some other limiting beliefs that hold us from achieving we desire.. And I hope this topic will be more clear as we cover the next two topics on defining business risk and determining stop loss and position sizing.

Regards
Taiki

 

[Taiki]

Proper Money Management Plan

2. Defining Business Risk

Let me start this topic with an analogy I had read some where. (Dont remember where, Don't even have any links to the original material. Apologies to original author). The analogy is - Lets think of a tomato seller in local market (Sabji mandi) who buys baskets of tomatoes at a cheaper rate from some whole sale dealer, and aims to sell them all by night to make a profit. But how much it is likely that he will be able to sell it all by the night. What if some tomatoes are left unsold, (he cant keep them to sell next week as they will rot). So that will be counted as a loss. Even being aware of this loss, he aims to sell at least that amount of tomatoes from which he can cover this small loss and still make a living. But what if this loss will start exceeding every week, and it will start imposing a question his survival as a tomato trader ? So he should know when to stop or need to re-adjust his business plan once his business itself comes in risk.

Similarly in trading, we are risking few money in order to gain some. So in the process we have to bear some losses, But one should not kept loosing every time and think of surviving in the business (unless one is having infinite source of capital inflows). So at some point of time we need to apply a break if the loosing streak continues, and we need to evaluate our system, our trades, and learn from the mistakes. So business risk is like a stop loss to your trading every month, i.e. if in a month you hit your business risk, then stop trading for the month, analyse your systems, loosing trades, what best you can do to avoid them, and prepare to be a better trader.

Once trade risk is defined, and how much you are willing to loose on a particular trade is determined, we also need to draw a line for our business risk.

One can ask here what If just after we stop trading for the month after hitting the business risk, a big profitable trade comes, where we could have recovered our capital. So what is the need of a business risk in the first place ?

To me here are the reasons.

1. No one knows in advance when a profitable trades is gonna come, one can only talk about probabilities. It can very much happen that if you take the next trade after hitting business risk, thinking of recovering your lost capital, but that trade again goes in to a loss, and thus in that month you are loosing more than your defined business risk and leaving a hole in your pocket, and also leaving you doubt full psychologically.

2. You need to induce this belief in you that market is not gonna run away anywhere, so opportunities will come again. So there is absolutely nothing wrong if you let few trades go because you had a loosing streaks.

3. There were 2 instances where I had hit my business risk, and just after I stopped trading for that month, there was a big profiting trade which definitely I missed and kicked myself. But that gave me a chance to introspect further in to my approach, and I found out that my trade risk and business risk were not in sync.

Just because you define trade risk and business risk for your trading it does not necessarily mean you have a proper money management in place. To me what happened was my trade risk was little bigger even though I was psychologically comfortable for the risked amount. And business risk was getting hit by 3/4 trade risks hit (3/4 loosing trades). And this can very much happen that you can have continuously 3/4 or even more loosing streaks in range bound narrow market.

So the key here is to be in the game until the range overs, and market starts picking a trend. So in order to have that, the looses from those tuk-tuk trades need to be small. If you loose a considerable amount before the big move, and hit your business risk just before it happens in market, then you will kick yourself like I did in those 2 occurrences.

So these two questions need to be answered first before deciding on trading on any month. i.e. How much risk I am willing to take on every trade, and How much can I risk this month out of my total trading capital.

Regards
Taiki

 

[raj_jain1]

Taiki sir come fasttttt to below topics....m waitin frm many days

Objectively defined trading rules.
1. Trading Instruments
2. Market Structure Analysis
3. Determining Trend and Trade
direction.
4. Trade Setups
5. Trade Management & Exit

 

[Taiki]

Taiki sir come fasttttt to below topics....m waitin frm many days

Objectively defined trading rules.
1. Trading Instruments
2. Market Structure Analysis
3. Determining Trend and Trade
direction.
4. Trade Setups
5. Trade Management & Exit

Dear Raj,

I could have started right from these topics, and trade setups/rules, but often trading psychology, risk & money management are the most overlooked topics, but when they are learned and practised, they do the miracle. This I have learned from my own experiences of doing mistakes and learning from them. I just did not want to share the system here, and thats why I started from the 2 major and must needed topics in trading i.e. psychology and Risk Management.

I hope you are not overlooking these topics, and just being desperate for the system. If thats the case then I hope you learn them soon.

Good luck
Regards
Taiki

 

[bunti_k23]

Proper Money Management Plan



So these two questions need to be answered first before deciding on trading on any month. i.e. How much risk I am willing to take on every trade, and How much can I risk this month out of my total trading capital.

Regards
Taiki

Does that mean you are utilizing 100% capital available in your trading account for a single trade?if yes why so?


Kindly clear the doubt of my lill mind

 

[raj_jain1]

Dear Raj,

I could have started right from these topics, and trade setups/rules, but often trading psychology, risk & money management are the most overlooked topics, but when they are learned and practised, they do the miracle. This I have learned from my own experiences of doing mistakes and learning from them. I just did not want to share the system here, and thats why I started from the 2 major and must needed topics in trading i.e. psychology and Risk Management.

I hope you are not overlooking these topics, and just being desperate for the system. If thats the case then I hope you learn them soon.

Good luck
Regards
Taiki

thanks for opening my eyes...I just trade on setups wid sl bt never ever looked or even tried to see that topics‚nw I'll also read and apply coz I don't want to do mistakes as u did by overlooked them.

 

[akrsrivastava]

thanks for opening my eyes...I just trade on setups wid sl bt never ever looked or even tried to see that topics‚nw I'll also read and apply coz I don't want to do mistakes as u did by overlooked them.

Controlling your emotions is important, but at the same time, nothing succeeds like success.

 

[Taiki]

Proper money management plan

3. Stop loss and position sizing

Now after understanding the trade risk and business risk lets see how to use them in stop loss and position management.

thanks for opening my eyes...I just trade on setups wid sl bt never ever looked or even tried to see that topics‚nw I'll also read and apply coz I don't want to do mistakes as u did by overlooked them.

When I understood the concept of stop loss, I thought just because I use stop loss, my trade is secure. But then I realized that its not about just using the stop loss, but about how much we are risking through the stop loss. So there is the question what is a valid stop loss. Some uses a fix percentage of their trading capital, few uses a time stop, and few uses technical stop below/above recent low/high. I prefer the third approach, i.e. below/above the recent low/high, as this gives price enough room to move and keeps the odd in my favour.

Now lets take this example, that you are buying 1000 shares of stock ABC, with a stop loss of 5 points. That means if the stop loss is getting hit, then you will loose 5K (Trade Risk). lets say your trading capital is 1 Lakh. That means it will take only 20 bad trades to wipe out your capital. I dont know how right or wrong is it. but lets say you are risking only 1K per trade, then it will take 100 bad trades to wipe out your capital. So in which case you have better chances of survival ??

Now lets say you are an intraday trader, so it is quite usual that you may take 2/3 trades per day. Lets think about the worst case scenario where all 2/3 trades are going for a loss on that day. That means you are down by 2%-3% from your capital. And this means, it needs to take around 33-50 continuous bad days to blow your account. And this is where you are going to need the business risk.

lets say your trading system gives signal with a 60% accuracy. That means out of 10 trades, there will be 6 winners and 4 losers on avg. And if all the trades are taken with minimum of 1:2 R:R, then you will loose 4K, and will gain 12K. So on any random distribution, since this is very much possible that you can get a continuous 4 loosing trades, you should keep your business risk above 4K. lets say we keep our business risk at 6K (6%). and trade risk is at 1%. That means, if on any month my loss amount will exceed 6% of my trading capital, I will consider this as a business risk hit, and a threat to my survival on this business. So i will better stop trading for that month and will analyse the setups and my approach. Now again thinking about the bad case scenario, if on every month I will keep on hitting my business risk (6%), then it will take around 16+ months to completely blow my account.

Does that mean you are utilizing 100% capital available in your trading account for a single trade?if yes why so?

Kindly clear the doubt of my lill mind

Dear Bunti, I guess i have answered your doubts. Any more doubts are welcome.

Regards
Taiki

 

[Somatung]

Taiki sir come fasttttt to below topics....m waitin frm many days

Objectively defined trading rules.
1. Trading Instruments
2. Market Structure Analysis
3. Determining Trend and Trade
direction.
4. Trade Setups
5. Trade Management & Exit

Dear Raj,

I could have started right from these topics, and trade setups/rules, but often trading psychology, risk & money management are the most overlooked topics, but when they are learned and practised, they do the miracle. This I have learned from my own experiences of doing mistakes and learning from them. I just did not want to share the system here, and thats why I started from the 2 major and must needed topics in trading i.e. psychology and Risk Management.

I hope you are not overlooking these topics, and just being desperate for the system. If thats the case then I hope you learn them soon.

Good luck
Regards
Taiki

Good question from Dear Raj, which represents the thoughts of most, not so experienced traders :thumb:, and a perfect answer from your side to the question :thumb: , which is only recognized after being in the market for a while and even survived it.

Take care / Dan