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Wisdom from Legendary Traders

“I absolutely believe that price movement patterns are being repeated; they are recurring patterns that appear over and over. This is because the stocks were being driven by humans- and human nature never changes”.

-Jesse Livermore (Considered by many to be the greatest stock market operator ever. Made 100 million dollars in 1929 stock market crash. Made several other multi-million dollar fortunes in his trading career).
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“You have to cut your losses fast. The secret for winning in the stock market does not include being right all the time. The key is to lose the least amount possible when you are wrong”.

-William J. O’Neil (In my opinion, the best stock market operator in the world today. Has made an incredible fortune trading the stock market. O’Neil is the founder of Investors Business Daily. Much of my stock market education and training has been from William J. O’Neil).
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“Whatever method you use to enter a trade, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend”.

-Richard Dennis (Turned 400 dollars into a fortune of at least 200 million dollars by using his remarkable trading skills).
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“I am primarily a trend trader. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell”.

-Ed Seykota (One of the greatest traders of all time. Turned 5000 dollars into an incredible 15 million dollars or more).
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“The most important rule of trading is to play great defense”.

-Paul Tudor Jones (An amazingly consistent and successful trader. In 2006, earned a whopping 750 million dollars).
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“Being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong”.
-Bernard Baruch (Fantastic trader who earned ten’s of millions of dollars in the first part of the 20th century).
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“The greatest safety lies in putting all your eggs in one basket and watching that basket”.

-Gerald M. Loeb (Amassed many millions in the stock market during his long career).
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“I am looking for the strongest stocks in the market, in terms of both earnings and the technical picture”
-David Ryan (Multiple time winner in the stock division of the U.S. Investing Championships).
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“Most of my success has been due to my hanging on while my profits mounted. There is the big secret”.
-Arthur W. Cutten (Gained wealth and prominence, early in the 20th century, as a commodity trader, mostly in the wheat market.
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“I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone”.

– Michael Marcus (In a ten-year period, he multipled his company account by an incredible 2500 times).
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“Whenever I enter a position, I have a predetermined stop. I know where I’m getting out before I get in”.
-Bruce Kovner (One of the world’s largest traders in the 1980’s. Made profits of over 300 million trading for himself).
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“I try to assemble facts and decide what kind of scenario I think will unfold”.

-Bill Lipschutz (One of the most successful currency traders ever).
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“Virtually every successful trader I know ultimately ended up with a trading style suited to his personality”.

-Randy McKay (Turned $2000 into $70,000 his first year of trading. Went on to double digit million dollar gains).
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“The biggest misconception is the widespread belief that it is easy to make a living trading in the stock market”.
-Stuart Walton (Fantastic stock trading track record in the 1990’s).
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“If you decide to trade for a living, you have to treat it just like any other business endeavor and go into it with a plan”.

-Mark D. Cook (Great annual returns trading the markets).
 

Managing Risk

Over the years I’ve been fortunate enough to get to know thousands of market participants. Some are long-term investors others are scalping pennies per trade on thousands of shares while others manage millions of other people’s money. The interesting theme I picked up on with nearly every one of them is that they each experienced panic and uncertainty at certain times in the market. Oftentimes, this panic stems from the inability to make sense of the market, to gain control of market participation. Thoughts such as whether or not too much capital is at work or perhaps not enough or even whether or not to be in the market at all seemed to consume them.

This ambivalence can consume and debilitate even the best market participants. The uncertainty or self-doubt about market participation is common yet finding a solution is not. The greater the level of uncertainty felt the higher the odds are that risk is being misperceived. Here are some questions that I’ve asked to assess whether risk was real or perceived:

  • What are your reactions, both physical and emotional, to a losing trade? A winning trade?
  • Have you rationalized recent losses?
  • Has your out-of-market homework/research fallen behind?
  • Do you monitor your positions by dollars or percentages?
  • Have you ever not taken a trade that made sense simply because you were burned before?
  • Has the number of indicators you use to enter/manage/exit a position increased/decreased lately?
  • Do you know the Beta of your portfolio?
  • What would others say about you when asked about your risk management?

In a sense, managing risk involves managing the emotional side of trading so that the focus can be on the cognitive side of trading. As an example, if I’m concerned with the direction of the market because my traditional analysis methods are giving unclear signals then it probably doesn’t make much sense for me to participate. My biases will impact the data, whether it’s of a technical or fundamental nature, and lead to poor decisions. If I’m unable to clearly define what sectors are leading and which are lagging and, more importantly, why they are moving in the direction they are, then my risk is skewed. It’s times like these that large losses can accrue as objectivity is clouded by subjectivity.

I’ve always used sleep as a gauge to help me know if I’m in-line with real risk. If I’m able to sleep at night and wake up excited to participate in the market then I know that the odds are good I’m managing my risk. If I’m unable to get a good night’s sleep and lay awake wondering about positions I have on the odds are good that my risk management is off. Yea, I’m pretty simple.

Two Emotions

Two emotions that plague the inexperienced trader are Anticipated Loss  and Buyers Remorse.

Does your trading life go something like this? You see a trade line up, and suddenly a cramp in your solar plexus appears as you anticipate a possible loss. You put this down to simple fear and make an effort to mentally overcome this internal barricade so as to enter the trade. Acting quickly so as not to miss out, you swiftly enter the position and your trading platform indicates that you are filled. Now you are gripped by the sensation of buyers remorse – too late to back out now… A small voice in the back of your subconscious says “what have I done?”

To your great delight and surprise, the trade soon goes in your favour, and for a while you feel a warm fuzzy glow and give yourself a little compliment, but soon the old feeling returns in the form of a hot flush. Anticipated loss is back again as you worry about the market turning against you and taking away the profit you now have. (more…)

Jesse Livermore: Original Trend Follower and Great Trader

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The unofficial biography of Jesse Livermore was Reminiscences of a Stock Operator published 1923. Below are selected quotes:

  • Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
  • I told you I had ten thousand dollars when I was twenty, and my margin on that Sugar deal was over ten thousand. But I didn’t always win. My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times. In fact, I have always made money when I was sure I was right before I began. 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. There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily- or sufficient knowledge to make his play an intelligent play.
  • 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.
  • There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!
  • 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.
  • To tell you about the first of my million dollar mistakes I shall have to go back to this time when I first became a millionaire, right after the big break of October, 1907. As far as my trading went, having a million merely meant more reserves. Money does not give a trader more comfort, because, rich or poor, he can make mistakes and it is never comfortable to be wrong. And when a millionaire is right his money is merely one of his several servants. Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong- not taking the loss- that is what does damage to the pocketbook and to the soul.
  • What I have told you gives you the essence of my trading system as based on studying the tape. I merely learn the way prices are most probably going to move. I check up my own trading by additional tests, to determine the psychological moment. I do that by watching the way the price acts after I begin.
  • Of all speculative blunders there are few worse than trying to average a losing game. My cotton deal proved it to the hilt a little later. Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.
  • The loss of the money didn’t bother me. Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it.
  • In booms, which is when the public is in the market in the greatest numbers, there is never any need of subtlety, so there is no sense of wasting time discussing either manipulation or speculation during such times; it would be like trying to find the difference in raindrops that are falling synchronously on the same roof across the street. The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privelege of proving conclusively that it cannot be found on this sordid earth. At first, when I listened to the accounts of old-time deals and devices I used to think that people were more gullible in the 1860’s and 70’s than in the 1900’s. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings.
  • There are men whose gait is far quicker than the mob’s. They are bound to lead- no matter how much the mob changes.

My Trading Lessons for Traders

Read….When ever you are Free.

  • Prepare, be confident & be decisive

  • Follow my trading rules without exception

  • Plan every trade with profit exit, stop exit and risk/reward ranking

  • Trade only when you have time AND you have an edge

  • Formulate and write down a trading/investing plan

  • Exit a position at my stops and not “hope” it will recover tomorrow

  • Trade the market I actually see, not the one I think I will see

  • Focus more on what’s actually happening rather than what I wish would happen

  • Learn to prevent my skepticism and opinion over the economy from keeping me from making good trades

  • Have a plan every day to trade the market and to not let my opinions of the market interfere with my trading

  • Concentrate on rule based trade management and not the outcome of the specific trade

  • Follow price action as opposed to listening to the fundamental “experts”

  • Listen to the market signal rather than market noise

  • Don’t be afraid of making mistakes

  • To pay more attention to technical signals to determine purchase/sell points rather than emotion & personal reasoning

  • Have more confidence in my trade ideas and believe in myself more often

  • Do not have a bias but instead let the charts be the guide

  • Have the discipline and fortitude to stick to my trade plans

  • To improve my organization of stock lists and automation of stock alerts

  • Do not over-leverage

  • Select only the most favorable setups

  • Try not to over analyze every potential trade

  • Lose less when I am wrong

  • Spend less time reading words and more time reading charts

  • Stick with winners and sell the losers

  • Allocate 2-3 hours each day & 5 hours every weekend to finding attractive setups

  • Increase position size and be in the market more (more…)

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