Introduction:
I started full time trading in 2021. My biggest learning since then has been that I need to constantly improve myself and hone my skills. This realization has had a profound impact on my life overall because a lot of what we realise as necessary in our trading journey also applies to life in general. But coming back to the world of stock trading, mastering the art of analysis and risk management is absolutely crucial for success. In this blog post I delves into an effective strategy to achieve just that- Past trade analysis. Let discuss how it aids in making more informed trading decisions.
The Essence of Past Trade Analysis:
Every quarter, I take a deep dive into the stocks I exited in the previous quarter - essentially, reviewing the quarter before the last one. For instance, at the end of December, I analyze the stocks that I had exited before October. This practice is not just a routine review but a critical evaluation to understand my trading decisions in hindsight and compare the outcome against real market action. Makes sense?
The Importance of Emotional Detachment:
A key aspect of this analysis is the time factor. By allowing a quarter to pass, I ensure that the emotions tied to the trades have dissipated. This emotional detachment is vital for objective analysis, allowing me to assess my decisions without the cloud of immediate reactions or feelings.
Lessons gather from my past trade analysis journey
1. Learning from Stop Loss Strategies:
One significant insight from my analysis is the importance of setting appropriate stop losses for different stocks. This is not only about minimizing losses; it's about smartly managing active positions to control risk exposure, especially in stocks with high potential upside. The strategy of stop loss setting and revision requires taking into consideration factors like stage of trend and momentum profile of the underlying. Once a stock catches on strong momentum it is encouraging to use tight stops but if this is done at the beginning on the trend when the momentum is trying to find its feet then there is good change your position will get exited prematurely. I have lost a lot many great trades to this mistake. I still do, but the frequency is a lot lesser.
2. Dealing with Volatility:
In cases where the underlying trend of a stock is strong, but it's prone to significant corrections (like a 20-25% drop), a different strategy is required. For a swing trader, these corrections are substantial. I’ve learned to be prepared for these scenarios- for instance I would rather start accumulating at 50% of the expected downside in a stock which has displayed strong upside on a higher timeframe rather than see it unleash into the next leg of upside without me. The 200 EMA on daily and 75minute timeframes serves as a very reliable support level to start accumulating and setting stop loss.
5. Timing the Market:
The timing of position creation is crucial. There are two phases to build position in a stock-
a. Enter before the bottom with a stoploss in place, or
b. Enter after the rally begins
whatever appeals to you and suits your risk profile. Speaking of my preference, I am not afraid to risk 5% of my capital if the potential upside suggested by my analysis is 5x of my risk. I've observed that creating positions after the rally starts can be quite risky, as sometimes the rally unfolds very quickly, leaving little room for strategic entry and calls for quick and emotional decision making. It simply makes me nervous. So, I prefer to accumulate and wait with a stop loss in place.
Conclusion
Through past trade analysis, I've honed my approach to stock trading, focusing on objective evaluation, risk management, and timing. This method has not only improved my decision-making process but has also been instrumental in enhancing my overall trading performance.
Remember, the key to success in trading lies in continuous learning and adapting. I hope my insights provide you with a new perspective on how to approach your trading strategies.
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Thank you for reading!
-Kavita Agrawal CMT CFA
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