When an aspiring trader asks me to recommend books on technical analysis he or she is often surprised at my answer. While I do have a technical favorite or two (besides my own) I am quick to redirect him or her to books on trading psychology.
Technical analysis is worthless without a thorough understanding of the psychology behind winning and losing, buying and selling, fear and greed, risk versus reward, the past versus the future, the knowable versus the unknowable. Technical analysis is best used as a psychological tool to help the trader manage random price action and the emotions associated with it, not as a way to predict price action and thus confirm the trader’s egotistical need to be right. Psychology first; technical second.
One of my favorite “go to” authors on trading psychology is Mark Douglas. Although he is best known for his book Trading In The Zone, Mr Douglas’ first book The Disciplined Trader is a gem of a read also. I recommend both but start with The Disciplined Trader. It will help you better understand and appreciate the principles discussed in Trading in the Zone.
The following is from the INTRODUCTION and provides the thesis for the book. In it Douglas discusses the following
THE MENTAL GAME IS MUCH DIFFERENT IN THE MARKETS THAN IN EVERYDAY LIFE
THE MARKETS HAVE NO POWER OR CONTROL OVER YOU
YOU ALONE ARE RESPONSIBLE FOR YOUR ACTIONS AND REACTIONS
YOU MUST LEARN TO CONTROL YOURSELF
YOU CREATE THE MARKET YOU CHOOSE TO TRADE
YOU MUST DEVELOP YOUR OWN RULES…AND FOLLOW THEM
YOU MUST ALWAYS BE PREPARED…OR FACE DISASTER
WHILE YOU CANNOT CONTROL THE MARKET YOU CAN CONTROL YOUR PERCEPTION OF IT
YOU MUST WORK ON SEEKING OPPORTUNITY INSTEAD OF TRYING TO AVOID PAIN
IN YOUR ATTEMPTS TO AVOID LOSSES YOU ACTUALLY CREATE THEM
TO BE SUCCESSFUL YOU MUST DEVELOP SELF CONFIDENCE AND SELF TRUST (more…)
Archives of “January 6, 2019” day
rssS&P 500 Sector Weightings
2 Thoughts For Traders
It is impossible to make money trading without an edge.
There are many ways to create an edge in the markets, but one this is true—it is very, very hard to do so. Most things that people say work in the market do not actually work. Treat claims of success and performance with healthy skepticism. I can tell you, based on my experience of nearly twenty years as a trader, most people who say they are making substantial profits are not. This is a very hard business.
Every edge we have is driven by an imbalance of buying and selling pressure.
The world divides into two large groups of traders and investors: fundamental traders who base decisions off of financial analysis, understanding of the industry and a company’s competitive position, growth rates, assessment of management, etc. Technical traders base decisions off of patterns in prices, volume or related data. From a technical perspective, every edge we have is generated by a disagreement between buyers and sellers. When they are in balance (equilibrium), market movements are random.
The Wyckoff Spark
On a recent plane trip, yours truly polished off “How I Trade and Invest in Stocks and Bonds” by Richard D. Wyckoff.
Originally published in 1924, this short little book is a classic — well worth revisiting — and will later get a full review in its own right. (There is just something wonderful about old trading books.)
For now, though, the below passage is excellent — a classic demonstration of utilizing all the principles of the game.
Next in importance to knowing what to buy is the question as to when it should be done. (more…)
Are you a doer?
Great Trading Advice
Jeffrey A. Hirsch , The Little Book of Stock Market Cycles-Book Review
Jeffrey A. Hirsch is best known as the editor-in-chief of the Stock Trader’s Almanac. He draws on the extensive research behind that yearly publication for The Little Book of Stock Market Cycles: How to Take Advantage of Time-Proven Market Patterns (Wiley, 2012).
Let’s get Hirsch’s most controversial call—that the Dow will reach 38,820 by the year 2025—out of the way right at the beginning. He claims that this “is not a market forecast; it is an expectation that human ingenuity will overcome adversity, just as it has on countless past occasions.” (p. 66) The operative equation is “War and Peace + Inflation + Secular Bull Market + Enabling Technology = 500% Super Boom Move.” (p. 67) But don’t buy that magnificent villa overlooking the Pacific or the Ferrari you’ve been coveting just yet. “[A]fter stalling near 14,000-resistance in 2012-2013, Dow 8,000 is likely to come under fire in 2013-2014 as we withdraw from Afghanistan. Resistance will likely be met in 2015-2017 near 13,000 to 14,000. Another test of 8,000-support in 2017-2018 is expected as inflation begins to level off and the next super boom commences. By 2020, we should be testing 15,000 and after a brief pullback be on our way to 25,000 in 2022. A bear market in midterm 2022 should be followed by a three- to four-year tear toward Dow 40,000.” (pp. 67-68) In brief, if Hirsch’s scenario plays out, we’ve got quite a wait for the market to catch up with our dreams.
The bulk of Hirsch’s book describes the most effective market seasonalities. Take, for instance, the presidential election cycle. Since 1913, from the post-election year high to the midterm low the Dow has lost 20.9% on average. By contrast, from the midterm low to the preelection high, the Dow has gained nearly 50% on average since 1914. (more…)
Notes From Charlie Munger's Daily Journal Meeting
– Munger talked about the embedded options in the public notice papers he bought for Daily Journal… Phoenix public notice paper generated “thousands of percent” return for Daily Journal
– “Many of you people are here because you’re investment groupies, not Daily Journal shareholders.”
– “I don’t think anyone on the board or management of General Motors had one shred of guilt for destroying 100% of the equity of the greatest company in America.”
– “It’s hard to predict which comfortable two company duopolies will become ghastly competitive miasmas.”
– Munger on ratings agencies: they were selling opinions, not guarantees. But in front of a jury the internal emails will cause trouble.
– Munger, quoting Buffett “I’m waiting for a list of business that we declined because it was morally beneath us.”
– On why other CEOs can’t copy the Berkshire Hathaway (BRK.A) operating model: “They came to power at 58 and they’re gone at 63.” (more…)
Stop It
There’s an old joke about the investor who never used any stop losses. His friend knew his big positions were getting crushed.
Out of concern, the friend asked, “How are you sleeping?”
“Like a baby” he answered.
“Really? You aren’t nervous or upset?”
“I sleep like a baby” he repeated.
“That’s amazing. I’d never be able to sleep through the night with those types of losses.”
“Who said anything about sleeping through the night? I said I slept like a baby: I wake up every two hours, wet myself and cry for 30 minutes before falling back to sleep.”
That’s why risk management is so critical: to save you from sleeping like a baby, and in the long run to save you a lot of money.
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There’s a reason flight attendants show you where the emergency exits are before takeoff. The same thinking should apply to investors. Prudent investors have a sell strategy in place beforethey get involved with a stock. Using any of these stop strategies helps keep your emotions out of the process when an investing emergency arises.
Remember These Two Quotes
