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.
August 25, 2010
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.
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