Gaps are always interesting to me! I gives directional clues and also trading ideas. However each and every gaps should be treated differently. In the last tutorial we had discussed which gaps need to be given preference and which one should be ignored. Only the Gaps which opens above or below the previous days high low range gains importance from a traders perspective.
Gaps are nothing but lack of trading during the market open caused by either by a day traders or professional institutional traders/investors. There is a old saying that ‘all the Gaps will fill’. It is often observed that wider the gap introduces more volatility in the markets. And gaps are created because of extreme sentiments among traders/investors (Macro Events, Earning announcements, earnings expectations) which make them to bring flood of orders during the market open
The confidence level exhibited by the unskilled trader who is new to the market is enormous in most of the cases and after few trades they will start behaving like an expert. Most of the traders who are young to financial markets would have experienced such tremendous confidence in financial markets during their initial stage of trading/investing.
Unexpected events in financial markets is referred to as ‘Six sigma’ or ‘six standard deviation’. A huge fall or a sudden rise, which is anything that is not ordinary. In historical terms, six sigma events are those which makes the market to drop down in red more than 9.5% a day. Theoretically a six sigma event happens once in 796 years, but not in practical.
Backtesting is a process of Testing the trading conditions with respect to the past historical data, evaluating not only the profitability of the system but the underlying risk factor associated with the Trading/Investing Model. Proper Backtesting gives belief and enough confidence to a trader to trade a set of rules. But are the newbie traders really doing proper backtesting?
Will an investor choose a mutual fund based on returns only? Absolutely a big NO. So portfolio’s performance should be associated with volatility,a major factor resulting in risk-adjusted returns. Sharpe and Sortino ratios are the metrics used as performance measurement ratios.
Listed Stock options offer the greatest profit potential of any investment vehicle. Profits of 100 percent or more. Risk, on the other hand, is limited to your original cash outlay. Therefore, to attain maximum profits trading listed Stocks options, aggressive investors should never target for a profit of less than 100 percent for most options trades. This will ensure that your target risk/reward ratio is always in your favor.
All right, its time to tackle some important questions and controversies. Do cycles exist in financial markets? Even if they exist, can we trade them profitably? Perhaps it’s often debated only on first scale and completely ignored on second scale basis. Let me take a dip into the topic and some insights alongside.
For most people, it is not easy taking a loss and there is a strong tendency to “book profits” whenever you get profits. Unfortunately, this approach will never help you earn big money and more often you will see that after running a lot you are still in the same place. Your broker has however been earning slowly but steadily.
Many people assume that those who regularly make money in stock markets must be very clever. Or that you must be blessed with some intelligence to “make it big” in the markets. This is a very wrong assumption as there is no correlation between intelligence and trading.
As with every field in finance there is a large amount of misconception about discretionary trading, which is highly profitable and led some to believe such a type of trading is purely subjective-No! People have misunderstood the concept and definition of discretionary trading. Even if you are systematic trader you can use the power of discretionary trading for your advantage.
Whatever system you have, there will winning and loss making trades. Fact is, and this is important, is you can never know in which order this will appear. Also, while you can quantify and limit your loss, you cannot know in advance how much you will win in any trade.