Think of trading as a business. Proper management of the business will ensure a successful enterprise. In the same way, proper management of the activities of trading is required to provide for trading profits.
If you buy a share for trading, what is your role in the trade ? After all, the market decides if the price will go up or down. You cannot control the movement of the price. What is the role of your skill in the trading business ?
You can manage the trade properly, or mismanage it. Your role will play an important part in the success or failure of your business of trading.
You decide:
1. What is the trend of the stock ?
2. At what entry price is a purchase justified ?
3. Is there a valid stop loss near the entry price ? If not, should you take the trade ?
4. If the stock price falls a little but not enough to stop you out, will you evaluate the trade again after a period of time ?
5. If you are stopped out, will you consider a reentry ?
6. If the trade goes in your favor, at what point will you move the stop to brekeven ?
7. Will you buy more if the trade goes in your favor ?
8. If the trade is in profits, do you plan to sell a part of your position ? If so, what are the rules for exiting partial position ?
9. How will you keep trailing stops ?
These are some of the issues that are in your control. As a trader, you should plan and manage them. Notice that I have not discussed anything about the possible price movement. Why ? Because the market is not within your control. We can manage only what we can control.

A perfect weekend read is The Alpha Hedge Fund Hall of Fame . The website honors fourteen of the best ever hedge fund managers who "had an outsize impact on the hedge fund industry, enjoyed spectacular long-term success and displayed tremendous originality."
What accounts for your success?
Louis Bacon: Hard work, patience, knowing when to hold ’em, fold ’em or go all in. We have a rigorous risk framework, and although I do not micromanage every position, my portfolio managers understand the risk format prior to joining the firm.
What’s your take on the next generation of managers?
Paul Tudor Jones: I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over. ... We learned just to go with the chart. Why work when Mr. Market can do it for you? .....explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation. As a result, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust the price action. The pain of gain is just too overwhelming for all of us to bear!
How do you choose a hedge fund ?
David Swensen (manages the $22.5 billion Yale university fund): At Yale the most important shift in vetting hedge fund managers over the past 15 or 20 years has been an increasing focus on the character and quality of the investment principals.
Years ago, I would have talked about this investment characteristic or that objective factor. Now we focus overwhelmingly on assessing the managers running the business. The fundamental question is, Are these people you want to be partners with? I think it really comes down to individual characteristics.”

Peter Drucker "In turbulent times, liquidity is more important than earnings. A business can survive long periods of low earnings or low revenues if it has adequate cash flow and financial strength."
The top Information Technology companies: Infosys, Wipro, TCS are cash rich, with strong cash flows. Three blue chips: Hindalco, Tata Steel, Tata Motors are raising cash to finance thier business activities thus suggesting a cash shortage of some kind. The market is punishing this by lower share prices.
Safe Havens. Sectors which may remain relatively safe for investments in current turbulence are: Information Technology (cash flows) - long list of names, Natural Resources (wealth in their reserves) - ONGC, Cairn, Neyvelli, Sesa Goa....., Renewable Energy (new technologies) - Suzlon.
Disclosure: I own shares in Cairn as I write this.

For investors, buying on a dip is a low risk method of accumulating blue chip stocks.
First, the repeat - blue chip stocks. If you are planning to apply this idea to trade in so called momentum stocks, then you are likely to face great risk at the worst possible time. This blog entry is about slowly building up a portfolio of blue chips.
A panic decline in the stock market is an ideal opportunity to add some high quality stocks to your portfolio. Such panic declines comes two or three times in a year. Thus, the quality of patience is essential to take advantage of low risk situations.
What is a blue chip ?
A company that is known nationally for its products and services, and is financially stable in good and bad economic times is considered Blue Chip Company.
Thus, a company sees its financial position under pressure is NOT a blue chip in our definition. But, a company that sees some setback in business conditions yet remains financially solid qualifies as a blue chip. Just to give an example valid for today, August 21, 2008:
Grasim has seen a setback in business conditions, but its financial condition is solid. It is a blue chip.
Hindalco (same management) is seeing a setback in earnings, together with pressure on its finances due to its acquisition - Not a blue chip for the moment.
I have a simple method - blue chip comanies are cash rich.
Now, what is a dip ? The current price should be at least 35% lower than the highest price recorded in the last two years. In fact 50% lower is better.
When you see this price, and hear about panic in the market, go and invest. Do not invest more than 1% (one percent) of your capital at any one time.

When the Trader has a midly bullish outlook for an Index or a security, she can use options to set up a bullish ratio spread.
The Nifty has been facing resistance in the 4600 - 4650 zone. On August 18, 2008 The Nifty closed at 4405 after a four day decline. There was support at 4400. The day was also an NR7 - Narrowest range in 7 days. Thus, it was possible that the Market may be ready for a mild rally which could see the Index touch 4500. The upside is essentially limited as there is that overhead resistance at 4600.
Options expire on August 28, giving only 10 days to expiry. Buying premium with only 10 days to go is not a good idea. Before close of trading, a ratio spread was set up to take advantage of any minor up move. The trade went like this:
Buy 100 NIFTY 28 August CALL strike 4400 @ 104 - Implied Volatility 35%
Sell 200 NIFTY 28 August CALL strike 4600 @ 31.4 - Implied Volatility 32%
This is a ratio spread because 2 calls are sold for 1 call purchased. Since the market feels that 4600 is strong resistance, the 4600 calls have a lower implied volatility. That's a pity since these calls are being sold, but that's the way the prices are structured.
Expectations:
The Nifty moves up to 4500 or closeby. Fine. There is a gain. We do nothing. Beyond 4600, the additional call sold will start losing money. Thus, if the Nifty crosses 4600, the spread should be liquidated. There will be a small profit.
The Nifty falls. The spread loses money. Now, the net cost of the spread is small. Thus, the trader can bear this loss. When there are only two days left to expiration, if the 4400 call is selling below 20/- then the trader may like to sell this call and keep a short position in the 4600 calls.
The spread requires an investment of Rs 4,200 for each pair of 100-200 calls (excluding margin). The success of this strategy should be measured not just in terms of return on this investment. It provides a systematic method of trading in the market.

1. Have a trading Method
Write down on paper, the reasons for entering the market, your plans for stop losses. If you do not have well thought out, coherent ideas for entries & exits then maybe you should stop all buying and selling until you develop a basis for your trading.
2. Back test your trading ideas.
Back-testing is the research which tells you exactly how an investment strategy and trading plan would have performed over a given historical period.
The reasoning goes like this: If it worked in the past, then there is a reasonable chance that it will work in the future.
Read about Back Testing here
Examples of Back Testing
(Both links open in new windows)
3. Stop Loss
Execute your stop losses ruthlessly, without any emotion. If your trading plan calls for a stop loss, apply it. Then forget about the loss.
4. Think like a Casino
When you enter a casino, does the management think you are going to provide their year's earnings ? No. There will be thousands like you, giving little bits to the casino. The casino earns money because of thousand sof visitors and could not care less if one of them made some money and went away.
In the same way, traders should not worry about one bad trade here or there. In your trading career, you are going to take thousands of trades, so do not get atatched to the success or failure of any one trade.
5. Accept that you will be wrong.
Are you looking for perfection in trading ? When you buy, do you wait and wait and wait to be proved right ? If you want perfect trades, then you are likely to ignore all warning signs that tell you otherwise.
Come on, we are all going to be wrong, more often than we like. Buit it makes no difference. The key is: our correct trades make more money than the losses in the wrong trades. That's enough.

Today's newsletter for our subscribers (http://www.technicaltrends.com/) contains a learning chart for SASKEN (close: 156.55). Based on the chart, the lessons are: The stock is in a trading range, pushing against 160 resistance. A buying opportunity exists with a possible target of 200 and a stop below 140.
Can you build on your wealth with such ideas ? The answer is: Only if you understand the importance of wealth presevation.
Let me start with the assumption that this idea actually works, meaning it makes money. Assume that Sasken breaks out above 160, slowly moves up reaching 200 over the next 8 weeks. This is the most favorable scenario, but it does not mean that it is a wealth builder for you.
Suppose, SASKEN moves above 160, then a sharp and sudden dip comes in the stock market, pushing stock prices below 140. Later an equally sharp recovery takes price all the way to 200. Now, the target has been achieved, but before touching the target, your stop loss was activated. So, you were out of the trade, not participating in the forthcoming up move.
There are many such possibilities. Sasken moved up after you purchased it. Then a sharp correction brought it down from 180 to 160 - your purchase price. the stock started moving aimlessly in this range for weeks. You eventually got frustrated and sold off, then just a few days after your exit, the stock took off, reaching 200 in no time.
I have not discussed the possibility of the trade becoming a loss from the start. Surely, even this is possible.
I hope you get the idea: Real life trading and investing is very different from imaginary trading.
It is not enough to get a "call" for buying some share or the other. Frankly, such "Calls' are a dime a dozen and have no value at all. The real skill lies in managing your trade.
Once you setup a stop loss, you must have the discipline to follow it. It is possible that the stock may move your way after you are stopped out. So be it.
If you had valid reasons to exit the trade when a stock begins to move sideways, be glad that you took the right decision. If the stock moes up after you exit, so be it. You took the right decision at the right time.
My point is: wealth building takes place with patience, discipline and acceptance of the impact of market forces. If you follow your rules, trade in small volumes, you will be able to withstand any number of whipsaws and false signals. In the final outcome, you will come out as a winner.

Money multiplies many times over when it is invested and the earnings are reinvested. This is the power of Compound Interest. The sooner you start to save, the greater the benefit of compound interest. Compound interest is the interest earned on reinvested interest, in addition to the original amount invested.
This blog is meant for traders & investors. You will get the benefit of compounding when you (a) invest your money in income generating avenues, and, (b) ensure the safety of your capital.
If you trade carefuly and conservatively, it is posssible that you may earn less as compared to an aggressive trader. But, your earnings will be steady while the aggressive trader may find himself out of business. Your steady earnings can then be compounded month after month. At the end of five years, who will be the winner - the conservative trader or the aggressive trader ? No prizes for chooisng the winner. It is the conservative trader.
there is a saying in Wall Street:
"You can find a bold trader, and, you can find an old trader but you will never find an old, bold trader."
To explain this, bold traders vanish from the scene so they never last long enough to be old traders.

In investment, diversify your portfolio.
In other words, place your money in a variety of different investments.
The idea of divesification is not to put all your eggs in one basket. A diversified portfolio reduces the risk for a given rate of return.
You should distribute your assets accross a variety of asset classes. For Indian households, these are (ranked in order of importance, 1 is most important and so on..):
1. Residential Property
2. Fixed Deposits with Banks
3. Equity Shares
4. Gold ( in ETF )
5. Commercial Property
6. Capital for Trading in Shares / F&O
In addition, the entire family MUST carry mediclaim and earning members MUST have life insurance.

Wealth gives you financial freedom. During your working years, it provides you with a superior standard of living, better facilities for your family, the ability to enrichen your own life. At retirement, wealth provides you with independence.