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6 Thumb Rules of Market

  
  Education

Something today reminded me of a mentor (English teacher, older guy retired a few years later) that I had in high school. One of the key things he told me was, “Never get serious with a girl whose mother you would not want to have relations with, if given the chance”. I think more than a few times that thought flashed before my eyes and it saved me from serious error, partly because it was memorable. I’m trying to think of any similar rules of thumb that might help us to avoid those trades or strategies that can severely set back profits, create anguish, and otherwise make things worse than they should be. Any ideas?

“Never get serious with a girl whose mother you would not want to have relations with, if given the chance”– I thought that was only my words!

There can be many similar things for trading. Here are some for critique.

1. If you don’t like someone’s way of life, don’t trade like him.

2. If you don’t like the dominant players of a market, don’t trade that market.

3. If you don’t like the rule makers of a market, don’t trade that market.

4. (I learned this one from Scott Brooks) If there is already a professional at the table, go somewhere else.

5. If you don’t like a country’s tax code, don’t trade in that country.

6. If a market hasn’t shown a lot of opportunities in the past, don’t trade that market.

Livermore on speculation

  
  Education
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Just remember, without a discipline, a clear strategy and a concise plan, the speculator will fall into all the emotional pitfalls of the market and jump from one stock to another, hold a losing position too long, cut-out of a winner too soon and for no reason other than fear of losing the profit. Greed, fear, impatience, ignorance and hope, will all fight for mental dominance over the speculator. Then after a few failures and catastrophes, the speculator may become demoralized, depressed, despondent, and abondon the market and the chance to make a fortune of what the market has to offer.

Develop your own strategy, discipline and approach to the market. I offer my suggestions as one, who has traveled the road before you. Perhaps I can act as a guide for you and save from falling in some of the pitfalls that befell me. But in the end the decisions must be your own”.

A word from Bruce Kovner

  
  Education
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Bruce Kovner is one of the world’s most successful traders. The following below is extracted from his Market Wizardsinterview:

“A greedy trader always blows out. I know some really inspired traders who never managed to keep the money they made. One trader at Commodities Corporation – I don’t want to mention his name – always struck me as a brilliant trader. The ideas he came up with were wonderful; the markets he picked were often the right markets. Intellectually, he knew markets much better than I did, yet I was keeping money, and he was not.”

Q: So where was he going wrong?

“Position size. He traded much too big. For every one contract I traded, he traded ten. He would double his money on two different occasions each year, but still ended up flat”.

And, from further on in the interview:

“First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they risk three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.”

Prudent risk control, combined with the power of compounding, can lead you a long way in this game.

From $8 a Month to $20 Billion

  
Education, Life
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“Twenty-five years ago, when Zong Qinghou was 42, he made his living selling soft drinks and popsicles to schoolchildren. He says he earned about $8 a month — less than a third of China’s average wage at the time — and was so broke that he once slept in a tunnel under the streets of Beijing rather than spend on a hotel.

“Today, Zong, 67, is still selling soda — and lots of other things — as the wealthiest man in mainland China, Bloomberg Markets magazine reports in its December cover package, “The World’s Richest People.” His net worth of $20.1 billion as of Oct. 5 ranks him No. 30 in the world…”

– Bloomberg, Zong Tops China Billionaires as Communist-to-Capitalist

The responsible trader puts risk control first. That means staying clearheaded in respect to potential outcomes, refusing to “drink the kool-aid” while everyone else chugs it.

Given the need for realism, though, it’s good to temper cynicism with awareness of what’s possible… the potential in what could happen, with hard work, if things really go right.

In that regard, extreme success outliers are not to be envied or copycatted — obviously one needs a lot of fortuitous circumstance (plus the hard work) to do what Zong did.

Instead, fat tail successes serve as a useful reminder that perhaps, just perhaps, outlandish aspirations are not so outlandish… and could even be modest in respect to what’s been done.

After all, if a man in China can go from making $8 a month at age 42, to being worth $20 billion at age 67, who is to say what you or I might achieve? 

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