Tesla, 20th largest by market cap, trades at 300+ times earnings.
Archives of “Education” category
rssThese eight steps are intended as a guide to the new trader and a reminder to the experienced.
1. Find Your Strength. It is important that the trader determine what type of market, trending or consolidating, best suits their own personality and strength. The best traders stay focused on one or the other and master it.
2. Know Your Market. You should know your market when trading. In other words, know the levels of support/resistance; know how the instrument you trade moves with the general market; know who is likely to be on the other side and what they are thinking; and “the terrain of any market includes the “long-term charts” (140).
3. Prepare Your Order. Know when to get into a trade and why and know when to get out of a trade and why. Just like a secret agent who will “never enter a room without knowing how to get out of it in a hurry” (142).
4. Placing Your Order. Once you have adequately prepared for a trade, it is then necessary to be ready to place the trade when the time is right. Here “patience is the key…you must be able to wait for the market to tell you when the moment is right. Wait for the market to generate the action; don’t force it” (143).
5. Sticking With Your Plan. This is probably the hardest part about trading. Once you enter the battlefield (enter a trade), the emotions of fear, ecstasy, greed, and sheer excitement can then take over and cause you to forget your well prepared plans for entry and exit. You must enter a “Zen-like mental state” where you remain in control of your emotions. Not doing so could spell disaster.
6. Identify When You Are Wrong. “It is crucial to your survival to identify in advance whether your view might be wrong and to determine what price level, when broken, would be in support of the consensus view; therefore, you are building up your ability to defend the occasional probes against you” (145).
7. Holding On To Your Winning Positions. Set a trailing stop when your trade is moving in your direction thereby locking in profits while allowing the trade to work toward its maximum potential. “A trailing stop loss keeps you in the war, keeps you in tune with the war, and, most important, leaves you in full readiness to instantly strike again” (152).
8. Focus On Your Next Trade. This is the most important step and is saved for last. This step simply says to start anew with each new trade. No matter if you won, lost, or broke even on the last trade, the next trade is a new one. “You do indeed need to be starting every single trade fresh and alert without any baggage from the previous encounter” (153).
Eight steps for success; eight goals for every trader.
From Wyckoff 95 years ago.
Successful investors/traders have been doing similar things for a long, long time.
10 HABITS OF SUCCESSFUL TRADERS
1. Follow the Rule of Three. The rule of three simply states that a trade will not be made unless you can carefully articulate three reasons for doing so. This eliminates trading from an indicator alone.
2. Keep Losses Small. It is vitally important to keep losses small as most all of large losses began as small ones, and large losses can put an end to your trading career.
3. Adjust Stops. When a trade is working move your stop loss up in order to lock in gains.
4. Keep Commissions Low. There is a cost to trading but there is no reason to overpay brokerage fees. A discount brokerage is just as good as a premium brand name one.
5. Amateurs at the Open, Pros at the Close. The best time to enter trades are after lunch when the professionals are looking to get in at a better price than one provided in the morning.
6. Know the General Market Trend. When trading individual stocks make sure you trade with the general market trend or condition, not against it.
7. Write Down Every Trade. Doing this will allow you to learn what is working and what is not. It will also help you determine what types of trades work best for your personality.
8. Never Average Down a Losing Position. It is a loser’s game when you add to a loser. You add to winning positions because they are winners and are proving themselves to be such.
9. Never Overtrade. Overtrading is a direct result of not following a well thought out plan, deciding it is best to trade off emotion instead. This will do nothing but cause frustration and a loss of money.
10. Give 10 Percent Away. Money works the fastest when it is divided. When we share we prime the economic pump of the universe.
Trading is a game of rules. We either make the decision to abide by them or we break them. We do the latter at our own peril.
Markets, data, and subsequent observations.
How expectations will destroy you.
It is easy to see others around you that are successful and just see two points. Where you are and where they are. It is easy to miss or skip what took place between. Everyone would rather fly from New York to LA than drive. If you look at trading as driving that distance chances are you are not going to have the time, money, or patience to do it. However, you have to get in a car to get to the airport. How long that drive is ultimately up to you.
Getting off on the right foot.
Many traders get in the car not knowing where they are going. Some of the time it leads them to the airport. Most of the time it leads them in the complete opposite direction. The do not know what they do not know. Chances are during this period they have had enough moments of success to keep them going. That amount of time, energy, and money was used to find out what they do not know. Only they did not realize that or refuse to realize that.
Now what?
It is time to own your mistakes. You can tell by the money and time that you burnt up that you made a mistake. If you try to make it all back at the wrong moments than the hole will get bigger. This time you paid to learn what you already know. Insert definition of insanity here. Doing the same thing expecting different results. Once again, you are at the cross roads and once again it is up to you.
- Own your mistakes
- Learn from them
- Make them cost you less
- Divide and conquer your losses
Moving on.
Quick Compilation of Market Crashes
With the current liquidity/credit crisis, I thought it will be interesting to take a look at past crashes. Here’s a quick compilation (not comprehensive):
- 1901 – 1903 (17 Jun 1901 – 9 Nov 1903) – 46.1% drop in DJIA.
- 1906 – 1907 (19 Jan 1906 – 15 Nov 1907) – 48.5% drop in DJIA.
- 1916 – 1917 (21 Nov 1916 – 19 Dec 1917) – 40.1% drop in DJIA.
- 1919 – 1921 (3 Nov 1919 -24 Aug 1921) – 46.6% drop in DJIA.
- 1929 (3 Sep 1929 – 13 Nov 1929) – 47.9% drop in DJIA. Kicked off the great depression.
- 1930 – 1932 (17 Apr 1930 – 8 Jul 1932) – 86% drop in DJIA.
- 1937 – 1938 (10 Mar 1937 – 31 Mar 1938) – 49.1% drop in DJIA.
- 1973 – 1974 (11 Jan 1973- 6 Dec 1974) – 45.1% drop in DJIA.
- 1987 – Black Monday (19 Oct 1987)
- 1989 – Friday the 13th mini crash (13 Oct 1989)
- 1990 – Savings & Loans collapse.
- 1997 – Asian financial crisis (27 Oct 1997)
- 1998 – Long Term Capital Management
- 2000 – 2002 (15 Jan 2000 – 9 Oct 2002) – 37.8% drop in DJIA.
- 2002 Summer – freezing up of corporate credit
With each new trade we must believe the following:
1. Consistent profitability has nothing to do with our predictive abilities.
2. With each new trade we cannot place any undeserved significance (e.g. “this is the perfect setup”) on its outcome.
3. We cannot expect the trade to do anything for us other than provide the information needed for us to either hold or exit. The process by which we have determined our trade setup will also be our guide for exiting (win, lose, or draw).
4. We accept that we have control over the process but absolutely no control over the outcome.
5. We accept that our current trade setup may look exactly like past opportunities, profitable or not, but may produce an entirely different result due to the collective beliefs and decisions of other market participants.
Learn to be wrong and Who cares?
1.) Learn to be wrong. Traditional education trains us into thinking that we have to be right to get the grade. With investing and trading, focusing on being right will bring assymetric risk to your methodology and will eventually lead to a blowout at least once. – Steven Place
2.) First, invest in yourself. That is, acquire as much knowledge as possible and analytical skills in a wide variety of disciplines and develop the ability to abstract yourself from the present. Become a mathematician, economist, political scientist, psychologist, sociologist, and futurist. – Gary Evans
3.) You are not a market-timing genius and neither is anyone selling services to you! There is a long-term path to progress, with several good ways to get aboard. Be interested, be watchful, but do not be too confident. – Jeff Miller
4.) First, understand that ultimately you are responsible for the outcome of your investments and that they shouldn’t blame bad markets, bad advisors, or bad luck if they lose money. Secondly, always try to stay as objective and unemotional as you can about what you invest in. And lastly, remember that discipline and risk management is the key. You can lose all the profits from five well managed trades or investments with one poorly managed one.