1. You must be well capitalized. A lot of people got into trouble when they are under-capitalized. What do I mean? If you have $ 2,000, you will have no choice but to use 50% of your capital i.e. $ 1,000 plus a minimum round trip of $ 28 transaction costs. If you happen to lose 25% based on your stop-loss, then you will lose $278. That means you are leaving yourself with $ 1,722 residual capital. However, if you have $ 50,000, you place the same $ 1,000 trade and assuming you have similar amount of $ 278 losses, you still have $ 47,722. A loss of $ 278 is only 0.5% of that $ 50,000 but 14% for a person with $ 2,000. Losing 13.9% of capital will put a lot of pressures on a lot of people. What most will do is to take more risk trying to recover the losses end up with more losses. A lot of people will turn $ 1 to $ 0.1. Now you should know why I did not recommend Turtle portfolio as a trading portfolio.
2. You must keep a separate account to tell yourself that you are trading. Give it a name - Profit Killing Turtle Portfolio for example. Set a fixed amount in trading portfolio. This will force you to account for P&L(Profit and Loss) for your trading activities. Prevent you try to pretend to be a long term investor when you lose money!
3. I like what BHC investment used to put up, Risk Awareness. When you trade, your time horizon is normally a lot shorter. 1 - 11.99 months. One of views expressed by Warren Buffett risk is tied to time horizon and not so much on volatility. He always says if you buy something today and expect something to go up tomorrow, then you have entered into a risky transaction. Things are a bit more random in the short term - I agree.
4. If you must trade, trade as infrequent as possible. 1 - 2 times/month. Why? High probability trade don't come very frequent, when it comes, you must swing your bat!
5. You must understand who is on the other side of your trade. Don't forget, a professional trader is an expert of reading into crowd psychology. He or she is reading your minds all the time, guessing what card you are holding. So be careful.
6. Most of traders have a unique set of system. In a low volatility environment, a lot of price actions are actually very beautiful, nice repeating pattern if you look at from different trading system perspective. Prices are being watch all the time. For example, when short moving average(7-day MA) cross over on long moving average(50-d MA), traders will start placing bets. Some will want to bet if price is 25% below 200-day MVA. Some will sell around 0.618 Fibo retracement because they know probability going beyond that is tough. Some will want ride based on wave length count, bet on wave 3 which typically has longest time of moving up. Etc.......Make sure you develop a system and stick to it. What differentiate a good trader and a hopeless trader is emotion discipline. If you are as cool as Obama - I think you should trade.
7. A trader will have to manage risk very carefully. They calculate risk-reward. They develop entry point based on all the factors in his favor and an exit plan. A good trader will always do a few things - set entry price target, stop-loss, they seldom worry about profit because profit will always take care by itself.
8. Setting stop-loss itself is an art. Let's pick an example Supermax. The stock has been on the downtrend for a long time but recently broken out from its downtrend. Most of the analysts think the stock worth between $ 1.50 - $ 2.50. So I just pick around $ 1.70 as an initial target(it also happens to be a 50% retracment between $2.68-$ 0.80). Stock will typically easily bounce back to around 0.618 Fibo, so expect very heavy profit taking around $ 1.35. Looking at RSI and slow stochastic, you might want to wait till it come back to at least neutral level. Around $ 0.96 - $ 0.97 will be a good entry target. Stop loss will be around 25% which is around $ 0.72 which also makes sense because the strong support is around $ 0.80, if the price managed to penetrate below $ 0.80 signals something has gone very wrong. You must get out!
(Click image to enlarge)
Why I pick all those prices? Because those prices are common reference by a lot of people. This will give me a feel of where people want to get in and out.
The fundamentalist will tell you Supermax is selling for very cheap among peers. Recent write-off of APLI will be the catalyst to let go the past bagage of a wrong acquisition. They are in a recession proof business, softening commodity prices, energy and weaker Ringgit should be in their favor. You see, you probably have to wait 1.5 years for things to develop to increase your probability of a winning trade.
9. Even you have a perfect trade set-up and a perfect plan, your profit will not be guarantee. All you plan will be screwed if KLCI goes down to 720. There are macro moods that beyond your control.
If trade you must, I wish you all the best.
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