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Three Motivations for Traders

  
  Education
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There are three motivations behind taking a trade: monetary reward, educational reward, and/or psychological reward. The first pays the bills, the second will pay the bills, and the last will prevent you from paying the bills.

Whenever I feel the pull of psychological reward, I have the voice saying “do you want to be a trader?” Letting go of the psychological need to take a trade or be right, is hard. Our brain does not know what money is. It listens in terms of chemical releases. Letting go of psychological reward is not easy. It is the most instantaneous form of reward.

The best way I know to give psychological power to money is to make a habit of seeing money as opportunity. Opportunity for financial freedom and opportunity to make another trade. The brain understands opportunity. This needs to be in balance as well.

If you are feeling the psychological pull, take a few seconds and answer the following.

Do I want to be a trader?
Did my last trade affect the thought process in an irrational way for this trade? (Need to be right, need to make my money back, I am invincible, etc.)
Can I get a better price or is this my best opportunity?
Am I seeing the whole picture?
As always, am I willing to accept the consequences of my action or inaction?

Dickson G. Watts ‘Speculation As A Fine Art’ – A Speculator’s Essential Qualities

  
  Education
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His list of ‘Essential Qualities of the Speculator’ and ‘Laws Absolute” show the timeless value of his insight:

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.”

The qualifications named are necessary to the makeup of a speculator, but they must be in well-balanced
combination. A deficiency or an overplus of one quality will destroy the effectiveness of all. The possession of such faculties, in a proper adjustment is, of course, uncommon. In speculation, as in life, few succeed,many fail.

These are his ‘Laws Absolute’:

1. Never Overtrade. To take an interest larger than the capital justifies is to invite disaster. With such an
interest a fluctuation in the market unnerves the operator, and his judgment becomes worthless.

2. Never “Double Up”; that is, never completely and at once reverse a position. Being “long,” for instance,do not “sell out” and go as much “short.” This may occasionally succeed, but is very hazardous, for should the market begin again to advance, the mind reverts to its original opinion and the speculator “covers up”and “goes long” again. Should this last change be wrong, complete demoralization ensues. The change in the original position should have been made moderately,cautiously, thus keeping the judgment clear and preserving the balance of the mind.

3. “Run Quickly,” or not at all; that is to say, act promptly at the first approach of danger, but failing
to do this until others see the danger, hold on or close out part of the “interest.”

4. Another rule is, when doubtful, reduce the amount of the interest; for either the mind is not satisfied with the position taken, or the interest is too large for safety. One man told another that he could not sleep on account of his position in the market; his friend judiciously and laconically replied: “Sell down to a sleeping point.”

30 NUGGETS OF STOCK MARKET WISDOM

  
  Education
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Wall Street people learn nothing and forget everything.”  Ben Graham

“ Buy on the cannons, sell on the trumpets.” Old French Proverb

“A stock broker is one who invests other people’s money until its all gone.”  Woody Allen

“It is fortunate for Wall Street as an institution that a small minority of people can trade successfully and that many others think they can.” Ben Graham

“Wall Street indices predicted nine out of the last five recessions!” Paul Samuelson

“ There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor –the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.” William Bernstein

“The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.” Gordon Gekko (more…)

Trading Should Be Effortless

  
  Education
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  • Money comes in bunches.

That one says it all. You can’t force trades. You can’t simply work harder in order to be ‘in sync’. Sometimes you are, sometimes you are not. You simply have to accept that as being part of the trading business. What you can do, is to closely monitor if your performance is in sync with the market’s performance. If the markets make new highs and your overall portfolio is going down something is wrong. You need to address that issue. Fast. The best way is to step aside and drastically reduce exposure and risk. That’s what I did.

  • Trading should be effortless.

A true piece of wisdom. In my experience when I trade well it is like shooting fish in a barrel. Almost everything works. I don’t need to be overly patient with positions. The money comes in very fast. That’s exactly how trading should be. The exact opposite was the case during the first 2 months of this year. So I did what I had to do. I recognized the situation for what it was and admitted my efforts were not leading my portfolio anywhere. It was like folding when you are dealt a bad hand in poker. So I folded. Now I am waiting for the next hand. If it is a bad one I fold again. If a series of trades start to really go my way I push it hard and increase exposure and trade aggressively.

  • When in doubt stay out.

This one is key. That’s how I interpret the adage: It doesn’t mean you don’t trust your instincts or your methodology. As a trader you should adapt to new situations. You constantly analyze the markets and your performance. Then you adjust your trading. Then you compare your expectations with the actual outcome. Then you adjust your trading. Then you repeat the process. At times things simply do not work. That’s when doubt creeps in. You know something is not ‘feeling right’. Your job is to protect your capital. Your job is not ‘to be right’. Put another way: You should be able to exit or reduce exposure without the need for explanations. The markets usually give you those explanations at some later point in time.

The Broker and The Dead Donkey

  
  Education
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brokerndonkey

A broker named, Jean Paul, moved to Texas and bought a donkey froman old farmer named Ben for $100. The farmer agreed to deliver thedonkey the next day. The next day, Ben drove up and said, “Sorry, but I have some bad news.The donkey died.””Well, then, just give me the money back,” said the broker”Can’t do that. I went and spent it already.” Replied Ben”OK, then. Just unload the donkey,” said Jean Paul.”What ya going to do with him?” asked Ben.”I’m going to raffle him off,” said Jean Paul.”You can’t raffle off a dead donkey!” uttered Ben.”Sure can. Watch me. I just won’t tell that he’s dead,” said Jean Paul.A month later Ben met up with the Cajun and asked, “What happenedwith that dead donkey?””I raffled him off, I did. I sold 500-hunderd tickets at two dollars apieceand made a profit of $898,” said Jean Paul.”Didn’t anyone complain?” inquired Ben.”Just the guy who won. So I gave him his two dollars back,” said the broker

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