95% Traders ……………….Don’t understand this
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rssThe 8 Downfalls of Jesse Livermore
Jesse Livermore was a pioneer in the trading world. He was one of the very first trend traders, rule based discretionary traders, and traders of pure price action. He was a trail blazer. It was not his methodology that was his undoing, it was other short comings. After reading books about the life of this trading legend along with his own, here are my eight observations that I believe was his ultimate undoing.
- Letting losers run: Many times he did not cut his losses. “I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”– Jesse Livermore
- Over Trading: “What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favored my play.” – Jesse Livermore
- Following tips: “Gradually, as I began to accept his facts and figures, I began to fear I had been basing my previous position on misinformation. Of course I could not feel that way and not cover. And once I had covered because Thomas made me think I was wrong, I simply had to go long. It is the way my mind works.” “It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.” – Jesse Livermore
- Risk of ruin: From the quantity of his account blow ups and personal bankruptcies it appears that he did not understand the mathematical risk of ruin based on winning percentage and the loss of capital per trade.
- Position sizing: The sheer size of his astounding wins at key times shows that he did not really have a position sizing model to limit his exposure to risk, he was likely all in with leverage on his biggest wins. Which results in inevitable account blow ups.
- Discipline: In his writings he seems to always hint that he had trouble following his own rules and advice and lost money when he didn’t follow his own plan.
- Lavish lifestyle: Livermore spent money lavishly on his lifestyle with mansions, vacations, and the best things money could buy. He had no number that allowed him to ever really retire and enjoy his wealth. He continued to trade with full size and aggressively through his career.
- Mental risk of ruin: In the end, for whatever reason he ended his life. The stress and strain of trading, finances, and his personal life probably took its toll.
Wall Street Its Mysteries Revealed Its Secrets Exposed By William C Moore 1921 – Greed
It’s been a while since I last posted an excerpt or quoted from one of the trading books I own. Tonight’s small excerpt is from the book: ‘Wall Street. Its Mysteries Revealed: Its Secrets Exposed’ published in New York, 1921 by William C. Moore. The book contains short and to the point chapters like: ‘The crowd mind’, ‘How the public speculates’, ‘Mental suggestion’ and ‘Market advice’ to name but a few. I chose the one on ‘Greed’ as I consider it great advice and timeless wisdom. Enjoy.
Greed p. 123-124
An avaricious or keen desire for profits is one of the most prevalent causes of failure in speculation. This weakness is general among traders. They desire “just a little more ” profit. If the stock or commodity bought advances, then that’s proof to them that it will advance further and so they hang on. They usually overstay and thus miss their market. If they fail to obtain the top price and it reacts, then they assure or console themselves by the expression: “Oh, it will come back.” It may “come back” but often it does not, and instead, declines to below the purchase price and frequently results in a loss. The same observations apply to a short sale for a further anticipated decline. It is a good policy to be satisfied with a reasonable profit and be willing to leave some for the other fellow. The market is always there and other opportunities for making profits will present themselves while the greedy trader is waiting to get the last eighth.
Greed leads to disaster in another way. A speculator has started in to buy at the inception of a bull movement. He makes money. The more he makes, the more avaricious he becomes as the market moves forward. His confidence in himself increases until he develops a mental state known in the vernacular as “big head” or “swelled head”. He now has unbounded confidence in himself and “plays the limit”. Soon thereafter the market culminates at the top and the trend reverses, but Mr. Swelled Head is ignorant of this, so continues to buy on set-backs instead of selling on rallies. A drastic slump follows and Mr. B.H. goes to the scrap pile – BUSTED.
Greed is a bottomless pit which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction. – Erich Fromm
Thought For A Day
It's better to do something and fail, than do nothing at all
Bubbles and Fools
Trading Addiction
The tell-tale sign of trading addiction is a trader who cannot refrain from trading–even when markets are objectively offering no opportunity. Even when losses are mounting.
Whenever a stock goes against the general trend, you're assuming if there's something wrong with that particular stock.
Trading Thoughts
There is a meaningful difference between trading to win and trading to not lose. The average person feels more psychological pain over a loss than they feel pleasure over a gain–particularly once they have already “booked” that gain mentally. If I’m expecting a bonus from my employer, I’ll be happy when I receive the paycheck–but I’ll be much more upset if I find out the bonus has been rescinded.
*We can never eliminate loss from life or trading; nor can we repeal the basic uncertainties of markets. What we *can* do is develop an edge in the marketplace and, over the course of many trades, let that edge accumulate in our favor.
And, if you’re trading well, maybe that losing trade will offer you a fresh perspective about how the market is trading: an insight that can make you money the next time around. Then it’s not a loss. It’s information that you’ve paid for.
The Risk of Mental Ruin for Traders
“Losing a position is aggravating, whereas losing your nerve is devastating.” – Ed Seykota
In my experience there are three components of trading that have to be managed correctly for the trader to be successful.
There is risk management, system management, and mental management.
I believe that the majority of the 90% of traders that do not succeed fail not because of their system or risk management but because of their own mind. This also includes professionals along with retail traders. There are countless profitable systems out there and risk management should just be math, so it comes down to discipline, self control, and perseverance to eventually make it as a trader yet so many fail.
A trader can be mentally ruined by stress, ego, arrogance, stubbornness, fear, greed, and emotional instability. These factors cause the bad decisions that inflict so much emotional and mental pain that it leads to just giving up. The majority of new traders make the decision in their first year that trading is not for them and they quit. (more…)