You are on page 1of 8

TRADING

Foundation

APRIL 28, 2016


DHIRAL H. SHAH
dshah3710@gmail.com

Disclaimer
This book is about psychology and mind set needed for trading. It doesnt include strategies or cover
technical depth. This is a short book just to give insight about various pillars of successful trading. It
includes rules of the game and laws of risk management. This book is suited well for beginners and
can even help traders who are seeking an answer for their loss. So guys, just go through and check
out if you doing the basics right.

Destiny is not a matter of chance. Its a matter of choice.

Before we start with trading, lets understand what is market.


Market is like an ocean. You remove 1 glass of water or a bucket or a tanker from it, it doesnt affect
the ocean. In other words, you can get as much as you want. Only question is How much you want?
Have a Goal, it will clear your vision and hence help you make better decisions.

Benefits of trading
1.
2.
3.
4.
5.
6.
7.
8.
9.

Start with limited capital


Equal opportunity
No boss No employees
Transparent business
High return on investment
Anytime liquidity
Easy to get leverage
Anywhere business
Controllable risk
(it is we who allow the market to take away our money)

Rules of trading
1.
2.
3.
4.

Expect and accept losses


Lose small and Win big
Set loss limits
R:R >= 3
(R:R -> Reward to risk ratio)

Reward to risk ratio is key to success as you can lose 3 times to breakeven.

Future belongs to those who believe in their dreams

7 Pillars of Trading

1.
2.
3.
4.
5.
6.
7.

Fundamental Analysis & Macro picture


Technical Analysis
Speed of Execution
Live data feeds
Risk management
Psychology of trading
Trading plan

Fundamentals
1. Earning dates
2. Competence of management team
3. Relative sector strength
Technical
1.
2.
3.
4.
5.
6.

Support and Resistance


Trend lines (Diagonal S.R)
Fibonacci
Multiple time frame analysis
Impulsions vs. Corrections
Overbought & Oversold
Historical data
Real time data

Risk management
1. Professional traders focus on ELIMINATION of down side all together.
2. If Win and Lose are two variables than there are four mathematical possibilities
Big Winner
Small Winner
Big Loser
Small Loser
They try to eliminate Big Loser category.

Psychology of trading
1. Focus on how not to lose Money.
2. Take EMOTIONS out of trading decisions and focus on moment of trade.

Trading plan
1.
2.
3.
4.
5.
6.

Defined goals
Daily Routine
System for selecting securities (stocks)
RMP (Risk Management Plan)
Defined trading strategies, entry and exit
Means of measuring success
Confidence in Analysis & Comfort in your Execution will take your anxiety and fear out.

10 Laws of Risk Management


Law 1:
Use small share size at least for many months.

1.
2.
3.
4.

Risk of Analysis
Risk of Execution

Dont take large risks until you build a buffer.


Dont make a deal with the devil.
If its easy, you become lazy.
Move ahead gradually in stages, dont jump. So that you can maximize on
Learning.

Law 2:
1. When in doubt, get OUT! Deal with Reality.
2. If it doesnt behave like expected, get OUT! Immediately!!!
3. Flats are winners.

Law 3:
1. Learn the difference between Gambling and Trading.
2. No overnights. (Things you cant control). Never take home a Loser!
3. Dont short a stock just because its irrationally high. (Dont just buy because its
simply low.)
4. No positions before market opens. (Extended hours may be used for escape).
5. No positions before major market announcements.
6. Volatile stocks have blown more accounts than anything else.

Law 4:
Dont add to Losers. {Short term} To make profits.

Law 5:
Dont overtrade - (waste in brokerage).
Example: if your goal is 500$ profit/ day & your average gain is 0.5 $ on 100 shares
then 10 trades will get you there.

Trade more as you get experience.


If losing dont trade more to reach even.

Law 6:
Dont increase share size to make up a losing trade. Its called Doubling downAnother gambling trick.

Law 7:
Have a daily loss limit
1-2 % of risk capital
Example: if 25000$ is the capital then 250-500 $ loss/ day is your loss limit.
I.e. 100 days of losses that you can sustain without having anything. Thats the worst
case.
But it gives you very essential experience, knowledge, market exposure and
skills that are valuable.

Law 8:
1. Be logical, not emotional.
2. Be unattached to outcome of your trades. Focus on your doing.
3. Scared Money never wins.

Law 9:
Dont trade if there are computer problems or slow quotes from NASDAQ
Go play golf, have nice time, read wall street journal but dont trade.
Start Early. Do check list.

Law 10:
Be Disciplined.
1.
2.
3.
4.
5.
6.

The tie that binds.


Make trading plan for tomorrow by going through/ reading finance websites.
Review your previous week.
Discipline is set of rules that help you make unemotional decisions over and over
Right decision making is key to success (survival).
If you start to trust yourself that you going to make good decisions in bad
situations, then youll make better decisions earlier Make Money.

Tip:
1. Write down your weaknesses and work on it. Make your plan and discipline
(customized one).
2. When youll remove all bad what will be left is all good.
3. Dont lose ..If cant escape.lose little!!!

HAPPY TRADING GUYS

You might also like