Best Stock Trading Book

 

Profit From Prices

A book on stock market trading
By Jayesh Patel, CFA

Chapter 2 continues

Chapter 2

Plan Your Trading and Trade as per your Planning (4)

1. 3. How many trades will be required per month? Let us do little math here. Let us take ODDS as a ratio. For 50% odds, it is .50 and for 70% success ODDS, it is .70
   
   Expected Profit per Trade= ODDS * PPT
   Expected Loss per Trade = (1-ODDS) * LPT
   Expected Net Profit/Loss per Trade = Expected Loss per Trade - Expected Profit per Trade.
   
   Hence, # of Expected Trades per Month = (Expected Monthly Profit)/Expected Net Profit or Loss per Trade.
   
   As an example, with an expected ODDS of 60% (.60), PPT of 500$, LPT of 250$ and Monthly Profit Target of 1000$
   Expected Profit per Trade = .60 * 500 = 300$.
   Expected Loss per Trade = (1 - .60)*250 =100$
   Expected Net Profit or Loss per Trade = 300$ - 100$ = 200$.
   Hence, # of Trades required per month= 1000$/ 200$ = 5 Trades.
   
   Now, put your numbers in the formulae above and find out how many trades you will need to make per month to reach to your target profit per month.
   
   My Target Trades per Month are =_________ trades.
   

What is my trading (entry and exit) strategy?

This is the major component that will determine any one's success or failure and it forms the central part of any trading system. How to select which stock to buy or short? Does it have the required PPT potential at the risk of LPT? When to take this position? What is going to be an exit strategy? It is not easy to answer these questions.

Some trading strategies look at fundamentals of the stock or market to answer above questions. Some others use the news, announcements or earnings. Some strategies even look at interest rate movements, money supply, Inflation, consumer sentiment or other economic/psychological indicators. However majority of trading systems base their trading decisions on technical indicators like MACD, ROC, Volatility, Bollinger Bands, or on contrary indicators. Or one can invent and use his own ratios. In short, a trader has thousand of choices. However, when you are choosing a strategy, you need to make sure it is capable of taking you where you want to go. Try to find answers to following questions:

Has it the success rate you are looking for?
Has it the potential to give you your target Profit Per Trade at the cost of target Loss Per Trade?
Will it give you enough trading opportunities that you need to reach to your monthly profit trades target?

Once you select a trading strategy (trades selection method), before you go ahead and make trades, test it out- first on paper and then in real life. Find what works for you and then stick to it.

This book is also primarily about trading strategies. In the subsequent chapters I am going to show you how to read daily stock prices and find trading signals to answer two most basic questions: What to buy/short and when. I will also show you when to book profit or close a position, and how to protect yourself in case of a loss with use of a stop-loss.

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