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Trading Wisdom Via John Templeton

  
  Education
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  1. There is only one long term investment objective, maximum total after tax return.
  2. Success requires study and work. It’s harder than you think.
  3. Outperforming the majority of investors requires doing what they are not doing.
  4. Buy when pessimism is at its maximum, sell when optimism is at its maximum.
  5. Therefore, buy what most investors are selling.
  6. Buying when others have despaired, and selling when they are full of hope, takes fortitude.
  7. Bear markets aren’t forever. Prices usually turn up a year before the business cycle hits bottom.
  8. Popularity is temporary. When a sector goes out of fashion, it stays out for many years.
  9. In the long run, stock index prices fluctuate around the EPS trend line.
  10. Stock index earnings fluctuate around replacement book value for the stocks in the index.
  11. Buy what other people buy and you will succeed or fail as other people do.
  12. Timing: buy when short term owners have finished selling and sell when they’ve finished their buying, always opposing the fashion.
  13. Stock prices fluctuate more than values. So stock indexes will never produce the best total return performance.
  14. Focus on value because most investors focus on outlooks and trends.
  15. Invest worldwide.
  16. Stock price fluctuations are proportional to the square root of the price.
  17. Sell when you find a much better bargain to replace what you are selling.
  18. When your method becomes popular, switch to an unpopular method.
  19. Stay flexible. No asset or method is forever.
  20. Stock market investing takes more skill than any other kind of investing.
  21. A person can outperform a committee.
  22. If you begin with prayer, you will think more clearly and make fewer mistakes.

The Illusion of Skill

  
  Education
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“The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the [financial] industry. Facts that challenge such basic assumptions — and thereby threaten people’s livelihood and self-esteem — are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide general facts that people will ignore if they conflict with their personal experience.”

I find that, unfortunately, to be terribly true.

For those of you who may be unfamiliar with Kahneman, he is a professor at Princeton and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, and behavioral economics.

Objectivity and Subjectivty in Trading

  
  Education
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Trading forces us to interact with the market, where price is objective – everyone can see the same thing. But human nature makes us subjective, that’s just part of being human, seeing the world (and the market) through our own filter of beliefs, hopes, and fears.  

The way to maximize performance in a situation where the objectivity of the market interacts with human subjectivity is to understand how your own subjective filter operates.

We have to do this for a number of reasons, with the big one being that the market will trigger our psychological vulnerabilities – sometimes I refer to them as our unmet developmental needs….the need  for approval, etc.  As traders  we must  understand how our personal filter operates and how it shapes our view of the market. (more…)

The 'Self-Factors' of Successful traders

  
  Education
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  •  – Knowledge of oneself and how one acts and behaves in situations and environments.
  • Self-Belief; – Self-Confidence – assuredness in one’s actions, judgments and abilities.
  • Self-Trust; -The ability to have faith in oneself under duress and pressure.
  • Self-Reliance; – Ability to depend on one’s own capabilities, judgment, and resources , and acceptance that nobody else is responsible for profits and losses.
  • Self-discipline; – A structured approach that keeps a person focused and grounded against negative forces and pressures.
  • Self-Control; – Is the ability of exert mind muscle and will-power to overcome the negative effects which can so easily distract and distort perceptions and judgments.
  • Self-Motivation; – Describes the initiative to undertake risks and activities when the mood and environment have been counterproductive.
  • Self-Esteem; – High regard, respect or value for one’s self, but not to the level of being conceited, or having an over-inflated opinion of their worth.
  • Self-efficacy; – Belief in one’s own competency and ability.

In summary, successful traders take responsibility for their own actions, but rarely beat themselves up. – If I was to sum it up succinctly, they know themselves, they like themselves, they believe in themselves, and above all – ‘they are comfortable in their own skin’.  (more…)

Ten Laws of Technical Trading

  
  Education
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1. Map the Trends

Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you’re trading in the same direction as the intermediate and longer term trends.

2. Spot the Trend and Go With It

Determine the trend and follow it. Market trends come in many sizes – long-term, intermediate-term and short-term. First, determine which one you’re going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you’re trading the intermediate trend, use daily and weekly charts. If you’re day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.

3. Find the Low and High of It

Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old “high” becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies – the old “low” can become the new “high.”

4. Know How Far to Backtrack

Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.

5. Draw the Line

Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes. (more…)

Trade on Intuition, Not Impulse

  
Analysis, Education
  • If you do your homework, you will develop a sense of intuition regarding the market. Intuition evolves from a foundation of long hours of study and work. It wells up from a long period of successful experience, thoughtful research, reflection, and wrestling with ideas, concepts, and markets.
  • Traders who trade on impulse are usually ungrounded, very excitable, emotional, and often wrong about their trading decisions. Impulsive traders tend to get carried away by greed and fear.

What is Risk?

  
  Education
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This is another piece in the irregular Simple Stuff series, which is an attempt to make complex topics simple.  Today’s topic is:

What is risk?

Here is my simple definition of risk:

Risk is the probability that an entity will not meet its goals, and the degree of pain it will go through depending on how much it missed the goals.

There are several good things about this definition:

  • Note that the word “money” is not mentioned.  As such, it can cover a wide number of situations.
  • It is individual.  The same size of a miss of a goal for one person may cause him to go broke, while another just has to miss a vacation.  The same event may happen for two people — it may be a miss for one, and not for the other one.
  • It catches both aspects of risk — likelihood of a bad event, and degree of harm from how badly the goal was missed.
  • It takes into account the possibility that there are many goals that must be met.
  • It covers both composite entities like corporations, families, nations and cultures, as well as individuals.
  • It doesn’t make life easy for academic economists who want to have a uniform definition of risk so that they can publish economics and finance papers that are bogus.  Erudite, but bogus.
  • It doesn’t specify that there has to be a single time horizon, or any time horizon.
  • It doesn’t specify a method for analysis.  That should vary by the situation being analyzed.

(more…)

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