quotations and euphemisms from : Reminiscences of a Stock Operator

  • It takes a man a long time to learn all the lessons of his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.
  • I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, Well, you know this is a bull market! he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape, but in sizing up the entire market and its trend.
  • The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.
  • The average man doesn’t wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. It is too much bother to have to count the money that he picks up from the ground. We love volatility and days like the one in which the stock market took a big plunge, for being on the right side of moving markets is what makes us money. A stagnant market in any commodity, such as grain has experienced recently, means there’s no opportunity for us to make money.
  • A man will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile.

Guidelines from Richard Donchian

  • Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.
  • From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
  • Limit losses and ride profits, irrespective of all other rules.
  • Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.
  • Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.
  • Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.
  • In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons a decline from 50 to 25 will net only 50 percent profit, whereas an advance from 25 to 50 will net 100 percent profit.
  • In taking a position, price orders are allowable. In closing a position, use market orders.
  • Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.
  • Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.
  • A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.

Common Psychological Fallacies on Risk and Probability

  • Tendency to overvalue wagers involving a low probability of a high gain and to undervalue wagers involving a relatively high probability of low gain.
  • Tendency to interpret the probability of successive independent events as additive rather than multiplicative.
  • Belief that after a run of successes, a failure is mathematically inevitable, and vice versa (aka Monte Carlo fallacy).
  • Perception that a favorable event has higher probability over an unfavorable event even though their mathematical probability is the same.
  • Tendency to overestimate the frequency of occurrence of infrequent events and to underestimate that of comparatively frequent ones after observing a series of randomly generated events.
  • Confuse the occurrence of “unusual” events with the occurrence of low-probability events (e.g. getting 13 spades is just as probable as getting any other hand).