“Jesse Livermore described Wall Street as a ‘giant whorehouse,’ where brokers were ‘pimps’ and stocks ‘whores,’ and where customers queued to throw their money away.” Another psychological aspect that drives me to use timing techniques on my portfolio is understanding myself well enough to know that I could never sit in a buy and hold strategy for two years during 1973 and 1974, watch my portfolio go down 48 percent and do nothing, hoping it would come back someday. With the title alone causing hysterics, placing this on your coffee table will elicit your guests to share their best dot-com horror story. How they invested their $100,000 second mortgage in Cisco Systems at $80 after reading about it, waiting for it to become $500 (as predicted in this very book) only to see it dive to $17. Just the thought of this book gives me the chuckles. You will run out of money before a guru runs out of indicators. There is little point in exploring the Elliott Wave Theory because it is not a theory at all, but rather the banal observation that a price chart comprises a series of peaks and troughs. Depending on the time scale you use, there can be as many peaks and troughs as you care to imagine. If you want a guarantee, buy a toaster. You have to say, “What if?” What if the stocks rally? What if they don’t? Like a catcher, you have to wear a helmet. There is no greater source of conflict among researchers and practitioners in capital market theory than the validity of technical analysis. The vast majority of academic research condemns technical analysis as theoretically bankrupt and of no practical value…It is certainly understandable why many researchers would oppose technical analysis: the validity of technical analysis calls into question decades of careful theoretical modeling [Capital Asset Pricing Model, Arbitrage Pricing Theory] claiming the markets are efficient and investors are collectively, if not individually, rational. The biggest cause of trouble in the world today is that the stupid people are so sure about things and the intelligent folks are so full of doubts. We are what we repeatedly do. Excellence, then, is not an act, but a habit. Forecasts are financial candy. Forecasts give people who hate the feeling of uncertainty something emotionally soothing. Never let the fear of striking out get in your way. The Henry theory— statistically corroborated, of course—is that assets, once in motion, tend to stay in motion without changing direction, and that turns the old saw— buy low, sell high—on its ear. Enron stock was rated as “Can’t Miss” until it became clear that the company was in desperate trouble, at which point analysts lowered the rating to “Sure Thing.” Only when Enron went completely under did a few bold analysts demote its stock to the lowest possible Wall Street analyst rating, “Hot Buy.” “If you don’t risk anything, you risk even more.” “No matter what kind of math you use, you wind up measuring volatility with your gut.” |
Archives of “Education” category
rss10+1 Rules If You USE Charts
Rule 1 – If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.
If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.
Rule 2 – If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.
When I look at a chart and cannot form an opinion after applying three or four different types of indicators – volume, momentum, trend, even Fibonacci – I must conclude that the market has not decided what it wants to do at that time. Who am I to tell it what it thinks?
Rule 3 – You can torture a chart to say anything you want. Don’t do it.
This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever. (more…)
Our 10 Trading Resolutions for 2015
- We will only take the very best trade set ups in 2015 discarding the average and mediocre ones.We want each trade to have an excellent risk/reward ratio.
- We will position size based on the worse case scenario for volatility and range expansion not what I think is a safe bet.
- We will use more option contracts when their volume permits in my trades to limit my risk to the size of the option contract instead of using so much capital to trade equities.
- We will limit my total risk exposure to only two trades on at a time.
- We will focus on limiting my losses and drawdowns in 2015 to in return maximize my gains.
- We will be looking to structure trades for a more consistent monthly return by trading stock indexes primarily.
- We will focus on understanding the emotions that arise during my trades, each trade will be made with a clean slate focused exclusively on current price action.
- We will be in absolutely no hurry to place trades. I will be waiting for trades to come to me.
- We will flow with the patterns and price action of the markets and restrain from bias and options. Signals will be my guide.
- We will double my efforts in backtests and chart pattern studies of historical charts.
"A truly strong person does not need the approval of others any more than a lion needs the approval of sheep."
7 reasons most traders fail in the markets
1. Most traders follow a flawed strategy with poor selection criteria, usually this is based on personal opinion or bad advice
2. Even when they find a good approach, the majority of traders don’t stay the course; they suffer what we call “style drift”, changing strategy when short-term results are unsatisfactory or become boring
3. The #1 mistake made by virtually all investors is they don’t cut losses
4. Most of the traders that blow themselves up usually do so by adding to losing positions
5. The grand majority of stock traders don’t know the truth about their trading – they fail to conduct in-depth post analysis regularly; they simply don’t know the math, so they have no idea how to manage risk in relation to reward
6. Many traders start with unrealistic goals; they want too much too fast and become disinterested when success doesn’t come quickly
7. Most failures in anything stem from a lack of belief in your own abilities; most people just don’t believe they can be exceptional at stock trading, but they can, if they really want it and follow the right plan
Someone ask Janet what she thinks of this Adam Smith quote.
Go Ahead
Biases That Cause You To Make Mistakes
You are your own worst enemy.
Those are the six most important words in investing. Shady financial advisors and incompetent CEOs don’t harm your returns a fraction of the amount your own behavior does.
Here are 15 cognitive biases that cause people to do dumb things with their money.
1. Normalcy bias
Assuming that because something has never happened before, it won’t (or can’t) happen in the future. Everything that has ever happened in history was “unprecedented” at one time. The Great Depression. The crash of 1987. Enron. Wall Street bailouts. All of these events had never happened… until they did. When Warren Buffett announced he was looking for candidates to replace him at Berkshire Hathaway, he said he needed “someone genetically programmed to recognize and avoid serious risks, including those never before encountered.“ Someone who understands normalcy bias, in other words.
2. Dunning-Kruger effect
Being so bad at a task that you lack the capacity to realize how bad you are. Markus Glaser and Martin Weber of the University of Mannheim showed that investors who earn the lowest returns are the worst at judging their own returns. They had literally no idea how bad they were. “The correlation between self-ratings and actual performance is not distinguishable from zero” they wrote.
3. Attentional bias
Falsely thinking two events are correlated when they are random, but you just happen to be paying more attention to them. After stocks plunged 4% in November 1991, Investor’s Business Daily blamed a failed biotech bill in the House of Representatives, while The Financial Times blamed geopolitical tension in Russia. The “cause” of the crash was whatever the editor happened to be paying attention to that day.
4. Bandwagon effect
Believing something is true only because other people think it is. Whether politicians or stocks, people like being associated with things that are winning, so winners build momentum not because they deserve it, but because they’re winning. This is the foundation of all asset bubbles. (more…)
DB – Me waiting for more money to vanish.
This is Another Reason…Why 95% Traders Lose Money in Trading
