Blog: Trading Tips

You’ve probably heard that you need a trading plan before you start trading, but how exactly do you go about crafting one?

Now, if you’ve ever tried to start a business, you will know that you need a business plan, which tells you the A to Z of everything you need to do for your business, the step-by-step process you’re going to execute your plan, your strategy, and all that.

So the same thing applies to trading.

You need a trading plan before you start trading.

And today I’m going to share with you the 7 key ingredients that you need to craft a winning trading plan.

Trading Plan Ingredient #1 Trading Style

The first thing you need to do is to determine what is your preferred trading style.

Now, there are three main types of trading styles: day trading, swing trading, and position trading.

The main determining factor would probably be the amount of time that you can afford to spend on trading.

So if you are doing it as a full-time job, or if you have a lot of time to spend, then you can probably consider trying day trading.

And if you like the fast-paced environment and making quick decisions, then that may be something for you.

On the other hand, if you’re just doing it as a part-time endeavor where you have maybe an hour or 2 a day to spend on trading, then you might consider swing trading instead where you take longer-term positions, more in the medium to long-term position instead of going in and out of the market, such as like in day trading.

Lastly, if you do not have much time at all to spend, then probably the most effective thing for you to do is position trading that you take long-term positions that could last weeks or months.

So this does not require you to spend a lot of time analyzing the charts on a day-to-day basis.

Trading Plan Ingredient #2 Trading Timeframe

Now, the second factor to consider is the timeframe.

Now this corresponds closely to the trading style that you choose.

For example, if you are day trading, most likely you’ll be using an intraday timeframe such as the 5-minute chart or the 15-minute chart, or even the 1-hour chart.

On the other hand, if you are swing trading, most likely you’ll be using a timeframe such as the hourly chart, the 4-hour chart or the daily chart.

And lastly, if you are doing position trading, which is a long-term endeavor, you’ll probably be using the daily chart or the weekly chart, or even the monthly chart.

Trading Plan Ingredient #3 Product Selection

The third major ingredient is the product.

Now, this is the trading product that you are choosing to specialize in.

For example, it could be things like forex, stocks, bonds, commodities, derivatives, cryptocurrencies, options, etc.

There are actually many different products, so you need to find a product that suits your trading style, suits your personality, something that you are going to be familiar with.

Trading Plan Ingredient #4 Risk Management

Now, this is the part that determines how you allocate your resources.

So for example, one thing to note is your starting capital, which is the amount of capital that you are going to start with, because this will determine your trading size and the risk that you’re going to take for each trade.

So for example, a common calculation is to risk 1 to 2% of your capital per trade, depending on how much risk you want to take.

If you are starting with $10,000, then you will probably be risking 2% of $10,000 per trade, which is about $200 a trade.

And the other thing you need to take note off, is the open risk on all your trades.

If you are risking, say 1 or 2% on each trade, you need to ask yourself, what is the maximum risk or maximum drawdown that can happen if all the positions that you have open at one time, all get stopped out simultaneously.

So when that happens, what is the total amount of risk?

And that is known as the open risk.

If you’re risking 1% a trade and you have 5 trades that all go sour at the same time, you lose 5%. So 5% is your open risk.

You want to limit your open risk to less than 5% because you don’t want to lose a large chunk of your capital at the same time.

It’s ideal that you have a limit to the monthly drawdown that you incur, because you don’t want to have a scenario where you lose a large chunk of your capital in one time period, because if you will lose too much capital in one month, then in the next month, you have no more capital to trade.

If you are not doing well this month, it will be ideal to perhaps take a break from trading and you can come back to fight the next month.

Trading Plan Ingredient #5 Type of Analysis

The next major category to look at is the type of analysis that you are going to be using.

Now, there are three main types of analysis: price action, classical charting, and technical indicators.

Now, each of these is a complex topic that I have created other tutorials on.

So the main thing for you is really to decide which one you are going to specialize in.

But most of the time as a trader, it’s important to actually learn and master all the three different techniques because you are going to use them in combination in certain ways.

And that actually leads you to formulate your trading strategies, which is number 6, the type of strategy that you are going to be using.

Trading Plan Ingredient #6 Type of Strategy

Now, personally, I feel that most trading strategies will fall under 4 main categories: breakouts, trend-following, counter-trend and market reversals.

So if you look at your strategy, you want to be able to see which category it falls under so that you can better understand, what are the strengths and weakness of each strategy.

To help you out, I have other tutorials that cover each strategy in greater detail.

So, what are the different strategies that I use?

Breakouts are when price breaks to new highs or new lows.

Trend-following is more like finding an opportunity to ride on a strong trending market.

So usually you look to enter on pullbacks.

Counter-trends are usually opportunities where the market has gone to certain extremes, like too overbought or too oversold. Knowing how to pinpoint and target those counter-trends, is the essence of counter-trend trading.

Lastly, market reversals are like the big kind of reversals or turns in the market.

They do not happen that frequently, but when it does happen, you want to be aware because it leads to a change in the major trend.

Trading Plan Ingredient #7 Trade Execution

The final 7th ingredient is the trade execution.

Now there are three key parameters that you need to determine before you decide to enter a trade.

And that is the trade entry, the stop loss and the target price.

The trade entry is the price at which you are going to enter the trade and that is determined by the strategy and the setup that you are using.

The stop loss is the price that you are going to get out of the trade.

So, a stop loss is there to protect and limit the amount of loss that you are going to incur on the trade.

There are certain types of stop loss, such as the fixed stop loss, the trailing stop loss and all these should be part of your trading plan.

And finally, the last thing is the target price, which is where you are going to take profit on a trade if it does go in your favor.

So you need to have certain preset rules, for example, how are you going to project a target price?

Or how are you going to determine where’s the optimal point to scale down your positions or to get out of the position totally?

Trading Plan Bonus Ingredients

Now that I’ve covered the seven key ingredients to a winning trading plan, there are some other things that you might want to include as well.

For example, evaluation metrics.

How do you going to measure and improve the performance of your trades, as well as trading psychology rules that you can implement to prevent you from making cognitive biases or mistakes in your trading.

So remember that the key purpose of having a solid trading plan is to separate the execution phase from the planning phase.

Ideally, the moment the market opens, you are focused on executing your trading plan and you no longer have to strategize because if you are trying to do both at the same time, it is going to be really difficult to concentrate.

Therefore, that is the idea of a trading plan.

Now that I have shared the key ingredients in my planning plan,

What are some of the things that are missing from your trading plan or things that you think can be improved on?

Do let me know in the comments below.

Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.

How to Profit from a Short Squeeze (aka. Bear Trap)?

What is Short Selling?

Before talking about what a short squeeze or bear trap is, we first need to understand the concept of short selling a stock.

Normally, investors buy stocks when they expect prices to go up, so that as the stock prices increase, they can then sell the stocks they own at a higher price, and make a profit.

However, what if they expect the stock price to go down?

For example, they might think that the stock price is over-valued, or that the fundamentals are in shambles, and thus feel that in the long-run the stock price should decrease.

How then would they profit from this?

Besides using financial derivatives such as stock options or CFDs, one common method traders use is to borrow the stocks from someone (an investor who owns the stocks), and then sell those stocks in the market.

By selling stocks they do not own (the borrowed stocks), they will need to buy the stocks back to return the stocks to the person who lent it to them.

The idea is that when the time comes to buy back those stocks, the price of the stocks would have fallen, so it would be cheaper for them to buy it back.

Effectively, by “selling high” and then “buying low”, they are able to profit from the difference.

Of course, there are risks involved, like if the stock prices goes up instead going down, then they would be forced to cover (buy back) those borrowed shares at a higher price.

And if a short squeeze happens, they could potentially lose a lot of money.

When you buy a stock, the price cannot go below zero, so the maximum you can lose is your investment.

But with a short position, there is no limit to how high the stock can continue climbing, which means the losses can snowball to more than your original investment, hence the short squeeze (bear trap).

What is Short Interest?

Now that we understand the concept of short selling, how do we know which stocks are being heavily shorted? (And have potential for a short squeeze?)

We can look at this statistic called the short interest, which shows the quantity of shares outstanding that are currently sold short, which means the short sellers will need to buy these stocks back at some point of time, or if there is a short squeeze (bear trap).

This number can either be expressed as the absolute number of shares that are currently short, or if it is expressed as a percentage, then it shows how many percent of the total outstanding shares are short.

For example, 5 million shares out of 100 million outstanding shares, or 5% if it is expressed as a percentage.

In general, the short interest gives you a benchmark of the market sentiment for this stock.

If there is a lot of short interest, it means people are generally bearish about this stock, so the fundamentals might be bad or hedge funds are heavily building short positions.

If the short interest reaches an extreme point, such as short interest percentage exceeding 50%, then it could signal that “everyone who has wanted to short has shorted”, and lead to a lack of new sellers.

This could also mean that the stock is ripe for a short squeeze, because if there are little new sellers, all it takes is for new buyers to come in to tips the scales and cause a snowball effect.

If you are looking for this data, stock exchanges usually report short interest monthly for the stocks they list. The NASDAQ publishes a short interest report in the middle and also at the end of every month.

For example, these stocks with a very high short interest make them more susceptible to a short squeeze (bear trap), which was what happened when traders on r/wallstreetbets decided team up to push some stocks (Gamestop, AMC, etc) up, triggering a short squeeze on them.

What is a Short Squeeze (Bear Trap)?

A short squeeze happens when a stock jumps sharply, forcing short sellers to buy it in order to prevent even greater losses. Their scramble only adds to the upward pressure on the stock’s price.

A bear trap is a false technical bearish signal for price to continue falling in a down swing on a chart to new lower prices that lures in short sellers. Bear traps catch short sellers chasing a price lower which reverses causing shorts to cover and leads to more buying and momentum to the upside.

A bear trap usually starts with price moving lower sharply and creates expectations of a continued downtrend on the chart. Instead, the price of the chart can go sideways in a range and eventually rally higher causing short sellers to be trapped on the wrong side of the move and to incur losses.

Bear traps are usually short squeezes, when a big rally to the upside happens during a downtrend in a market due to a lack of sellers at lower prices. This combines with the need for short sellers to buy to cover due to the reversal in the market trend creating heat on their positions.

Short squeezes gain momentum as more short sellers are forced to buy to cover their positions at higher prices resulting in increased trading volume on the reversal. The pressure on the short sellers to buy back their positions can be amplified by margin calls, trailing stops, and stop losses being triggered on their trades. The short sellers create buying pressure because they have to buy back the shares or contracts they are short to cover during the swing higher in price. Most short squeezes that are bear traps result in very fast and powerful moves to the upside.

If a stock has a high short interest ratio, and large amounts of shares outstanding as short interest, then a bear trap is more likely to occur. The probability increases further if the market has an extremely bearish sentiment and a large amount of a stock’s float is short.

If sellers get exhausted after a long downtrend, and the market reaches maximum bearish sentiment, and if all these happens at a price level where traders and investors prefer to hold their positions instead of selling, then it could become a strong support level, where a bear trap could be set.

Catalysts for a Short Squeeze (Bear Trap)

As we mentioned earlier, a high short interest will provide the fuel for a short squeeze, but to ignite the flames, we need a trigger, or a catalyst.

This can be a fundamental catalyst like a management change, or a launch of a new product, an expansion, etc, or it could be a technical catalyst like price hitting a key price support level or breaking a new 52-week high, etc.

Either way, the gains triggered by the catalyst need to be significant enough so that the short sellers will panic and race to cover their short positions. Depending on the history of the stock and its volatility, this “critical mass” gain can be as small as 1-2%, or can go up to 5-10% for more volatile stocks.

One way to find fundamental catalysts is to browse newspaper or online sources for press releases, or scheduled events. These could be things like a new product launch, a product safety test report, a transition of management, etc.

The key thing is to look for events that can potentially move the stock price significantly in a short period of time, especially if based on your research, the outcome could turn out very different from what everyone else is expecting.

In short, we are looking for a potential large deviation from the consensus expectations.

Trading the Short Squeeze

Trading a short squeeze or bear trap is not a simple set-it-and-forget-it strategy. This is because short squeezes happen fast.

A short squeeze doesn’t take place over the course of months or years. Most happen over just a couple of days, so if you want to trade the short squeeze, you need to act fast once you see the opportunity, or you could miss the whole event entirely.

The moment the short squeeze starts happening, you need to watch the price movements of the stock very carefully. The idea is to ride the momentum of the price movement for as long as possible.

There might be small pullbacks from profit-taking along the way, and eventually as most of the short sellers are squeezed out, the fuel for the movement runs out, and the momentum will start to fizzle. This is the point where you want to get out as fast as possible before the party ends.

Though trading short squeezes or bear traps can be very profitable, they are also some downsides:

The right confluence of events, fuel and catalysts do not happen often
The squeeze might not happen if your research is wrong
You might miss the move or might not sell out in time

Ultimately, you will need to do a lot of research to find these rare opportunities, but if you get good at it, a handful of such trades a year is all you need to make decent returns.

5 Biggest Day Trading Mistakes that Beginners Make

Why do new traders always lose out to professional traders? What is the extra edge that professional traders have that allow them to always win in the long run against new traders? And why do new traders tend to make the same day trading mistakes?

Back when I was trading professionally in a private equity fund, when I was sitting next to veteran traders with 20, 30 years of experience who were literally moving millions of dollars, I was fortunate to have the chance to observe the way they trade.

And I also got the chance to see many new traders come and go. And to see the kind of trading mistakes that they made.

And I realized that for retail traders, if you want any chance of competing with these professional traders, you need to be able to understand and learn certain key skills and avoid key day trading mistakes that will kill your trading account.

If you would like to learn all the essential elements to kickstart your trading journey, also check out: The Beginner’s Guide to Trading & Technical Analysis

Day Trading Mistake #1 No Solid Trading Plan

The trading plan is the foundation of all your trading endeavors. Imagine once the market is open and prices are moving, the charts are moving, it gets very emotional.

Once the market is open, you should purely be focused on executing your trades. All the time, all the focus and energy should be in the execution.

So even before the market opens, before you even place your first trade, you need to have a solid plan that will tell you:

What you are going to trade, what is the trading strategy
What is the trading style, where you’re going to enter your trades?
Where you are going to exit your trades
How much you’re going to risk per trade?

All of these are important things that should go into your trading plan.

So the moment the market opens, or the moment you get ready to place a trade, the focus should be on the execution, because you are supposed to be just strictly executing your trading plan.

Day Trading Mistake #2 Lack of Practice

If you think back when you first started to learn how to drive, you did not just go into the car and start driving immediately.

You first had to familiarize with, “what does this button do?” “What does this lever do?’

You actually had to familiarize with the whole process of driving because you cannot be trying to drive on the road, and at the same time, figure out how the different parts of the car works.

The same theory applies to trading.

When the market in session, you want to be focused on executing your trading plan as efficiently as possible, to avoid making any day trading mistakes.

You need to be familiar with, “how do you execute the trade?” “How do you key in the orders?”

You really need to be very familiar with the whole process to be able to do this.

What you should be doing, even before you go into live trading, perhaps like paper trading, virtual trading, such that you get used to the whole process of trading without taking the unnecessary risk of losing your money.

Day Trading Mistake #3 Wrong Psychology

The next common day trading mistake is not having the correct psychology or mindset. There are a lot of different things that can affect you mentally when you are trading.

One of the biggest problem is actually the inability to cut losses. Most of us have this innate loss aversion. It’s one of the cognitive biases that we hate to lose money.

For new traders, the tendency is to not want to cut losses, even though you know that you are wrong.

If you follow your trading plan, it should have a strict stop loss area or price level.

But if you do not follow that, then your losses could really snowball and you end up blowing your trading account.

The second mistake of having a bad psychology is overtrading.

For new traders, they tend to see too many trading opportunities, whereas professional traders zoom in and only take the very best trades.

These new traders, they tend to see every trade as an opportunity, they are afraid of missing out on potential trading opportunities.

Whereas as a professional, you want to deliberately filter out as many bad trades as possible.

That is the kind of mentality of a professional versus an amateur trader.

And another mistake is revenge training, where you’ve already lost, and instead of calling it a day or resting to fight another day, you try to make back the money.

You try to earn back whatever you have lost, and that leads you to make poorer and poorer decisions because it no longer becomes about executing.

Your trading plan becomes “I don’t want to lose but I’m trading because I want to take revenge on the market. To teach it a lesson or to make back the money that I lost.”

So that is a very wrong approach to trading.

Day Trading Mistake #4 Being Too Greedy

The next day trading mistake is not having the correct progression. Just as with all skills in life, you need to learn it in a step by step basis.

Like when you are trying to learn how to swim, you do not jump right into the deep end of the pool.

You start off in the shallow pool and then you slowly progressively move up with the correct technique.

When it comes to trading, most new traders, especially if they start earning a little bit of money, they start to get complacent.

They start to think that, wow, I’m a genius. Everything, every trade I make turns to gold and they start trading more and more aggressively.

They’re thinking, wow, if I can make $50 a day, why not I increase my trading size and now, I can make like $500 a day.

Why not I increase it even more? I can make like $5,000 a day.

So what happens when you keep scaling up more and more?

There was a veteran trader who shared with me, he told me that all it takes is one bad trade.

No matter how good you are, whether you’ve been trading for 10 years, 20 years, 30 years, all it takes is one bad trade that if you break your rules that one bad trade can potentially blow up your whole account.

You hear stories of people making a lot of money, but because of one trade, and they don’t follow their rules, and they end up losing everything.

You must not let the greed control you. You must always be in control.

So with regards to progression, you need to scale up your account size gradually. Do not scale it up too fast.

One recommendation is to always scale it up by 1.5 times. For example, if you are trading a $10,000 account, And you have been consistent for say a month, then you scale it up to maybe a $15,000 account.

When you are consistent for another month, then you scale up by 1.5 times again.

If your consistency drops, you may want to scale back to $10,000 until you regain confidence.

The whole idea is to scale it gradually instead of just arbitrarily multiplying your account.

Day Trading Mistake #5 Lone Wolf Mentality

The last point is to not adopt a “lone wolf” mentality.

Now, maybe because you see it in movies or you hear a lot of stories of people going in as a lone wolf, as a solo top trader who disregards the opinions of everyone.

And they just go in alone, they make a lot of money and they make a lot of enemies.

So I will say that is the lone wolf theory/approach.

But in reality, if you watch nature shows, wolves usually hunt in a pack and that is when they are most effective.

If you are working with a community of traders and if you have a mentor, there’s no need to be selfish, or wanting to be the best or wanting to be better than other people.

If there’s a good trading opportunity, and you share it with other people, it doesn’t mean you earn less.

Everyone can take the same opportunity. And when they have good opportunities, they will share it with you as well.

When we were working as a professional trading team, we share ideas with one another, we work together. Everyone gets more trading ideas.

Another upside of having a community is that you get to learn from each other’s mistakes, so you can avoid making the same day trading mistakes that others have made.

Summary of Day Trading Mistakes

So I’ve just covered the top 5 day trading mistakes that beginners make.

And just to sum it up. The five key points are:

You need to have a solid trading plan.
You want to have a lot of practice before you go into live trading.
You want to adopt the correct trading psychology and mentality.
You want to scale up your account progressively.
And lastly, think in terms of abundance.

Do not try to go in as a lone wolf in the markets because the lone wolf gets eaten. Whereas if you hunt in the pack, it’s a lot easier to be profitable in the long run.

Now that I’ve shared the top 5 most common day trading mistakes that beginners make, what were some of the difficulties you faced when you were starting off as a new trader?

Do let me know in the comments below.

How to Pick the Market Bottom (As Well As Market Tops)

There is a common fallacy amongst many investors that because you cannot time the exact market tops and market bottoms in the stock market, therefore you cannot time the market at all, and market timing should be avoided.

This is simply not true.

While it is impossible to buy at the exact market bottom and sell at the exact market top, it is definitely possible to time your entries and exits to minimise your risk and maximise your returns.

A wise trader once told me that if you want to time the market, you must be willing to give up the top 1/8 and the bottom 1/8 of any move.

This means that instead of trying to capture the precise turning points in the market, we should focus on capturing the remaining 75% of the move, which forms the meat of every trend.

This is true not just for the stock market, but also very relevant to any market, like forex, commodities, etc. It also works on any timeframe, such as swing trading, intraday trading, position-trading, etc.

In this video, I share 2 simple strategies that a new investor or trader can use to pick tops and bottoms easily.

The first method has to do with scaling in, which is similar to dollar-cost averaging.

By studying how much stock markets usually decline (30-60% during corrections, you can allocate your capital to buy in at certain fixed points, such as the 30% mark, the 40% mark, the 50% mark, etc.

This allows you a low-risk way to buy in near the bottom, and the best part is that you do not even need any knowledge about how to read charts or how to analyse price trends.

The second method requires a bit more skill, as you will need to be familiar with technical analysis and reversal chart patterns.

By identifying bearish reversal chart patterns (such as the double top at the 2008 top), as well as bullish reversal chart patterns (such as the inverse head and shoulders pattern at the 2009 bottom), you will be able to time your trade near the top and bottom of every major move.

Enjoy the video, and remember to “like” and “subscribe”!

How to Trade the News (Especially When There is Too Much Market News)

Quite often, when we dive into the financial market, we find that there is simply too much market news. When we try to trade the news, we have no idea what is important or trivial, because we are so overloaded with information. This makes news trading quite an impossible task.

To make matters worse, we often get conflicting views from experts, with some being bullish all the time, while others are bearish all the time. And because some of them have pretty convincing arguments, we easily get swayed and our own opinions tend to fluctuate from extremely bullish to extremely bearish.

So what is the way around this?

The first thing you need to know as a trade relying on market news is to be able to differentiate between FACTS and OPINIONS.

Facts are like raw data, statistics, research from credible sources, economic data, etc. These are usually unbiased and come without opinions, and provide the basis for you to form your opinion.

Opinions, on the other hand, are views formed based on the analysis of facts/data, so there is inherent bias, and the conclusions drawn from the data may or may not be correct. Hence as a trader or investor, we need to zoom in on a handful of credible sources of good analysis.

The second thing you need to know when doing news trading is to “trade what you SEE, not what you THINK”.

Opinions often give you preconceived notions or views on the market, for example you might think that the market is bullish, and hence it should go up. However, in reality, the market may not move according to your opinion.

The only reality in the market is what we see on the charts, which is the price action of the market.

No matter how bullish you think the market is, the truth is that you will not be able to make money unless the price actually moves up. So when it comes to trading, your strategies, setups and analysis of the chart should take precedence over your opinions.

And that will help you filter out all the unnecessary noise in the market to zoom in on the best trading opportunities.

Enjoy the video, and remember to “like” and “subscribe”!