Archives of “January 15, 2019” day

rss

3 Reasons Traders Don’t Make More Money

  
  Education
#  #  #  #
1) Position Sizing – They don’t take their largest risk when they have their greatest feel for the market and conviction about direction. Very high confidence trades may be sized relatively small; lower confidence trades are sized too large (often to make money back from earlier losses). They are taking their biggest cuts at the plate when the ball is out of their strike zones;
 
2) Execution – They wait for markets to go up before they buy and to go down before they sell. As a result, they get in at prices that leave them unusually subject to pullbacks. Many times, particularly if the trades are sized large (see above), the heat will take them out of good trades. In short, they’re not patient about getting into positions; they chase moves, fearful that they’ll miss a profit opportunity;
 
3) Rigidity – They don’t adapt to changing markets. They look for big moves in markets with declining volatility; they trade breakouts when signs point to range conditions. They set stops and profit targets in ways that don’t adapt to shifting volatility. They expect the market to accommodate what they’re doing rather than vice versa.
 
How much money you make is a function of what you trade and how you trade it. Many traders will switch what they trade (markets, stocks, time frames), only to continue making the same mistakes outlined above. Getting into good risk/reward trades and then maximizing the risk/reward while the positions are on is a major driver of long-term trading success.

5 Qualities essential to the equipment of the speculator

  
  Education
#  #  #  #  #
  1. Self-Reliance. A man must think for himself, must follow his own convictions. George MacDonald says: “A man cannot have another man’s ideas any more than he can another man’s soul or another man’s body.” Self-trust is the foundation of successful effort.
  2. Judgment. That equipoise, that nice adjustment of the faculties one to the other, which is called good judgment, is an essential to the speculator.
  3. Courage. That is, confidence to act on the decisions of the mind. In speculation there is value in Mirabeau’s dictum: “Be bold, still be bold; always be bold.”
  4. Prudence. The power of measuring the danger, together with a certain alertness and watchfulness, is very important. There should be a balance of these two, Prudence and Courage; Prudence in contemplation, Courage in execution. Lord Bacon says: “In meditation all dangers should be seen; in execution one, unless very formidable.” Connected with these qualities, properly an outgrowth of them, is a third, viz: promptness. The mind convinced, the act should follow. In the words of Macbeth; “Henceforth the very firstlings of my heart shall be the firstlings of my hand.” Think, act, promptly.
  5. Pliability the ability to change an opinion, the power of revision. “He who observes,” says Emerson, “and observes again, is always formidable.”

Ten word investment philosophies

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

Every writer knows that trying to express an idea in the fewest number of words is one of the hardest tasks.  That is, in part, why there are editors.  There is a legend that Ernest Hemingwaywon a bet by writing a six word short story:

For sale. Baby shoes. Never worn.

The folks at Snopes are skeptical of this legend, but the fact remains that the six word story is a compelling one, Hemingway or not.

Jason Zweig writing at Total Return asked a number of investment professionals to do something similar when it comes to expressing their investment philosophy in ten words or less.  One might think that ten words would be too much of a constraint, but the participants did compelling work.  Zweig wrote this:

Anything is possible, and the unexpected is inevitable. Proceed accordingly.

We also liked Elroy Dimson’s contribution as well:

Risk means more things can happen than will happen. (more…)

Trading Book Review Of the Week: The Three Skills of Top Trading

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

This book is written about how three mutually reinforcing skills make a complete trader.

1). Pattern Recognition and Discretionary Trading.

Using the Wyckoff method you will see chart representations of how hot growth stocks are accumulated in bases for long periods of time. They eventually have pull backs then break out to new highs and trend. You will also see how they eventually have exhaustion tops on high volume that fail to rally and they begin to break down in distribution with lower lows and lower highs. The author encourages discretionary trading through experience by being able to identify market action through the models from past stocks. This work ties in nicely with the school of thought from legendary traders William J. O’Neil, Jesse Livermore, and Nicolas Darvas.

2). Behavioral finance and systems building.

The book teaches that readers must be flexible in their trading. We are merely a ship on a sea of market participant opinions. Follow the prevailing sentiment during the middle of the the trend, and go contrary to it at the extreme tops and bottoms. Hope, fear, and greed are the dangers and the movers of the market that cause support and resistance,  trends, and chart patterns. The action of the stock market is nothing more than a manifestation of mass crowd psychology in action. The Pruden model shows a chart of how accumulation, mark-up, distribution, and markdown works in the market tied to price, volume, sentiment, and time. It truly explains how the price pattern and charts in growth stocks generally play out historically. (more…)

Must read for serious traders – common mistakes

  
  Education
#  #  #  #

CommonMistakes1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they “second guess” it and don’t stick to it, particularly if the trade is a loss. Consequently, they overtrade and use their equity to the limit (are undercapitalized), which puts them in a squeeze and forces them to liquidate positions.
Usually, they liquidate the good trades and keep the bad ones.
2. Many traders don’t realize the news they hear and read has already been discounted by the market.
3. After several profitable trades, many speculators become wild and aggressive. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”
4. Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.
5. Some traders try to “beat the market” by day trading, nervous scalping, and getting greedy.
6. They fail to pre-define risk, add to a losing position, and fail to use stops. (more…)

Battle of Waterloo and Trading

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

I often talk about the Battle Of Waterloo and how it relates to trading in general and specifically strategy development. If you don’t know the battle (which I recommend reading about if you have time), just listen to this once popular country song and you’ll get a sense to why I think this is so important.

While I’m no historian, I do think traders can learn a lot about trading through learning about important battles in history. The Battle Of Waterloo offers a great example as it offers many lessons for us to consider:

  1. Make your planning and risk analysis commensurate with the size of your project. For major endeavors, contingency plans are critical.

  2. Know when to cut your losses if necessary. Don’t let your desire to succeed be the enemy of good judgment.

  3. Be sure that the justification is clear for your project, and that your entire team is sold.

  4. Don’t become over-confident, especially after many successes. Remember the basic principles.

  5. Never attempt an unpopular endeavor in isolation.

  6. Don’t make enemies. You are only as good as your allies.

  7. Adopt leader style politics, not the Machiavellian style. Look for the win-win.

Many of these lessons apply to good trading, especially the ones about the importance of having contingency plans, knowing when to cut losses, having clear justifications for your trades, the importance of avoiding overconfidence and finally how important it is to attack from a strong position like having plenty of capital and cash reserves.

Needless to say, every trading strategy has their own weaknesses. So, what the most common weakness I’ve found? That’s easy – human error. That’s right, usually most strategies that have been backtested and proven to work continue to work well unless we do things to either deviate from the plan and/or we apply leverage to it rendering it extremely vulnerable. It is fairly often that I see traders come forward with a hot strategy they’ve used and are in the process of levering it up, creating havoc and exposing themselves to great risk. There is good reason for the expression – leverage always kills. In my experience, that has been true. Beyond that, many strategies are based on things that don’t account for the constantly evolving nature of the market. (more…)

Go to top