31. The Need for Self-Awareness
Each trader must be aware of personal weakness that may impede trading success and make the appropriate adjustments. Awareness alone is not enough; a trader must also be willing to make the necessary changes.
32. Don’t Get emotionally Involved
Ironically, although many people are drawn to the markets for excitement, the Market Wizards frequently cite keeping emotion out of trading as essential advice to investors. If you let your emotions get involved, you will make bad decisions.
33. View Personal Problems as a Major Cautionary flag to Your Trading
Health problems or emotional stress can sometimes decimate a trader’s performance. The morale is: Be extremely vigilant to signs of deteriorating trading performance if you are experiencing health problems or other personal difficulties. During such times, it is probably a good idea to cut trading size and to be prepared to stop trading altogether at the first sign of trouble.
34. Analyze Your Past Trades for Possible Insights
Analyzing your past trades might reveal patterns that could be used to improve future performance.
35. Don’t Worry About Looking Stupid
Never let your market decisions be restricted or influenced by concern over what others might think.
36. The Danger of Leverage
If you are too heavily leveraged, all it takes is one mistake to knock you out of the game.
37. The Importance of Position Size
Superior performance requires not only picking the right stock, but also having the conviction to implement major potential trades in meaningful size. The point is that all trades are not the same. Trades that are perceived to have particularly favorable potential relative to risk or a particular high probability of success should be implemented in a large size than other trades. Of course, what constitutes “large size” is relative to each individual, but the concept is as applicable to the trader whose average position is one hundred shares as it is to the fund manager whose average position size is one million shares.
38. Complexity Is Not a Necessary Ingredient for Success
Some of the patterns and indictors that Cooks use to signal trades are actually quite simple, but it is his skill in their application that accounts for his success.
39. View Trading As a Vocation, Not a Hobby
As both Cook and Minervini said, “Hobbies cost money.” Walton offered similar advice, “Either go at it full force or don’t go at it at all. Don’t dabble.”
40. Trading, Like Any Other Business Endeavor, Requires a Sound Business Plan
Cooks advices that every trader should develop a business plan that answer al the following essential questions:
- What market will be traded?
- What is the capitalization?
- How will orders be entered?
- What type of drawdown will cause trading cessation and revaluation?
- What are the profit goals?
- What procedure will be used for analyzing trades?
- How will trading procedures change if personal problems arise?
- How will the working environment be set up?
- What rewards will the trader take for successful trading?
- What will the trader do to continue to improve market skills?
41. Define High-Probability Trades
Although the methodologies of the traders interviewed differ greatly, in their own style, they have all found ways of identifying high-probability trades.
42. Find Low-Risk Opportunities
Many of the traders interviewed have developed methods that focus on identifying low-risk trades. The merit of a low-risk trade is that it combines two essential elements: patience (because only a small portion of ideas will qualify) and risk control (inherent in the definition).
43. Be sure You Have a Good Reason for Any Trade You Make
As Cohen explains, buying a stock because it is “too low” or selling it because it is “too high” is not a good reason. Watson paraphrases Peter Lynch’s principal that if you can’t summarize the reasons why you own a stock in four sentences, you probably shouldn’t own it.
44. Use Common Sense in Investing
Taking a cue from his role model, Peter Lynch, Watson is a strong proponent of commonsense research. As he illustrated through numerous examples, frequently, the most important research one can often do is simply trying a company’s product or visiting its mall outlets in the case of retailers.
45. Buy Stocks That Are Difficult to Buy
Minervini says, “Stocks that are ready to blast off are usually very difficult to buy without pushing the market higher.” He says that one of the mistakes “less skilled traders” make is “wait[ling] to buy these stocks on a pullback, which never comes.”
46. Don’t Let a Prior Lower-Priced Liquidation Keep You From Purchasing a Stock That You Would Have Bought Otherwise
Walton considers his willingness to buy back good stocks, even when they are trading higher than where he got out, as one of the changes that helped him succeed as a trader. Minervini stresses the need for having a plan to get back into a trade if you’re stopped out. “Otherwise,” he says, “you’ll often find yourself … watching the position go up 50 percent or 100 percent while you’re on the sidelines.”
47. Holding on to a Losing Stock Can Be a Mistake, Even If It Bounces Back, If the money Could Have Been Utilized More Effectively Elsewhere
When a stock is down a lot from where it was purchased, it is very easy for the investor to rationalize, “How can I get out now? I can’t lose much more anyway.” Even if this is true, this type of thinking can keep money tied up in stock that are going nowhere, causing the trader to miss other opportunities. Talking about why he dumped some stock after their prices had already declined as much as 70% from where he got in, Walton said: “By cleaning out my money than I would have if I had kept [these] stocks and waited for a dead cat bounce.”
48. You Don’t Have to Make All-or-Nothing Trading Decisions
As an illustration of this advice offered by Minervini, if you can’t decide whether to take profits on a position, there’s nothing wrong with taking profits on part of it.
49. Pay Attention to How a Stock Responds to News
Walton looks for Stocks that move higher on good news but don’t give much ground on negative news. If a stock responds poorly to negative news, then in Walton’s words “[it] hasn’t been blessed [by the market].”
50. Insider Buying Is an Important Confirming Condition
The willingness of management or the company to buy its own stock may not be a sufficient condition to buy a stock, but it does provide strong confirmation that the stock is a good investment. A number of traders cited buying as a critical element in their selection process.