Extracted from the book: Inside the Mind of the Turtles, Turtle trader Curtis Faith
Here are the seven rules great traders use to manage risk and uncertainly. They are
1. Overcome fear
Great traders know that fear can choke our decision process and cause us to avoid taking risks. Fear also can paralyze you when you need to act quickly and decisively to save yourself from danger---the deer-in-the -headlights syndrome. All great traders have mastered their fears adn are able to act decisively when needed.
2. Remain flexible.
As a trader, you never know which stock or which market may make a move. This is the essence of uncertainty. You don't know what is going to happen. When you don't know what is going to happen, the best strategy is to be ready for anything.
3. Take reasoned risks.
Many beginners trade like they are sitting at a Las Vegas craps table. They put too much money at risk, and they trade based on hunches,rumors, or someone else's advice. They take foolish risks. Great traders take reasoned risks. A reasoned risk is more like an educated guess than a roll of the dice. Great traders are not gamblers.
4. Prepare to be wrong
If you don't know what the future will bring and you choose a trade that assumes a particular outcome, you are possibly going to be wrong. Depending on the type of trade, in many cases it can even be more likely that you will lose money than that you will win money. What matters in the end is the total money won and lost, not whether you are right more often than wrong. Great traders are comfortable making decisions when they know they could be wrong.
5. Actively seek reality
As a trader, nothing is more important than an accurate picture of reality. Traders know that their decisions will result in losses. They also know that they need to know about these losses as soon as possible. A focus on what the market actually does, the market's reality, keeps successful traders from burying their heads in the sand and pretending that the world is other than it actually is.
6. Respond quickly to change
Just as important as actively seeking reality and facing that reality is doing something when that reality is not what you wanted, when the uncertain future brings the unhoped-for. When the market moves to price levels that a trader has previously determined would be the place to get out of a trade---by selling what he bought previously, for example---a competent trader will respond quickly and get out, thereby reducing his exposure to continued uncertainty to zero.
7. Focus on decisions, not outcomes
One of the reasons that great traders can so easily reverse course is that they have a more sophisticated view of the meaning of error for decisions made under uncertainty. They understand that the fact that things did not turn out the way they had hoped does not necessarily mean that taking the trade was a mistake. They know that many times good ideas don't work out. The very presence of uncertainty ensures that you will be wrong some of the time. All great traders put trades on for a particular reason, and they take them off for a particular reason too. Great traders focus on the reasons for the trades instead of the outcomes for a few given trades.
April 19, 2011
January 20, 2011
January 05, 2011
November 07, 2010
The Psychology of Trading
Extracted from the book: The Psychology of Trading, Dr Brett Steenbarger
Most of the time the problem with traders is that the frame of mind in which they analyze markets is different from the one in which they are actually making trading decisions. When the author encountered periods of uncertainty and stress, one of his techniques for handling the novel shifts is to temporarily get away from the screen.
"Behavior patterns are anchored to one's states of mind and body." Once the traders learn the skill of shifting their emotional and physical states, they are free to create and to enact new patterns. The change of emotional and physical state is a powerful strategy for interrupting the impulsive and emotional problem patterns during the volatile periods of price action.
However, many traders are so afraid of missing a possible market move that they dare not spend time refocusing on their trading plan. They fail to realize the far greater risk of losing sight of their plans and trading haphazardly.
Your trading plan is your anchor; you most want to utilize it when seas are roiling. The psychological antidote to greed and fear is planfulness, not calm or confidence.
CONCLUSION Late in 2001, the author conducted a survey of the following traders personality traits and coping styles which known as NEO Five Factor Inventory:
1. Neuroticism ---- the tendency toward negative emotions who reported the greatest problem with their trading
2. Extraversion --- an outward orientation toward people and life.
3. Openness to experience - a desire for novelty, variety, and risk taking.
4. Agreeableness - the tendency to get along well with others.
5. Conscientiousness - the capacity to be reliable, steady, and trustworthy.
The findings were eye opening. The traders who reported the greatest success (and who were willing to have me verify their success in case studies) tended to score high in conscientiousness. They were very steady and reliable.
The traders who reported the greatest problems with their trading tended to score high in neuroticism and openness. They were experiencing many negative emotions and tended to use trading for excitement.
The conscientious traders tended to be highly rule-governed in their trading. There was little excitement in their trading. Instead, they very consistently developed their plans and followed them.
The neurotic and risk-taking traders tended to make their decisions impulsively, without prior planning. They tended to revel in telling stories of their great wins and losses.
The survey above drove home one important lesson: Success in trading is related to the ability to stay consistent and plan-driven. Traders fail not because of their emotions, but because their emotions deflect them from their purpose. In developing their rules and systems, the successful traders had found a way to immunize themselves from the emotional effects of market volatility. Indeed, in many respects, the successful traders appeared to be every bit as fearful as the unsuccessful ones. It's just that the fears of the successful traders were not those of drawdown or missing a market move. Rather, they fears deviating from their plans. Dedication to purpose was the cornerstone of their success.
Most of the time the problem with traders is that the frame of mind in which they analyze markets is different from the one in which they are actually making trading decisions. When the author encountered periods of uncertainty and stress, one of his techniques for handling the novel shifts is to temporarily get away from the screen.
"Behavior patterns are anchored to one's states of mind and body." Once the traders learn the skill of shifting their emotional and physical states, they are free to create and to enact new patterns. The change of emotional and physical state is a powerful strategy for interrupting the impulsive and emotional problem patterns during the volatile periods of price action.
However, many traders are so afraid of missing a possible market move that they dare not spend time refocusing on their trading plan. They fail to realize the far greater risk of losing sight of their plans and trading haphazardly.
Your trading plan is your anchor; you most want to utilize it when seas are roiling. The psychological antidote to greed and fear is planfulness, not calm or confidence.
CONCLUSION Late in 2001, the author conducted a survey of the following traders personality traits and coping styles which known as NEO Five Factor Inventory:
1. Neuroticism ---- the tendency toward negative emotions who reported the greatest problem with their trading
2. Extraversion --- an outward orientation toward people and life.
3. Openness to experience - a desire for novelty, variety, and risk taking.
4. Agreeableness - the tendency to get along well with others.
5. Conscientiousness - the capacity to be reliable, steady, and trustworthy.
The findings were eye opening. The traders who reported the greatest success (and who were willing to have me verify their success in case studies) tended to score high in conscientiousness. They were very steady and reliable.
The traders who reported the greatest problems with their trading tended to score high in neuroticism and openness. They were experiencing many negative emotions and tended to use trading for excitement.
The conscientious traders tended to be highly rule-governed in their trading. There was little excitement in their trading. Instead, they very consistently developed their plans and followed them.
The neurotic and risk-taking traders tended to make their decisions impulsively, without prior planning. They tended to revel in telling stories of their great wins and losses.
The survey above drove home one important lesson: Success in trading is related to the ability to stay consistent and plan-driven. Traders fail not because of their emotions, but because their emotions deflect them from their purpose. In developing their rules and systems, the successful traders had found a way to immunize themselves from the emotional effects of market volatility. Indeed, in many respects, the successful traders appeared to be every bit as fearful as the unsuccessful ones. It's just that the fears of the successful traders were not those of drawdown or missing a market move. Rather, they fears deviating from their plans. Dedication to purpose was the cornerstone of their success.
October 21, 2010
Determining General Market Direction
Extracted from the book: Trend Trading for a Living, Thomas K. Carr
Five different types of market conditions
- Bullish strongly trending
- Bullish weakly trending
- Bearish strongly trending
- Bearish weakly trending
- Range-bound (or nontrending)
BULLISH: STRONGLY TRENDING
The Focus: It should be on long setups, particularly breakout plays.
Characteristics: Everything goes up, and up a lot, nearly every day. The bulls are completely in control and win every battle with the bears. Making money is easy in a bullish strongly trending market, as long as you have the right entry system. But the drawback is that when this kind of market reaches a top, the sell-off can be quick and harsh and can wipe out months of hard-won gains in a matter of days. So in a strong bull market you must always be careful to play defensively against a possible reversal of momentum.
How to Play It: Here we can say that a bullish strongly trending market is a great market to be in if you are already long. But if you are coming late to the party (and hopefully not too late), your best play is to look for stocks that are breaking out to new highs from periods of consolidation. You must make sure these breakout plays are confirmed by the various technical indicators we use. If price is making a new high but the indicators are not making new highs, then you have bearish divergence and you should move on to another chart.
BULLISH: WEAKLY TRENDING
The Focus: It should be on long setups, particularly pullback plays.
The Focus: It should be on long setups, particularly pullback plays.
Characteristics: This is a tougher market to trade, since the pullbacks tend to be more frequent, steeper, and
longer-lived. In a weakly trending market, corrections can last a couple of weeks. This can be frustrating if you are sitting on open long positions. Ultimately, the bulls are in control, but it can seem for days on end that the bears have moved in and made themselves right at home. However, this is one of the best markets in which to find great risk/reward scenarios in our setups. Those lengthier pullbacks serve to take a lot of the risk out of a trade, so our stop-loss can be closer to entry, and our exit targets can be that much further away.
How to Play It: Here we can say that a bullish weakly trending market is an ideal market for trend trading. You should find stocks that are showing strong trending action (normally stronger than the general market itself ) but have pulled back to an area of support. This pullback should be confirmed by oversold indicators, and the current daily candlestick should put in a reversal bar of some kind before you consider an entry.
October 01, 2010
Selling Winners and Holding Losers
Extracted from the book: Quantitative Trading Strategies, Lars Kestner
Studies of human bias in economic situations shed light on how the mind affects trading
decisions. In one such study conducted in 1998, Terrance Odean, professor of finance at the University of California, examined 10,000 accounts at a large discount brokerage firm to determine if individuals’ trading styles differed between winning trades and losing trades made from 1987 and 1993. He found a significant tendency for investors to sell winning stocks too early and hold losing stocks too long. Over his test period, investors sold approximately 50 percent more of paper profits on winning trades than they sold of paper losses in losing trades.
Based on the data, Odean concluded that winning stocks were sold quicker and more frequently than losing stocks. Although the results were a bit surprising, this behavior by investors could make sense. When we buy stocks, we’re placing a bet that a company is undervalued. Stocks that increase in value are logically
becoming less undervalued as they rise, while stocks that decrease in value are logically becoming more undervalued. Winning stocks that have increased in value could be considered not as cheap as when they were purchased. Losing stocks that have declined in value could be considered cheaper than when purchased. In this case, it makes sense to sell the winning stocks that have become less cheap and
hold losing stocks that have become cheaper.
Although the logic is sound, Odean’s results show that the opposite actually occurs. Winning stocks that were sold continued to rise, while losing stocks that were held continued to fall in value. In the year following sales, stocks sold with gains by individual investors outperformed the market by an average 2.35 percent. At the same time, losing stocks that were held underperformed the market by an average of 1.06 percent. Odean discovered, on average, that investors underperform the market by selling their winners too early and holding on to their losers too long. Based on purely economic terms, it’s unclear why they behaved in this manner; psychology may provide the missing link. Clearly, the more profitable course of action suggested by the study is to buy winning stocks and sell losing ones. Two theoretical underpinnings dominate the tendency to sell winners and ride losers: prospect theory and mean reversion theory.
Studies of human bias in economic situations shed light on how the mind affects trading
decisions. In one such study conducted in 1998, Terrance Odean, professor of finance at the University of California, examined 10,000 accounts at a large discount brokerage firm to determine if individuals’ trading styles differed between winning trades and losing trades made from 1987 and 1993. He found a significant tendency for investors to sell winning stocks too early and hold losing stocks too long. Over his test period, investors sold approximately 50 percent more of paper profits on winning trades than they sold of paper losses in losing trades.
Based on the data, Odean concluded that winning stocks were sold quicker and more frequently than losing stocks. Although the results were a bit surprising, this behavior by investors could make sense. When we buy stocks, we’re placing a bet that a company is undervalued. Stocks that increase in value are logically
becoming less undervalued as they rise, while stocks that decrease in value are logically becoming more undervalued. Winning stocks that have increased in value could be considered not as cheap as when they were purchased. Losing stocks that have declined in value could be considered cheaper than when purchased. In this case, it makes sense to sell the winning stocks that have become less cheap and
hold losing stocks that have become cheaper.
Although the logic is sound, Odean’s results show that the opposite actually occurs. Winning stocks that were sold continued to rise, while losing stocks that were held continued to fall in value. In the year following sales, stocks sold with gains by individual investors outperformed the market by an average 2.35 percent. At the same time, losing stocks that were held underperformed the market by an average of 1.06 percent. Odean discovered, on average, that investors underperform the market by selling their winners too early and holding on to their losers too long. Based on purely economic terms, it’s unclear why they behaved in this manner; psychology may provide the missing link. Clearly, the more profitable course of action suggested by the study is to buy winning stocks and sell losing ones. Two theoretical underpinnings dominate the tendency to sell winners and ride losers: prospect theory and mean reversion theory.
September 09, 2010
Common Types Of Order
There is a great range of orders that traders can give to precisely control the execution of their order. Not all brokers will accept the same range of order types, but I list below the most common types of orders that most brokers should accept.
Market Order
An order to buy or sell at the current market price.
Limit Order
An order to buy or sell at a specified price or better.
Stop-Loss Order
An order to close a position if the market price hits a certain level. Note however, that this type of order means that after the stop price is hit the order becomes a market order and you may suffer slippage.
Limit Entry Order
An order to buy below the market or sell above the market at a specified price. You use this type of entry order if you feel that the currency pair will reverse direction from that price.
Stop-Entry Order
An order to buy above the market or sell below the market at a specified price. You use this type of entry order if you feel that the currency pair will continue in the same direction. Just like with a stop order, you may suffer slippage when using this type of order.
Stop-Limit Order
An order to buy above the market or sell below the market at a specified price only. When your price is hit your order becomes a limit order which prevents slippage. However, there is a chance that in a fast-moving market your order won’t be filled at all.
One Triggers Other(OTO)/ Parent and Contingent
A set of orders whereby when the parent order is filled, the contingent order is placed. This is commonly used to make sure a stop and/or limit order is placed as soon as an entry order is filled.
One Cancels Other (OCO)
A set of orders whereby when one order is filled, the other order is cancelled. This is commonly used to set both a profit-taking limit order and a stop-loss order as soon as an entry order is filled.
August 29, 2010
Types of Technical Indicators
Extracted from:
Types of Technical Indicators
The basic one, called a moving average, involves a simple formula that analyzes the average price of a security or commodity over a period of time, and when isolating time periods, it is much easier to spot different trends. Other types of indicators belong to four major groups, as follows:
- Momentum indicators - Stochastic oscillator, Commodity channel index, RSI, Chande momentum oscillator (CMO) and more.
- Volatility indicators - Bollinger bands, projection oscillator, average true range, Trading bands (envelope) and more.
- Trend indicators - MACD, parabolic SAR, linear regression, Forecast oscillator and more.
- Volume related indicators - Ease of movement, OBV, Demand index, Chaikin money flow and more.
In technical analysis, trading indicators can be categorized into three main categories as follows:
1. Leading indicators
This type of indicators tend to give traders buy or sell signals before market makes its turn. The leading indicators predict a top or a bottom of a market but they do not predict specific price levels or duration of a move. Although there are so many leading indicators in theory, it is hardly to find ones that truly lead the markets. The Leading indicators are considered to be the most useful for the beginning traders since they allow ample time for traders to prepare their trades. One thing to remember when applying leading indicators in trading is they are just telling that a move is going to happen but it has not begun yet. While it seems like leading indicators offer traders the best of all worlds, there are drawbacks when using such indicators.
One major problem occurs because it may point traders to enter a trade too early. Exposure to price fluctuations that occur before the beginning of the indicated up or down trend may cause traders to bail out early. When traders are limiting risk in a particular trade but have bought early according to a leading indicator, they may be stopped out and lose all potential for profit.
2. Time current indicators
This type of indicators tend to turn higher or lower at about the same time that a market does. They can be very helpful in long-term trading, and are considered such indicators practically as useful as leading indicators.
Though, the time current indicator does not expose to pre-move price fluctuations as much as the leading indicator does. However, traders have to make their decisions about buying and selling quickly with indicators, as the price should be making its move at the same time they are taking a position.
3. Lagging indicators
This type of indicators are those that lag behind market movements. The market moves,and the lagging indicator moves after it. These indicators are also referred to as trend-following indicators because they just follow trends and do not attempt to predict them. Using lagging indicators to make decisions about buying and selling gives traders disadvantage since this will results in buying and selling after the tops and bottoms of market trends. The goal in using a lagging indicator is that traders will be able to profitably grab a significant portion of a trend before the indicator changes direction again.
1. Leading indicators
This type of indicators tend to give traders buy or sell signals before market makes its turn. The leading indicators predict a top or a bottom of a market but they do not predict specific price levels or duration of a move. Although there are so many leading indicators in theory, it is hardly to find ones that truly lead the markets. The Leading indicators are considered to be the most useful for the beginning traders since they allow ample time for traders to prepare their trades. One thing to remember when applying leading indicators in trading is they are just telling that a move is going to happen but it has not begun yet. While it seems like leading indicators offer traders the best of all worlds, there are drawbacks when using such indicators.
One major problem occurs because it may point traders to enter a trade too early. Exposure to price fluctuations that occur before the beginning of the indicated up or down trend may cause traders to bail out early. When traders are limiting risk in a particular trade but have bought early according to a leading indicator, they may be stopped out and lose all potential for profit.
2. Time current indicators
This type of indicators tend to turn higher or lower at about the same time that a market does. They can be very helpful in long-term trading, and are considered such indicators practically as useful as leading indicators.
Though, the time current indicator does not expose to pre-move price fluctuations as much as the leading indicator does. However, traders have to make their decisions about buying and selling quickly with indicators, as the price should be making its move at the same time they are taking a position.
3. Lagging indicators
This type of indicators are those that lag behind market movements. The market moves,and the lagging indicator moves after it. These indicators are also referred to as trend-following indicators because they just follow trends and do not attempt to predict them. Using lagging indicators to make decisions about buying and selling gives traders disadvantage since this will results in buying and selling after the tops and bottoms of market trends. The goal in using a lagging indicator is that traders will be able to profitably grab a significant portion of a trend before the indicator changes direction again.
The Three M's of Successful Trading
Extracted from the book: Come Into My Trading Room, Alexander Elder
To succeed in trading, you need several innate traits without which you shouldn't even start. They include discipline, risk tolerance, and facility with numbers. In additional, successful trading requires 3M's - Mind, Method and Money.
- Mind means developing psychological rules that will keep you calm amidst the noise of the markets.
- Method is a system of analyzing prices and developing a decision-making tree.
- Money refers to money money management, which means risking only a small part if your trading capital on any trade.
Trading is a journey if self-discovery. If you enjoy learning, if you are not scared of risk, if the rewards appeal to you, if you are prepared to put in the work, you have a great project ahead of you. You will work hard and enjoy the discoveries you'll make along the way.
The first Steps
Trading lures us with its promise of freedom. If you know how to trade, you can live and work anywhere in the world, be independent from the routine, and not answer to anybody. Trading attracts people of above-average intelligence who enjoy games and aren't afraid of risks. Before you rush into this exciting venture, keep in mind that in addition to your enthusiasm you will need to bring a sober understanding of the realities of trading.
- Trading will stress your feelings. To survive and succeed, you will need to develop a sound trading psychology.
- Trading will challenge your mind. To gain an edge in the markets, you will need to master good analytic methods.
- Trading will demand good mathematical skills. A math illiterate who can't manage risk is guaranteed to bust out.
Trading psychology, technical analysis, money management - if you learn all three, you can make it in trading. The market are set to separate the maximum number of people from their money. Stealing is not permitted but markets are heavily slanted in favor of insiders and against outsiders. Markets keep changing, and flexibility is the name of the game. Market operate in an atmosphere of uncertainty. There is no certainty, only odds. Here you have two goals - to make money and to learn. Win or lose, you have to gain knowledge from a trade in order to be a better trader tomorrow. Scan your fundamental information, read technical signals, implement your rules of money management and risk control. Now you are ready to pull the trigger. Go!
Good traders keep good records. They keep them not just for their accountants but as tools of learning and discipline. If you do not have good records, how can you measure your performance, rate your progress, and learn from your mistakes? Those who do not learn from the past are doomed to repeat it.
To succeed in trading, you need several innate traits without which you shouldn't even start. They include discipline, risk tolerance, and facility with numbers. In additional, successful trading requires 3M's - Mind, Method and Money.
- Mind means developing psychological rules that will keep you calm amidst the noise of the markets.
- Method is a system of analyzing prices and developing a decision-making tree.
- Money refers to money money management, which means risking only a small part if your trading capital on any trade.
Trading is a journey if self-discovery. If you enjoy learning, if you are not scared of risk, if the rewards appeal to you, if you are prepared to put in the work, you have a great project ahead of you. You will work hard and enjoy the discoveries you'll make along the way.
The first Steps
Trading lures us with its promise of freedom. If you know how to trade, you can live and work anywhere in the world, be independent from the routine, and not answer to anybody. Trading attracts people of above-average intelligence who enjoy games and aren't afraid of risks. Before you rush into this exciting venture, keep in mind that in addition to your enthusiasm you will need to bring a sober understanding of the realities of trading.
- Trading will stress your feelings. To survive and succeed, you will need to develop a sound trading psychology.
- Trading will challenge your mind. To gain an edge in the markets, you will need to master good analytic methods.
- Trading will demand good mathematical skills. A math illiterate who can't manage risk is guaranteed to bust out.
Trading psychology, technical analysis, money management - if you learn all three, you can make it in trading. The market are set to separate the maximum number of people from their money. Stealing is not permitted but markets are heavily slanted in favor of insiders and against outsiders. Markets keep changing, and flexibility is the name of the game. Market operate in an atmosphere of uncertainty. There is no certainty, only odds. Here you have two goals - to make money and to learn. Win or lose, you have to gain knowledge from a trade in order to be a better trader tomorrow. Scan your fundamental information, read technical signals, implement your rules of money management and risk control. Now you are ready to pull the trigger. Go!
Good traders keep good records. They keep them not just for their accountants but as tools of learning and discipline. If you do not have good records, how can you measure your performance, rate your progress, and learn from your mistakes? Those who do not learn from the past are doomed to repeat it.
August 26, 2010
Trading Formula
Extracted from the book: How to Trade in Stocks, Jesse Livermore
Market Timing - When to enter and when to exit a market trade - "when to hold 'em when to fold 'em".
Money Management - Don't lose money - don't lose your stake, your line. A speculator without cash us like a store owner with no inventory. Cash is a speculator's inventory, his lifeline, his best friend - without it you're out of business. Don't lose your line.
Emotional Control - Before you can successfully play the market you must have a clear concise strategy and stick to it. Every speculator must design an intelligent battle plan, customized to suit their emotional makeup, before speculating in the stock market. The biggest thing a speculator has to control is his emotions. Remember, the stock is not driven by reason, logic or pure economics. It is driven by human nature which never changes. How can it change, it's our nature.
Market Timing - When to enter and when to exit a market trade - "when to hold 'em when to fold 'em".
Money Management - Don't lose money - don't lose your stake, your line. A speculator without cash us like a store owner with no inventory. Cash is a speculator's inventory, his lifeline, his best friend - without it you're out of business. Don't lose your line.
Emotional Control - Before you can successfully play the market you must have a clear concise strategy and stick to it. Every speculator must design an intelligent battle plan, customized to suit their emotional makeup, before speculating in the stock market. The biggest thing a speculator has to control is his emotions. Remember, the stock is not driven by reason, logic or pure economics. It is driven by human nature which never changes. How can it change, it's our nature.
August 25, 2010
7 Habits Of A Highly Successful Trader (6 of 7)
6) View Trading as a Score in Points and Not In Money:
Really what I am saying is "follow your time tested rules which you have complete belief in and forget about everything else"
Really what I am saying is "follow your time tested rules which you have complete belief in and forget about everything else"
How can you do that when it's money we are trading with? Use some imagination. Pretend it's not money but simply a game your playing and your account represents points scored. Stop counting dollars every time the market moves and start concentrating on following your rules flawlessly. When you can operate on this level not only do your profits soar over the long run but it takes away all the stress of trading.
Think about it. No more are you watching the quotes intra-day thinking "wow! I have just made enough to buy a new car," or "uhhh.. I've just lost my holiday money" This kind of trading is emotionally draining. No-one can succeed like this. This was me in my early days.I would be so down when I checked my quotes during the day only to find I had lost $500. And the next day when I found I was up by $500 I was the life and sole of the party. Even if I could have made a success by trading this way I wouldn't have enjoyed it and I would have given up.
Nowadays with my low risk/ high reward trading system I check the charts at the end of day in 5 minutes and that's it. I simply ask my-self: " Should I buy, sell or hold according to my rules?" I give my-self ten seconds to answer and do what has to be done. I am not a trader any more but a rule follower. That's how I feel. ( why do you think I have so much time to write?)
Reading Market Wizards I and II it was a prominent feature I noticed with all top traders. They never saw the markets as a cash box but simply as a way of operating a business. the name of the business was to follow their rules and score the points. It's not possible to become a top trader if you view every tick in the market as money lost and gained.
If making and losing money leads to emotional distress and joy and emotions are one of the most potent destroyers of successful trading then common sense dictates that in order to be a Highly Successful Trader you must eliminate all emotion from trading. How is this done? Easy, follow the rules. How do you follow your rules? Make it THE most important element in your trading. Forget about the money that will take care of it-self it's all about those rules and how well you can follow them.
If you ever just read one book on the stock market then please let it be: " How I Made $2 million" by Nicolas Darvas
I love this book so much because when you have read it as many times as I have (50+) you begin to realize how well this guy turned his trading around from an emotional losing trader into a robotice, disciplined, money, generating, machine. What made his success possible? Apart from the usual accepting complete responsibility, developing a system that fitted him, planning his trades and lots of initial groundwork. The real reason he made so much money was because he never counted the money in the general sense. He had a set of rules and when it flashed a buy he placed on a percentage of his capital. It made no difference whether it was $5,000 or $500,000, it was all the same to him. He stopped counting money and flawlessly followed his rules.
If I could just describe a section that had profound effect on my trading. In one trade Darvas bought $350,000 of a share at $53 1/2. The share then climbed to over $100 and his broker telegrammed him with the message: "profits now $250,000" Darvas now realized that whilst he had been so busy concentrating on folowing his rules he has forgotten all about the paper profits building up. When he received the telegramme he now knew if he sold out he would be rich for life ( this was the 1950's) Every fiber in his body was saying "sell. abandon your rules and take the profit."
So he walked around Paris trying to work out what to do. Questions and thoughts such as will the share fall back? Should I sell and take the sure profit? Shall I just break my rules this one time? Kept repeating them-selves time and time again.
Finally he decided not to sell and to stick with his rules. It was anything but easy to do. But he was proved right. In the weeks ahead the share continued to rise and making that decision to stick to his rules he was able to hold on and make much more profit.
Had he have constantly been calculating his trades on a day to day basis in money terms I doubt he would have had the nerve to stay in so long. Amazing story and one definitely worth reading.
You see how theory is all very well. Every trader worth his salt knows the Wall Street sayings :
"cut your losses"
"let your profits run"
"trade with the trend" blah,blah,blah
But it is another ball game to do this in the heat of battle.
Time and time again when I enter a trade I want to bend the rules, "just this one time." But I have gathered enough experience to realize I can NEVER break my rules. Not one trade can be the exception. I have learned to do this by counting in terms of points scored and not money.
What separates the winners from the losers? It's certainly not knowledge? I believe what really separates winners from losers is the ability to follow your rules without exception, regardless of the circumstances. Very few traders have the discipline to do this.
7 Habits Of A Highly Successful Trader (5 of 7)
5. Positive Self- Belief:
" All truly wise thoughts have been thought already thousands of times; but to truly make them ours we must think them over again honestly, till they take root in our personal experience." - Goethe
Iron clad belief not only in the system you are trading but also in your discipline to execute both entry and exits flawlessly are essential to your success in trading.
The top traders know it is the discipline displayed in following their rules that is the important thing in trading and the money rewards are secondary. For if you can not execute your signals, on both entry and exit, without question it takes just one mistake to give all those hard earned profits back to the market.
Positive self-belief is built from repetition after repetition of following your rules. Extensive back-testing of your system and constant self analysis.
You'll never be able to follow a system if you have a doubt in your mind. That's why so many people who buy other peoples systems fail. When that system goes through a losing period the person who purchased it will throw it away and search for the next system. Yet the trader who has rock solid belief will be aware that the system does display periods of losses. He's seen it all before and sits it out waiting for the conditions to become more favorable. When they do he gets back in and makes a ton more cash. The person who purchased the system in the meanwhile is now losing more money with the new system because that too has just come into a losing streak.
" All truly wise thoughts have been thought already thousands of times; but to truly make them ours we must think them over again honestly, till they take root in our personal experience." - Goethe
Iron clad belief not only in the system you are trading but also in your discipline to execute both entry and exits flawlessly are essential to your success in trading.
The top traders know it is the discipline displayed in following their rules that is the important thing in trading and the money rewards are secondary. For if you can not execute your signals, on both entry and exit, without question it takes just one mistake to give all those hard earned profits back to the market.
Positive self-belief is built from repetition after repetition of following your rules. Extensive back-testing of your system and constant self analysis.
You'll never be able to follow a system if you have a doubt in your mind. That's why so many people who buy other peoples systems fail. When that system goes through a losing period the person who purchased it will throw it away and search for the next system. Yet the trader who has rock solid belief will be aware that the system does display periods of losses. He's seen it all before and sits it out waiting for the conditions to become more favorable. When they do he gets back in and makes a ton more cash. The person who purchased the system in the meanwhile is now losing more money with the new system because that too has just come into a losing streak.
7 Habits Of A Highly Successful Trader (4 of 7)
4. Work Hard at Learning How to Trade Properly and Keep Working:
This is no different from any other trade. Would you expect to become a brain surgeon after attending a week-end seminar and reading a few books? Yet, why do so many people expect to become a Market Wizard within such a short period of time?
If you ever have the privilege to ask questions to a successful trader you'll realize just how much effort, time, determination and lost money it took until they arrived at where they are. Being a consistent stock market winner is no different from being a top lawyer, Doctor or businessman.
First you must decide that you really do want to trade. Ask your-self is trading the stock market something I am genuinely interested in or are you lured by the potential money it has to offer you? I always remember reading a book called " Grow Rich With Peace of Mind" Napolean Hill. Whilst interviewing the top people in a number of professions he came to the conclusion that these people loved their chosen fields. They would have done it for no money. Trading is the same. If your number one goal in trading the markets is simply to make as much money as possible then I doubt you'll make it into the super trader status. If you are simply chasing the money it can be a motivation as long as you are motivated to learn and work at what really works in the market and NOT keep chasing the latest hot new trading idea that exploits peoples love of money to make them act.
This is no different from any other trade. Would you expect to become a brain surgeon after attending a week-end seminar and reading a few books? Yet, why do so many people expect to become a Market Wizard within such a short period of time?
If you ever have the privilege to ask questions to a successful trader you'll realize just how much effort, time, determination and lost money it took until they arrived at where they are. Being a consistent stock market winner is no different from being a top lawyer, Doctor or businessman.
First you must decide that you really do want to trade. Ask your-self is trading the stock market something I am genuinely interested in or are you lured by the potential money it has to offer you? I always remember reading a book called " Grow Rich With Peace of Mind" Napolean Hill. Whilst interviewing the top people in a number of professions he came to the conclusion that these people loved their chosen fields. They would have done it for no money. Trading is the same. If your number one goal in trading the markets is simply to make as much money as possible then I doubt you'll make it into the super trader status. If you are simply chasing the money it can be a motivation as long as you are motivated to learn and work at what really works in the market and NOT keep chasing the latest hot new trading idea that exploits peoples love of money to make them act.
7 Habits Of A Highly Successful Trader (3 of 7)
3) Plan a Trade and Trade a Plan:
Without doubt, no trader will last long if he doesn't plan every trade. But there is absolutely no point in making a plan for a trade if you are not disciplined enough to follow it.
A plan should cater for every eventuality. As Richard Dennis (Turtles fame) said,"Don't worry about where the prices are going. Worry about what you are going to do when they get there."
Think about what is being said here. Once you put your money down on a trade you can not control the prices. So stop worrying about what could happen and concentrate on you trigger points and what you will do when these points are violated. By doing this your trading stops being emotional and now becomes very systematic and stress free.
Without doubt, no trader will last long if he doesn't plan every trade. But there is absolutely no point in making a plan for a trade if you are not disciplined enough to follow it.
A plan should cater for every eventuality. As Richard Dennis (Turtles fame) said,"Don't worry about where the prices are going. Worry about what you are going to do when they get there."
Think about what is being said here. Once you put your money down on a trade you can not control the prices. So stop worrying about what could happen and concentrate on you trigger points and what you will do when these points are violated. By doing this your trading stops being emotional and now becomes very systematic and stress free.
7 Habits Of A Highly Successful Trader (2 of 7)
2) Have a System That fits You:
Every successful trader, investor,money manager,etc.. has a system that fits them. Some are long term, some mechanical, some intuitive, day traders, scalpers, arbitrage, value, momentum.The system its self is not the important factor. What is? Is that the system fits their unique personality.
The system does not matter. I've heard of value investors (Warren Buffet) who make untold millions from the stock market. I've heard of day traders taking home over $2 million per annum in profits. I've heard of a dancer making $2,5 million from Momentum trading. What do they have in common? As you can see it's not the system but they operate a style of trading that they are both happy with and excel at. They wouldn't dream of trading any other way. No-one told them to trade this way it just happened this way.
Too many traders try to copy the latest hot fad in trading. Right now that would be day trading. But that style of trading will not suite every-one. To be a successful day trader you have to love the short term up and downs of the market during the day. Being in contact with quotes for hours at a time. Yes, there are a number of traders making very good incomes from day trading, but there’s many more who lose their shirts within a couple of months and don't even find out whether day trading is suited to their temperament.
August 15, 2010
7 Habits Of A Highly Successful Trader (1 of 7)
1) Take Complete Responsibility:
For the successful trader knows every action he takes, every decision he makes he ,and only he, is responsible for that action.
You will never meet a successful trader who is looking to blame someone else, or something else for the consequences of his results. It just will not happen.
You see, when you accept 100%, no questions asked responsibility for all your actions you close the door to "excuses" behind you. When something goes wrong instead of looking for someone else to shoulder the blame, you will accept responsibility, note it down and vow never to repeat it again. Simply, you are willing to accept you are going to make mistakes, but more importantly, you are going to learn and never repeat those mistakes. A vital component of any winning trader.
Could you imagine Warren Buffet losing a few million $$$'s on a share trade and then blaming the general conditions of the market. Or blaming his broker for giving him dud advice? no way! Just not going to happen. I will guarantee when top traders takes a loss the first thing they will ask them-selves is Did I follow my rules?" If the answer is yes, then they will look at their rules.Is there something that could be changed in their rules to avoid this loss again? Many times the answer will be a re-sounding no.
August 09, 2010
The 2% - 6% Money Management Rules
The greater staying power of traders the greater chance to win. Traders have to stay in markets long enough to win trades. Money management plays an important role in helping traders to survive in markets.
No one win every trades; money management help traders to reduce losses on losing trades. Moreover it also maximizes traders' gains on winning trades.
All traders have ever heard about how important the money management but the most of them are still losing in understanding money management strategies.
To make traders clear and be able to find strategies of managing money that suit to them. Let us talk about a couple of simple and easy money management rules.
The 2% - 6% rules of have been introduced in Dr. Alexander Elder's book "Come Into My Trading Room"
The 2% rule is to protect traders from any single terrible loss that can damage their accounts. With this rule traders risk only 2% of their capital on any single trades. This is for limiting loss to a small fraction of accounts.
Besides a disastrous loss, a series of losses can also damage traders' account. The 6% rule is lent to handle this. Traders have to set the maximum of accumulated loss for a month. When they reach that level of loss, they have to stop opening any new position for rest of the month.
These 2 rules are designed to protect traders from the two types of losses. Nevertheless the 2% - 6% would be change for each trader. For those who are able to accept the higher risk, they might adjust the 2% - 6% rules to 5% - 10%, where the 5% is used to protect the account from any single disastrous loss. While the 10% rules is used to protect traders from any series of losses in each month.
No one win every trades; money management help traders to reduce losses on losing trades. Moreover it also maximizes traders' gains on winning trades.
All traders have ever heard about how important the money management but the most of them are still losing in understanding money management strategies.
To make traders clear and be able to find strategies of managing money that suit to them. Let us talk about a couple of simple and easy money management rules.
The 2% - 6% rules of have been introduced in Dr. Alexander Elder's book "Come Into My Trading Room"
The 2% rule is to protect traders from any single terrible loss that can damage their accounts. With this rule traders risk only 2% of their capital on any single trades. This is for limiting loss to a small fraction of accounts.
Besides a disastrous loss, a series of losses can also damage traders' account. The 6% rule is lent to handle this. Traders have to set the maximum of accumulated loss for a month. When they reach that level of loss, they have to stop opening any new position for rest of the month.
These 2 rules are designed to protect traders from the two types of losses. Nevertheless the 2% - 6% would be change for each trader. For those who are able to accept the higher risk, they might adjust the 2% - 6% rules to 5% - 10%, where the 5% is used to protect the account from any single disastrous loss. While the 10% rules is used to protect traders from any series of losses in each month.
May 31, 2010
Stock Market Wizard Lessons (Items 51-64)
51. Hope Is a Four-Letter Words Cook advises that if you ever find yourself saying, “I hope this position come back,” get out or reduce your size.
52. The Argument Against Diversification Diversification is often extolled as a virtue because it is an instrumental tool in reducing risk. This argument is valid insofar as it is generally unwise to risk all your assets on one or two equities, as opposed to spreading the investment across a broader number of diversified stocks. Beyond a certain minimum level, however, diversification may sometimes have negative consequences.
53. Caution Against Data Mining If enough data is tested, patterns will arise simply by chance – even in random data. Data mining – letting the computer cycle through data, testing thousands or millions of input combinations in search of profitable patterns – will tend to generate trading models (systems) that look great but have no predictive power. Such hindsight analysis can entice the researcher to trade a worthless system.
54. Synergy and Marginal Indicators Shaw mentioned that although the individual market inefficiencies his form has identified cannot be traded profitably on their own, they can be combined to identify profit opportunities. The general implication is that it is possible for technical or fundamental indicators that are marginal on their own to provide the basis for a much more reliable indicator when combined.
55. Past Superior Performance Is Only Relevant If the Same Conditions Are Expected to Prevail It is important to understand why an investment (stock or fund) outperformed in the past. For example, in the late 1990s a number of the better performing funds owed their superior results to a strategy of buying the most highly capitalized stocks. As a result, the high-cap stocks were bid up to extremely high price / earnings ratios relative to the rest of the market. A new investor expecting these funds to continue to outperform in the future would, in effect, be making an investment bet that was dependent on high-cap stocks becoming even more overpriced relative to the rest of the market.
56. Popularity Can Destroy a Sound Approach A classic example of this principle was provided by the 1980s experience with portfolio insurance (the systematic sale of stock index futures as the value of a stock portfolio declines in order to reduce risk exposure). In the early years of implementation, portfolio insurance provided a reasonable strategy for investors to limit losses in the events of market declines. As the strategy became more popular, however, it set the stage for its own destruction. By the time of the October 1987 crash, portfolio insurance was in wide usage, which contributed to the domino effect of price declines triggering portfolio insurance selling, which pushed prices still lower, causing more portfolio selling, and so on. It can even be argued that the mere knowledge if the existence of large portfolio insurance sell orders below the market was one of the reasons for the enormous magnitude of the October 19, 1987 decline.
57. Like a Coin, the Market Has Two Sides – but the Coin Is Unfair Just as you can bet heads or tails on a coin, you can go long or short a stock. Unlike a normal coin, however, the odds for each side are not equal.
58. The Why of Short-Selling With all the disadvantages of short selling, it would appear reasonable to conclude that it is foolhardy to ever go short. Reasonable, but wrong. The key to understanding the raison d'etre for short selling is to view these trades within the context of the total portfolio rather than as standalone transactions. With all their inherent disadvantages, short positions have one powerful attribute: they are inversely correlated to the rest of the portfolio (they will tend to make money when long holdings are losing and vice versa). This property makes short selling one of the most useful tools for reducing risk.
59. The One Indispensable Rule for Short Selling Although short selling will tend to reduce portfolio risk, any individual short position is subject to losses far beyond the original capital commitment. Because of the theoretically unlimited risk in short positions, the one essential rule for short selling is: Define a specific plan for limiting losses and rigorously adhere to it.
60. Identifying Short-Selling Candidates (or Stocks to Avoid for Long-Only Traders)
Galante, whose total focus is on short selling, looks for the following red flags in finding potential shorts:
- High receivables (large outstanding billings for goods and services)
- Change in accountants
- High turnover in chief financial officers
- A company blaming short sellers for their stock's decline
- A company completely changing their core business to take advantage of a prevailing hot trend.
- The stocks flagged must meet three additional conditions to qualify for an actual short sale:
> Very high P/E ratio
> A catalyst that will make the stock vulnerable over the near term
> An uptrend that has stalled or reversed
61. Use Options to Express Specific Price Expectations
Prevailing option prices will reflect the assumption that price movements are random. If you have specific expectations about the relative probabilities of a stock's future price movements, then it will frequently be possible to define option trades that offer a higher profit potential (at an equivalent risk level) than buying the stock.
62. Sell Out-of-the-Money Puts in Stocks You Want to Buy
This is a technique used by Okumus that could be very useful to many investors but is probably utilized by very few. The idea is for an investor to sell puts at a strike price at which he would want to buy the stock anyway. This strategy will assure making some profit if the stock fails to decline to the intended buying point and will reduce the cost for the stock by the option premium received if it does reach the intended purchase price.
63. Wall Street Research Reports Will Tend to Be Biased
A number of traders mentioned the tendency for Wall Street research reports to be biased. Watson suggests the bias is a result of investment banking relationships—analysts will typically feel implicit pressure to issue buy ratings on companies that are clients of the firm, even if they don't particularly like the stock. Lauer, who was himself an analyst for many years, pointed out the pressure on analysts to issue recommendations that are easily saleable (popular, ultra liquid stocks), not necessarily those with the best return/risk prospects.
64. The Universality of Success
This chapter was intended to summarize the elements of successful trading and investing. I believe, however, that the same traits that lead to success in trading are also instrumental to success in any field. Virtually all the items listed, with the exception of those that are exclusively market specific, would be pertinent as a blueprint for success in any endeavor.
52. The Argument Against Diversification Diversification is often extolled as a virtue because it is an instrumental tool in reducing risk. This argument is valid insofar as it is generally unwise to risk all your assets on one or two equities, as opposed to spreading the investment across a broader number of diversified stocks. Beyond a certain minimum level, however, diversification may sometimes have negative consequences.
53. Caution Against Data Mining If enough data is tested, patterns will arise simply by chance – even in random data. Data mining – letting the computer cycle through data, testing thousands or millions of input combinations in search of profitable patterns – will tend to generate trading models (systems) that look great but have no predictive power. Such hindsight analysis can entice the researcher to trade a worthless system.
54. Synergy and Marginal Indicators Shaw mentioned that although the individual market inefficiencies his form has identified cannot be traded profitably on their own, they can be combined to identify profit opportunities. The general implication is that it is possible for technical or fundamental indicators that are marginal on their own to provide the basis for a much more reliable indicator when combined.
55. Past Superior Performance Is Only Relevant If the Same Conditions Are Expected to Prevail It is important to understand why an investment (stock or fund) outperformed in the past. For example, in the late 1990s a number of the better performing funds owed their superior results to a strategy of buying the most highly capitalized stocks. As a result, the high-cap stocks were bid up to extremely high price / earnings ratios relative to the rest of the market. A new investor expecting these funds to continue to outperform in the future would, in effect, be making an investment bet that was dependent on high-cap stocks becoming even more overpriced relative to the rest of the market.
56. Popularity Can Destroy a Sound Approach A classic example of this principle was provided by the 1980s experience with portfolio insurance (the systematic sale of stock index futures as the value of a stock portfolio declines in order to reduce risk exposure). In the early years of implementation, portfolio insurance provided a reasonable strategy for investors to limit losses in the events of market declines. As the strategy became more popular, however, it set the stage for its own destruction. By the time of the October 1987 crash, portfolio insurance was in wide usage, which contributed to the domino effect of price declines triggering portfolio insurance selling, which pushed prices still lower, causing more portfolio selling, and so on. It can even be argued that the mere knowledge if the existence of large portfolio insurance sell orders below the market was one of the reasons for the enormous magnitude of the October 19, 1987 decline.
57. Like a Coin, the Market Has Two Sides – but the Coin Is Unfair Just as you can bet heads or tails on a coin, you can go long or short a stock. Unlike a normal coin, however, the odds for each side are not equal.
58. The Why of Short-Selling With all the disadvantages of short selling, it would appear reasonable to conclude that it is foolhardy to ever go short. Reasonable, but wrong. The key to understanding the raison d'etre for short selling is to view these trades within the context of the total portfolio rather than as standalone transactions. With all their inherent disadvantages, short positions have one powerful attribute: they are inversely correlated to the rest of the portfolio (they will tend to make money when long holdings are losing and vice versa). This property makes short selling one of the most useful tools for reducing risk.
59. The One Indispensable Rule for Short Selling Although short selling will tend to reduce portfolio risk, any individual short position is subject to losses far beyond the original capital commitment. Because of the theoretically unlimited risk in short positions, the one essential rule for short selling is: Define a specific plan for limiting losses and rigorously adhere to it.
60. Identifying Short-Selling Candidates (or Stocks to Avoid for Long-Only Traders)
Galante, whose total focus is on short selling, looks for the following red flags in finding potential shorts:
- High receivables (large outstanding billings for goods and services)
- Change in accountants
- High turnover in chief financial officers
- A company blaming short sellers for their stock's decline
- A company completely changing their core business to take advantage of a prevailing hot trend.
- The stocks flagged must meet three additional conditions to qualify for an actual short sale:
> Very high P/E ratio
> A catalyst that will make the stock vulnerable over the near term
> An uptrend that has stalled or reversed
61. Use Options to Express Specific Price Expectations
Prevailing option prices will reflect the assumption that price movements are random. If you have specific expectations about the relative probabilities of a stock's future price movements, then it will frequently be possible to define option trades that offer a higher profit potential (at an equivalent risk level) than buying the stock.
62. Sell Out-of-the-Money Puts in Stocks You Want to Buy
This is a technique used by Okumus that could be very useful to many investors but is probably utilized by very few. The idea is for an investor to sell puts at a strike price at which he would want to buy the stock anyway. This strategy will assure making some profit if the stock fails to decline to the intended buying point and will reduce the cost for the stock by the option premium received if it does reach the intended purchase price.
63. Wall Street Research Reports Will Tend to Be Biased
A number of traders mentioned the tendency for Wall Street research reports to be biased. Watson suggests the bias is a result of investment banking relationships—analysts will typically feel implicit pressure to issue buy ratings on companies that are clients of the firm, even if they don't particularly like the stock. Lauer, who was himself an analyst for many years, pointed out the pressure on analysts to issue recommendations that are easily saleable (popular, ultra liquid stocks), not necessarily those with the best return/risk prospects.
64. The Universality of Success
This chapter was intended to summarize the elements of successful trading and investing. I believe, however, that the same traits that lead to success in trading are also instrumental to success in any field. Virtually all the items listed, with the exception of those that are exclusively market specific, would be pertinent as a blueprint for success in any endeavor.
Stock Market Wizard Lessons (Items 31-50)
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.
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.
May 29, 2010
Stock Market Wizard Lessons (Items 16-30)
16. You Can’t Be Afraid of Risk
Risk control should not be confused with fear of risk. A willingness to accept risk is probably an essential personality trait for a trader.
17. Limiting the Downside by Focusing on Undervalued Stocks
A number of the traders interviewed restrict their stock selection to the universe of undervalued securities. One reason all these traders focus on buying stocks that meet their definition of value is that by doing so they limit the downside. Another advantage of buying stocks that are trading at depressed levels is that the stocks in this group that do turn around will often have tremendous upside potential.
18. Value Alone Is Not Enough
It should be stressed that although a number of traders considered undervaluation a necessary condition for purchasing a stock, none of them viewed it as a sufficient condition. There always had to be other compelling reasons for the trade, because a stock could be low priced and stay that way for years. Even if you don’t lose much in buying a value stock that just sits there, it could represent a serious investment blunder by tying up capital that can be used much more effectively elsewhere.
19. The important of Catalysts
A stock can represent great value and still stagnate for years, tying up valuable capital. Therefore, an essential question that needs to be asked is: What is going to make the stock go up? For example, Masters has developed an entire trading model based on primarily on catalysts. Through years of research and observation, he has been able to find scores of patterns in how stocks respond to catalysts. Although most of these patterns may provide only a small edge by themselves, when grouped together, they help identify high-probability trades.
20. Most Novice Traders Focus on When to Get in and Forget About When to Get Out
When to get out of a position is as important as when to get in. Any market strategy that ignores trade liquidation is by definition incomplete. A liquidation strategy can include one or more of the following elements:
Stop loss points – Detailed in item 15
Profit objective – A number of traders interviewed will liquidate a stock (or index) if the market reaches their predetermined profit target.
Time stop – A stock (or index) is liquidated if it fails to reach a target within a specified time frame.
Violation of trade premise – A trade is immediately liquidated if the reason for its implementation is contradicted. For example, when IBM, which Cohen shorted in anticipation of poor earnings, reported better-than-expected earnings, Cohen immediately covered his position. Although he still took a large loss on the trade, the loss would have been significantly greater if he had hesitated.
Counter-to-anticipation market behavior – See item 21
Portfolio considerations – See item 22
Some of these elements may make sense for all traders; others are very dependent on a trader’s style.
21. If Market Behavior Doesn’t Conform to Expectations, Get Out
A number of traders mention that if the market fails to respond to an event (Eg: earning report) as expected, the will view it as evidence that they are wrong and liquidate their position.
22. The Question of When to Liquidate Depends Not Only on the Stock but Also on Whether a Better Investment Can Be Identified
Investable funds are finite. Continuing to hold one stock position precludes using those funds to purchase another stock. Therefore, it may often make sense to liquidate an investment that still looks sound if an even better investment opportunity exits.
23. The Virtue of Patience
Whatever criteria you use to select a stock and determine an entry level, you need to have the patience to wait for those conditions to be met.
24. The Important of Setting Goals
Dr. Kiev. is a strong advocate of the power of setting goals. He contends that believing that an outcome is possible makes it achievable. Believing in a goal, however is not sufficient. To achieve a goal, Kiev says, you need not only to believe in it, but also to commit to it. Promising results to others, he maintains, is particularly effective.
Dr. Kiev. Stresses that exceptional performance requires setting goals that are outside a trader’s comfort zone. Thus, the trader seeking to excel needs to continually redefine goals so that they are always a stretch. Traders also need to monitor their performance to make sure they are on track toward reaching their goals and to diagnose what is holding them back if they are not.
25. This Time is Never Different
Evert time there is a market mania, the refrain is heard, “This time is different,” followed by some explanation of why the particular bull market will continue, despite already stratospheric prices.
As this book was being written, there was an explosive rally in technology stocks, particularly Internet issues. Stocks with no earnings, or even a glimmer of the prospect of earnings, were being bid up to incredible levels. Once again, there was no shortage of pundits to explain why this time was different; why earnings were no longer important (at least for these companies). Warnings about the aspects of mania in the current market were mentioned by a number of the traders interviewed. By the time this manuscript was submitted, many of the Internet stocks had already witnessed enormous percentage declines. The message, however, remains relevant because there will always be some market or sector that rekindles the cry, “This time is different.” Just remember: It never is.
26. Fundamentals Are Not Bullish or Bearish in a Vacuum; They are Bullish or Bearish Only Relative to Price
A great company could be a terrible investment if its price rise has already more than discounted the bullish fundamentals. Conversely, a company that has been experiencing problems and is the subject of negative news could be great investment if its price decline has more than discounted the bearish information. “A good company could be a bad stock and vice versa.”
27. Successful Investing and Trading Has Nothing to Do with Forecasting
Lescarbeau, for example, emphasized that he never made any predictions and scoffed at those who claimed to have such abilities. When asked why he laughed when the subject of market forecasting came up, he replied: “I’m laughing about people who do make predications about the stock market. They don’t know. Nobody knows.”
28. Never Assume a Market Fact Based on What You Read or What Others Say; Verify Everything Yourself
When Cook first inquired about the interpretation of the tick (the number of New York Exchange stocks whose last trade was an uptick, minus the number whose last trade was a downtick), he was told by an experienced broker that if the tick was very high, it was a buy signal. By doing his own research and recording his own observations, he discovered that the truth was exactly the opposite.
29. Never, Ever Listen to Other Opinions
To succeed in the markets, it is essential to make your own decisions.
30. Beware of Ego
Walton warns, “The odd thing about this industry is that no matter how successful you become, if you let your ego get involved, one bad phone call can put you out of business.”
Risk control should not be confused with fear of risk. A willingness to accept risk is probably an essential personality trait for a trader.
17. Limiting the Downside by Focusing on Undervalued Stocks
A number of the traders interviewed restrict their stock selection to the universe of undervalued securities. One reason all these traders focus on buying stocks that meet their definition of value is that by doing so they limit the downside. Another advantage of buying stocks that are trading at depressed levels is that the stocks in this group that do turn around will often have tremendous upside potential.
18. Value Alone Is Not Enough
It should be stressed that although a number of traders considered undervaluation a necessary condition for purchasing a stock, none of them viewed it as a sufficient condition. There always had to be other compelling reasons for the trade, because a stock could be low priced and stay that way for years. Even if you don’t lose much in buying a value stock that just sits there, it could represent a serious investment blunder by tying up capital that can be used much more effectively elsewhere.
19. The important of Catalysts
A stock can represent great value and still stagnate for years, tying up valuable capital. Therefore, an essential question that needs to be asked is: What is going to make the stock go up? For example, Masters has developed an entire trading model based on primarily on catalysts. Through years of research and observation, he has been able to find scores of patterns in how stocks respond to catalysts. Although most of these patterns may provide only a small edge by themselves, when grouped together, they help identify high-probability trades.
20. Most Novice Traders Focus on When to Get in and Forget About When to Get Out
When to get out of a position is as important as when to get in. Any market strategy that ignores trade liquidation is by definition incomplete. A liquidation strategy can include one or more of the following elements:
Stop loss points – Detailed in item 15
Profit objective – A number of traders interviewed will liquidate a stock (or index) if the market reaches their predetermined profit target.
Time stop – A stock (or index) is liquidated if it fails to reach a target within a specified time frame.
Violation of trade premise – A trade is immediately liquidated if the reason for its implementation is contradicted. For example, when IBM, which Cohen shorted in anticipation of poor earnings, reported better-than-expected earnings, Cohen immediately covered his position. Although he still took a large loss on the trade, the loss would have been significantly greater if he had hesitated.
Counter-to-anticipation market behavior – See item 21
Portfolio considerations – See item 22
Some of these elements may make sense for all traders; others are very dependent on a trader’s style.
21. If Market Behavior Doesn’t Conform to Expectations, Get Out
A number of traders mention that if the market fails to respond to an event (Eg: earning report) as expected, the will view it as evidence that they are wrong and liquidate their position.
22. The Question of When to Liquidate Depends Not Only on the Stock but Also on Whether a Better Investment Can Be Identified
Investable funds are finite. Continuing to hold one stock position precludes using those funds to purchase another stock. Therefore, it may often make sense to liquidate an investment that still looks sound if an even better investment opportunity exits.
23. The Virtue of Patience
Whatever criteria you use to select a stock and determine an entry level, you need to have the patience to wait for those conditions to be met.
24. The Important of Setting Goals
Dr. Kiev. is a strong advocate of the power of setting goals. He contends that believing that an outcome is possible makes it achievable. Believing in a goal, however is not sufficient. To achieve a goal, Kiev says, you need not only to believe in it, but also to commit to it. Promising results to others, he maintains, is particularly effective.
Dr. Kiev. Stresses that exceptional performance requires setting goals that are outside a trader’s comfort zone. Thus, the trader seeking to excel needs to continually redefine goals so that they are always a stretch. Traders also need to monitor their performance to make sure they are on track toward reaching their goals and to diagnose what is holding them back if they are not.
25. This Time is Never Different
Evert time there is a market mania, the refrain is heard, “This time is different,” followed by some explanation of why the particular bull market will continue, despite already stratospheric prices.
As this book was being written, there was an explosive rally in technology stocks, particularly Internet issues. Stocks with no earnings, or even a glimmer of the prospect of earnings, were being bid up to incredible levels. Once again, there was no shortage of pundits to explain why this time was different; why earnings were no longer important (at least for these companies). Warnings about the aspects of mania in the current market were mentioned by a number of the traders interviewed. By the time this manuscript was submitted, many of the Internet stocks had already witnessed enormous percentage declines. The message, however, remains relevant because there will always be some market or sector that rekindles the cry, “This time is different.” Just remember: It never is.
26. Fundamentals Are Not Bullish or Bearish in a Vacuum; They are Bullish or Bearish Only Relative to Price
A great company could be a terrible investment if its price rise has already more than discounted the bullish fundamentals. Conversely, a company that has been experiencing problems and is the subject of negative news could be great investment if its price decline has more than discounted the bearish information. “A good company could be a bad stock and vice versa.”
27. Successful Investing and Trading Has Nothing to Do with Forecasting
Lescarbeau, for example, emphasized that he never made any predictions and scoffed at those who claimed to have such abilities. When asked why he laughed when the subject of market forecasting came up, he replied: “I’m laughing about people who do make predications about the stock market. They don’t know. Nobody knows.”
28. Never Assume a Market Fact Based on What You Read or What Others Say; Verify Everything Yourself
When Cook first inquired about the interpretation of the tick (the number of New York Exchange stocks whose last trade was an uptick, minus the number whose last trade was a downtick), he was told by an experienced broker that if the tick was very high, it was a buy signal. By doing his own research and recording his own observations, he discovered that the truth was exactly the opposite.
29. Never, Ever Listen to Other Opinions
To succeed in the markets, it is essential to make your own decisions.
30. Beware of Ego
Walton warns, “The odd thing about this industry is that no matter how successful you become, if you let your ego get involved, one bad phone call can put you out of business.”
Subscribe to:
Posts (Atom)