My Collection of useful trading materials and resources

Here I shall post my collections of trading related stuffs in a random manner with no particular order.
It would be derived from numerous sources.

Benefits of trading in commodities.

There are a number of reasons why traders should consider trading commodities as part of their portfolios. Here are some of the benefits of trading commodities versus stocks:
Minimal outside influences. Unlike the stock market, which has outside influences such as earnings reports, government reports, analyst opinions, or brokerage upgrades, the commodities market is influenced by supply and demand. This means the focus is on inventory levels such as crude oil and growing cycles like corn, which is influenced by the weather.
Corporations are not in charge of commodities.
The actions of a few executives can send the stock price of a company tumbling and affect that sector.Ultimately, this will have an effect on global markets.How can we forget Enron, WorldCom, Adelphia,and Tyco and the impact they had on the equities markets? Commodities are traded on exchanges and are free from corporate control. An individual participates
in this market through the futures and futures options markets. This is purely a zero sum game, in that someone wins and someone loses the
exact same amount, except for commissions.

Money management is the process of analyzing trades for risk and potential profits, determining how much risk, if any, is acceptable and managing a trade position (if taken) to control risk and maximize profitability.
Many traders pay lip service to money management while spending the bulk of their time and energy trying to find the perfect (read: imaginary) trading system or entry method. But traders ignore money management at their own peril.

The importance of money management can best be shown through drawdown analysis.
Drawdown
Drawdown is simply the amount of money you lose trading, expressed as a percentage of your total trading equity. If all your trades were profitable, you would never experience a drawdown. Drawdown does not measure overall performance, only the money lost while achieving that performance. Its calculation begins only with a losing trade and continues as long as the account hits new equity lows.


Suppose you begin with an account of 10,000 and lose 2,000. Your drawdown would be 20%. On the 8,000 that remains, if you subsequently make 1,000, then lose 2,000, you now have a drawdown of 30% (8,000 + 1,000 - 2,000 =7,000, a 30% loss on the original equity stake of 10,000). But, if you made 4,000 after the initial 2,000 loss (increasing your account equity to 12,000), then lost another 3,000, your drawdown would be 25% (12,000 - 3,000 = 9,000, a 25% drop from the new equity high of 12,000).

Maximum drawdown is the largest percentage drop in your account between equity peaks. In other words, it's how much money you lose until you get back to breakeven. If you began with 10,000 and lost 4,000 before getting back to breakeven, your maximum drawdown would be 40%. Keep in mind that no matter how much you are up in your account at any given time--100%, 200%, 300%--a 100% drawdown will wipe out your trading account. This leads us to our next topic: the difficulty of recovering from drawdowns.

Even worse is that as the drawdowns deepen, the recovery percentage begins to grow geometrically. For example, a 50% loss requires a 100% return just to get back to break even (see Table 1 and Figure 1 for details).

Professional traders and money mangers are well aware of how difficult it is to recover from drawdowns. Those who succeed long term have the utmost respect for risk. They get on top and stay on top, not by being gunslingers and taking huge risks, but by controlling risk through proper money management. Sure, we all like to read about famous traders who parlay small sums into fortunes, but what these stories fail to mention is that many such traders, through lack of respect for risk, are eventually wiped out.


Guidelines that should help your long-term trading success.
1. Risk only a small percentage of total equity on each trade, preferably no more than 2% of your portfolio value. I know of two traders who have been actively trading for over 15 years, both of whom have amassed small fortunes during this time. In fact, both have paid for their dream homes with cash out of their trading accounts. I was amazed to find out that one rarely trades over 1,000 shares of stock and the other rarely trades more than two or three futures contracts at a time. Both use extremely tight stops and risk less than 1% per trade.

2. Limit your total portfolio risk to 20%. In other words, if you were stopped out on every open position in your account at the same time, you would still retain 80% of your original trading capital.

3. Keep your reward-to-risk ratio at a minimum of 2:1, and preferably 3:1 or higher. In other words, if you are risking 1 point on each trade, you should be making, on average, at least 2 points. An S&P futures system I recently saw did just the opposite: It risked 3 points to make only 1. That is, for every losing trade, it took 3 winners make up for it. The first drawdown (string of losses) would wipe out all of the trader's money.

4. Be realistic about the amount of risk required to properly trade a given market. For instance, don't kid yourself by thinking you are only risking a small amount if you are position trading (holding overnight) in a high-flying technology stock or a highly leveraged and volatile market like the S&P futures.

5. Understand the volatility of the market you are trading and adjust position size accordingly. That is, take smaller positions in more volatile stocks and futures. Also, be aware that volatility is constantly changing as markets heat up and cool off.

6. Understand position correlation. If you are long heating oil, crude oil and unleaded gas, in reality you do not have three positions. Because these markets are so highly correlated (meaning their price moves are very similar), you really have one position in energy with three times the risk of a single position. It would essentially be the same as trading three crude, three heating oil, or three unleaded gas contracts.

7. Lock in at least a portion of windfall profits. If you are fortunate enough to catch a substantial move in a short amount of time, liquidate at least part of your position. This is especially true for short-term trading, for which large gains are few and far between.

8. The more active a trader you are, the less you should risk per trade. Obviously, if you are making dozens of trades a day you can't afford to risk even 2% per trade--one really bad day could virtually wipe you out. Longer-term traders who may make three to four trades per year could risk more, say 3-5% per trade. Regardless of how active you are, just limit total portfolio risk to 20% (rule #2).

9. Make sure you are adequately capitalized. There is no "Holy Grail" in trading. However, if there was one, I think it would be having enough money to trade and taking small risks. These principles help you survive long enough to prosper. I know of many successful traders who wiped out small accounts early in their careers. It was only until they became adequately capitalized and took reasonable risks that they survived as long term traders.

10. Never add to or "average down" a losing position. If you are wrong, admit it and get out. Two wrongs do not make a right.

11. Avoid pyramiding altogether or only pyramid properly. By "properly," I mean only adding to profitable positions and establishing the largest position first. In other words the position should look like an actual pyramid. For example, if your typical total position size in a stock is 1000 shares then you might initially buy 600 shares, add 300 (if the initial position is profitable), then 100 more as the position moves in your direction. In addition, if you do pyramid, make sure the total position risk is within the guidelines outlined earlier (i.e., 2% on the entire position, total portfolio risk no more that 20%, etc.).

12. Always have an actual stop in the market. "Mental stops" do not work.

13. Be willing to take money off the table as a position moves in your favor; "2-for-1 money management1" is a good start. Essentially, once your profits exceed your initial risk, exit half of your position and move your stop to breakeven on the remainder of your position. This way, barring overnight gaps, you are ensured, at worst, a breakeven trade, and you still have the potential for gains on the remainder of the position.

14. Understand the market you are trading. This is especially true in derivative trading (i.e. options, futures).

15. Strive to keep maximum drawdowns between 20 and 25%. Once drawdowns exceed this amount it becomes increasingly difficult, if not impossible, to completely recover. The importance of keeping drawdowns within reason was illustrated in the first installment of this series.

16. Be willing to stop trading and re-evaluate the markets and your methodology when you encounter a string of losses. The markets will always be there. Gann said it best in his book, How to Make Profits in Commodities, published over 50 years ago: "When you make one to three trades that show losses, whether they be large or small, something is wrong with you and not the market. Your trend may have changed. My rule is to get out and wait. Study the reason for your losses. Remember, you will never lose any money by being out of the market."

17. Consider the psychological impact of losing money. Unlike most of the other techniques discussed here, this one can't be quantified. Obviously, no one likes to lose money. However, each individual reacts differently. You must honestly ask yourself, What would happen if I lose X%? Would it have a material effect on my lifestyle, my family or my mental well being? You should be willing to accept the consequences of being stopped out on any or all of your trades. Emotionally, you should be completely comfortable with the risks you are taking.

The main point is that money management doesn't have to be rocket science. It all boils down to understanding the risk of the investment, risking only a small percentage on any one trade (or trading approach) and keeping total exposure within reason. While the list above is not exhaustive, I believe it will help keep you out of the majority of trouble spots. Those who survive to become successful traders not only study methodologies for trading, but they also study the risks associated with them. I strongly urge you to do the same.

Expectation/Expectancy of a trade = (PW * AW) - (PL * AL)
Expectation of profit factor = (PW * AW) / (PL * AL)

where

PW = probability of a winning trade
AW = average size of winning trade
PL = probability of a loss
AL = average size of a loss

good initiative
Thanks:clap:

Option trading is based on probability and statistics, and it is affected by price, time, and volatility. An individual purchasing a stock has the luxury of time, but
options do not operate this way. In this case, you are fighting against time decay. Thus, it is important to choose the best strike price that maximizes your profitability of profit.

The main purpose of buying options is to gain leverage on your investment and reduce your initial capital outlay. Many option buyers tend to enter low-probability trades that are close to expiration and far out-of-money (OTM) options. They have the gambling mentality in that they know it will cost them only a limited amount of dollars to play, with the possibility of a large reward. This, of course, seldom happens. The smart option sellers take the other side of these low-probability losers and turn them into high-probability winners. If used correctly, selling options can be profitable because of the high probability of success. An option buyer has only one way to win with an option trade. The stock or commodity has to move in the right direction prior to expiration.
Even though time decay is a major factor in why many option traders lose money, nonprofessional traders are reluctant to sell options as it is viewed as an unlimited risk strategy.This is partly true, selling OTM option credit spreads has limited risk and although reward is also limited, the probability of success is high.

When option traders buy calls, they usually choose a strike price above the current price of the stock or commodity and hope it will get to that price by expiration. Similarly, when they buy puts, they choose options with a strike price below the current price of the stock or commodity, hoping that it will get to that price by expiration.What they are actually doing is buying out-of-the-money (OTM) options with a low probability of being profitable.

Basic Setup 1 :

For the basic signals we use the exponential moving average (EMA)(8) and EMA(21) based on the close, and the moving average convergence/divergence (MACD)(12/26/9), with the default parameters. Perhaps the most important task set in front of every trader is to define the dominant trend and trade
in its direction. To do this we use the EMAs. The indicator eliminates noise and shows the major direction of prices which, despite its drawback — a delay — is a useful tool. In addition, moving averages are easy to interpret. You get a
major signal at the intersection of the moving averages. If EMA(8) crosses above EMA(21), it is a buy signal. If EMA(8) crosses below the EMA(21), it is a sell signal.I prefer to define the signal according to the candlestick close. After getting a buy signal, I wait for the candlestick to close above the moving averages. Similarly, after the sell I wait for the candlestick close to be under the moving averages. This confirms that the signal is stable.After getting a buy signal, the trader must wait for the candlestick to close above the moving averages for this technique.PLACING YOUR TRADE AFTER THE EMA CROSSOVER. The idea is to buy or sell in the direction of the moving average and to place a trade as close to the EMA as possible.

After the intersection of the moving averages, how long should you wait for price to return to the EMA? This is where the MACD comes in. The buy signal is active as long as the MACD histogram is above its signal line. The sell
signal is active till the MACD histogram is under its signal line.
To set your stop-loss, you can use the following options:
■ If you can follow the market, you should exit your long position when the candlestick closes under the slow EMA.Conversely, you should close your short position when the candlestick closes above the slow EMA.
■ You could also set a trailing stop-loss. At the time you place your long trade, you should move the stop-loss a couple of points lower than the last bar’s low. For a short position you should move the stop-loss a couple of points higher than the last bar’s high, taking spread into consideration.
It’s important to understand that this technique works well when price is moving in a trend. So before placing a trade,you must determine what direction the trend is moving at the moment.
Your answer could be one of the following: 1) ascending;2) descending; or 3) flat — and there’s one more possibility.Sometimes you will find situations about which you can reply, “I don’t understand where the trend is moving.” This is the fourth possible answer, and it is often useful. No one can force you to click the mouse to make a trade.And therein lies the difference between a professional trader and an amateur one. The latter tends to trade every time he/she sits down at the computer, whereas the professional sometimes doesn’t make any trades at all during a day or even a week.
It is best to define the trend on a larger time frame than the one you’re trading in. For example, if you’re trading using a 15-minute chart, you should check the onehour or four-hour charts to see the direction of the trend.

Try to develop a sense of the price/value relationship underlying the trades you make. You'll find that there are only three possible price/value relationships:
price may be at value, above value or below value. If your trades are not buying a price above value or selling a price below value, your trading circumstances will be favorable;the effects of your mistakes will be muted, and it will be relatively easy to recover from them. Mistakes outside these
Parameters can be disastrous and career ending.

Your biggest enemy in trading is going to be a directional bias, an opinion about market direction ... whether yours, a broker's or a friend's. Shut it out! Learn to concentrate on the "right-hand side" of the chart-in other words, on the pattern at hand.