Notice that what’s really accomplished here is rapid thinking that does not take place in words.
This is very relevant to recognizing patterns in order flow and very short-term price patterns.
The key is to develop a “language” that is not verbal. The soroban provides a non-verbal language.
Archives of “January 5, 2019” day
rssCoast is Clear
1. Swear off the stock market forever. Look, the reality is that making money in the stock market is hard. Most of us just don’t have the emotional makeup to do it. That’s OK. If during the last 10 years you’ve found yourself making big behavior mistakes over and over, then stop. You might be better off just committing yourself to a life of owning only certificates of deposit, given how poor your stock returns could be if you trade too much.
2. Act like you have a blind trust. Find someone you trust, give them your money, tell them to buy you an index fund and then have them update you again in five years. This could be a financial planner like me, but you could also enlist a trustworthy friend who won’t charge you anything for the privilege.
I know that there are people who have been successful, people who behaved correctly. If you are one of them, congratulations and keep doing what you’ve been doing.
But we have to recognize that the way most of us have been doing things hasn’t worked, and it probably won’t work in the future.
Trading Mathematics and Trend Following
Some quick points, to be making money, Profit Factor must be greater than 1.
- Profit Factor (PF)
- = Gross Gains / Gross Losses
- = (Average win * number of wins) / (Average loss * number of losses)
- = R * w / (1-w)
- where R = Average win / Average loss
- w = win rate, i.e. % number of winners compared to total number of trades
Re-arranging, we have
- w = PF / (PF + R)
- R = PF * (1 – w) / w
Sample numbers showing the minimum R required to break-even (i.e. PF = 1, assuming no transaction costs) for varying win rates.
- w = 90% >> R = 0.11
- w = 80% >> R = 0.25
- w = 70% >> R = 0.43
- w = 60% >> R = 0.67
- w = 50% >> R = 1
- w = 40% >> R = 1.5
- w = 30% >> R = 2.33
- w = 20% >> R = 4
- w = 10% >> R = 9
Something You Need to Know
A trader with a superior trading strategy but lacking in self-management skills will generally underperform a trader who has a less than superior strategy (but still has en edge) and is superior in self-management. I see this all the time.
Consider re-directing some of your energy and time toward self-mgt. Self mgt. includes a lot of things….but the big one is understanding how your emotions – including subconscious emotions – influence your decisions and actions.
Your trading plan or your strategy must include self management.
26 Quotes for Trading & Life
1. Don’t try making sense out of it. You’re in an insane asylum – things are not going to make sense, people will do things that don’t make sense, that they cannot adequately explain. People don’t know what makes them tick, only that they tick.
2. Happiness, of course…is all in your head. If you don’t know that, if you haven’t come to that realization, you will never be happy.
3. The Bull Market Syndrome. People, when they are met with success, take personal credit for it (bull markets breed geniuses), and when they are met with failure, blame luck.
4. Actually, luck is responsible for both! If you can only die by being struck by lightning, eventually, you will die by being struck by lightning! Conversely, if a man were to live forever, and bought a lottery ticket every week, eventually, he will win the lottery, with a probability that approaches certainty. Just stay the course, keep doing today what you must do today. As Woody Allen says, “Fifty percent of success is just showing up.”
Luck Trumps Brains. To get luck, keep showing up each day with your shoes on.
5. Creativity trumps money every time.
6. Fortunately in life, you don’t have to succeed at everything you do, only a few things. One success often justifies all prior attempts.
7. You can buy great a education – you can not buy brains.
8. The Oswald Principle: Usually, the best course of action in life, is to take no action (and usually, the best thing to say is nothing!). The guys in jail or there not because they didn’t do anything. Usually, you should just sleep in! If nothing really bad happens today, as my friend Oswald said to me in eighth grade, it’s been a good day!
9. You don’t have the problems you think you do. Actually, the only real problems are health and criminal problems. Everything else is just a frivolous, meaningless nuisance.
10. Never say never. Everyone, however righteous they may claim to be, however upstanding they say they are, will, under the right circumstances commit the crime. A cold morning, wet, hungry, tired, angry….they’ll do things they never dreamed they would! (more…)
Practice does *not* make perfect.
Only *perfect practice* makes perfect. I learned this in my younger years, pursuing a professional baseball career. Perfect practice will keep your losses smaller than your gains in the trading business.
There are a lot of things involved in perfect practice. When you get tired, or when the phone rings, or whatnot, *don’t trade*. Always, *always* exit trades exactly the way I’ve outlined above on every trade in every market condition. Always *wait* for your pitch, the well-timed setup for entering. Don’t practice sloppy entries just because you’re bored. Only perfect practice will help you. Anything else just amounts to practicing bad habits.
On Flexibility
#1 Rule of Investing: Be Flexible – Roy Nueberger
Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded, and skeptical. – John Templeton
Pliability: Consider and reconsider the facts, and your opinions. Stubbornness as to opinions-“cockiness”-must be entirely eliminated. – Bernard Baruch
Ignore mechanical formulas – Phil Carret
If there is anything I detest, it’s a mechanistic formula for anything. People should use their heads and go by logic and reason, not by hard and fast rules. – Gerald Loeb
Empty your mind, be formless, shapeless–like water. Now you put water into a cup, it becomes the cup, You put water into a bottle, it becomes the bottle, You put it in a teapot, it becomes the teapot. Now water can flow or it can crash! Be water my friend. – Bruce Lee. Ok, this quote comes from the world of martial arts, but the lesson transcends mere combat.
Perfectionism and Avoidance
Perfectionists are often motivated by avoidance: the need to avoid unpleasant emotional experiences. Traders who seek the perfect system are also likely to be motivated by the need to avoid unpleasant experiences.
Avoidance
Imagine taking part in a game where participants are divided into two groups, blindfolded and asked to stick out their right hand. The first group is given ten dollars each time they extend their hand. They soon learn how to play the game and, no doubt, enjoy playing at every opportunity.The second group is also given ten dollars, randomly, about 80% of the time. The remaining 20% of the time, instead of being given a dollar, their hand is jabbed with a pin. Most participants in this group are likely to quit fairly quickly — they focus on the pain and ignore the reward.With trading losses, the only pain that you will suffer is the emotional reaction to a loss — often far worse than being jabbed with a pin. If you concentrate on avoiding losses rather than on maximizing your overall gain, you are unlikely to succeed at trading.
Thought For A Day
Day Trading Mistakes
There are some major day trading mistakes that just about every new trader will make early on in their career. The ones who survive are those who can recognize these mistakes and take corrective action.
The first mistake many day traders make is to skip the planning phase of the day or a trade. Every day you sit down in front of your monitors you should have a general plan for the day. You should understand the major trends and support/resistance of the major indices, and the stocks you plan on trading. In addition to that, once you see your stock setting up for a trade you should have a plan that includes an entry, a target and a stop-loss before you even pull the trigger on the trade.
Another mistake that we often see in day trading is the inability to exit on a losing trade. If you have issues with getting out of the market when your pre-planned loss has been hit on your own, try using stop-loss orders. Never. Never ever ever move a stop loss order once it’s been placed. This requires some discipline but it will save you tons of money in the long run. You should never be hoping that your stock will turn around, and go where you expected. You should be executing your plan to the letter.
On a similar note, you also never want to move your targets. If you keep moving your target away from the stock’s current price, you’re never going to take your profits. A typical day trading exit strategy is to take profits at predetermined levels as you proceed into green territory. This means that before you’ve entered the trade you’ve chosen two or more targets. You exit a portion of your trade at each target. Now, if you think your stock is going to trend for the day, you can plan for that too. This is called a trade-to-hold. It doesn’t mean you move your target, but rather you try to stay in the trend by setting a trailing stop. A trailing stop can either be automatically set at a certain percentage or point value behind the stock price, or you can mechanically keep moving your stop loss up to obvious points of resistance or support behind your trending stock. (more…)